Carbon Prices and the Political Process

Rethinking Political Viability

For the last decade or two, some have considered market-based carbon policies as the “sweet spot” for climate policy, since environmentalists get emission reductions while industry gets an approach that is more flexible and considered more cost-effective than other reduction strategies. But, although some jurisdictions have been willing to adopt cap-and-trade programs, market-based programs may be less, not more, politically appealing than alternative mechanisms.

A carbon price is, after all, a “price.” And while supporters may tout some of the ancillary benefits that accompany that price, like the promotion of cleaner renewable energy or new employment opportunities, those benefits stand behind the price tag; they are not front and center. In contrast, policies that focus on a larger vision, or a planning process for generating a larger vision, could be more politically appealing.

Policies and planning processes that generate a vision for a reliable and equitable clean energy transition are likely to be more politically feasible than carbon prices alone.

California adopted its comprehensive global warming act by setting a goal and then establishing a systematic planning process for achieving that goal. The state’s multi-sector scoping plan integrates numerous laws and policies that, together, are designed to meet the state’s multifaceted climate goals.^[i] Although the state chose to include a cap-and-trade program as part of its overall plan, the trading program supplements a wide range of policies, including renewable energy requirements, energy efficiency programs, transportation measures, and agricultural measures. The cap-and-trade program has been one of the more controversial elements of the state’s plan, facing opposition from environmental justice advocates as well as industry.^[ii] The political success of California’s climate policies have thus rested on a wide range of visionary policies, not its cap-and-trade program.

Voters in Washington State have twice defeated carbon tax ballot measures, despite provisions to return value to ratepayers and assist low-income consumers.^[iii] In contrast, the legislature successfully passed a range of more substantive climate policies, including a 100 percent renewable energy goal and new standards for buildings and transportation.[iv] In France, the widespread “yellow vest” protests against the central government were initially sparked by a national effort to impose a climate tax on gasoline.^[v] Canada continues to move forward with an ambitious carbon tax, but the program appears to be prompting a political backlash, with politicians who supported the tax losing seats to those who oppose it.^[vi]

In economies dependent on fossil fuels, a carbon price presents a vague and threatening hit to standards of living, and a potentially devastating blow to those who are most dependent, like truck drivers, farmers, long-distance commuters, and others. Without carbon policies that provide a larger vision that helps citizens perceive a better future, and without demonstrating how those affected by the tax would cope, carbon prices, without more, are politically challenging.

Who Decides? Private versus Public Decision-Making

One of the purported advantages of market-based mechanisms is that they provide private entities with the flexibility and autonomy to make their own emission-reduction decisions. Though nudged by a carbon price, and, in the electricity context, subject to state utility commission oversight,^[vii] industries can decide when and how to reduce emissions and when and how to make new investments. Given industry and utility knowledge of their own business operations and their capacity to innovate, that flexibility has important policy advantages.

Relying too heavily on markets would undercut democratic governance by lessening the role of government institutions and the public in making key public policy decisions.

At the same time, however, market mechanisms lessen the role of government and citizens in decisions that will have enduring and widespread impacts. Decarbonization will bring significant risks and opportunities, as well as potential trade-offs, all on a scale that exceeds that of the average business decision. Complete reliance on market mechanisms that leave the key decisions to utilities, oil companies, auto companies, and emerging renewable energy companies risks short-changing deliberative debate and accountability.

The alternative to pure reliance on market mechanisms is not rigid “command and control.” Policymakers can develop a portfolio of approaches that achieve specific goals and measures and push innovation in certain directions while still leaving room for flexibility and innovation. Policymakers might choose to meet certain specific goals, like greater reliance on distributed energy, and adopt specific rules furthering that form, like interconnection rules, net metering rules, and requirements or incentive programs for new buildings.^[viii] At the same time, policymakers could couple narrowly tailored programs with more general performance standards that encourage innovation, like requiring utilities to meet renewable portfolio standards and electricity storage requirements. Performance standards are more prescriptive than market mechanisms but still allow considerable flexibility.

Of course, we live in a market economy and recognize that markets, not just government institutions, can meet citizen preferences and needs. However, too much is at stake to rely solely on industry – even highly regulated industries like utilities – to make critical decisions about our clean energy transition. While some flexibility and room for innovation should remain an important component of transition policy, a role for public input – whether in legislative or administrative forums – would be more likely to serve the public interest than pure reliance on private actors in the marketplace.

Conclusion

Carbon pricing has a vital role to play in a clean energy transition. But the invisible hand of the market will not and should not be the primary driver of our transition to a clean energy economy.

Carbon pricing has a vital role to play in a clean energy transition. But the invisible hand of the market will not and should not be the primary driver of our transition to a clean energy economy. We face important choices about the character, structure, and distribution of a new energy system. Our options present a wide array of benefits and costs, and a wide array of mechanisms for enhancing benefits and mitigating costs. Relying too heavily on markets would sacrifice the democratic governance values of public decision-making.