Would Passing Climate Legislation Reduce Our Dependence on Oil?

Is the Gulf of Mexico disaster a reason to pass climate legislation – or is that legislation largely irrelevant to curbing our oil use? A Greenwire article Tuesday quoted a number of economists arguing that the leading proposals in Congress wouldn’t do much to change our dependence on petroleum.

The only reasonable response is “yes, of course.” Climate proposals such as Kerry-Lieberman, Cantwell-Collins, or Waxman-Markey will have limited effects on oil consumption for two reasons: first, they are market mechanisms; second, they are weak market mechanisms.

To start with the good news, reducing carbon emissions from electric utilities is cheaper than reducing oil use. Any market mechanism is supposed to prompt us to do the cheapest things first; that’s the whole point. There are many ways to make electricity with lower carbon emissions than a coal plant; putting a price on carbon makes those alternatives cheaper relative to coal. There are also many ways to promote energy efficiency, incrementally reducing electricity use.

For most Americans, on the other hand, there is only one way to make transportation, and it runs on oil. In the short run, with all of us driving the cars we now own, there is very little chance to change our gasoline use. In the closing words of one of the best satirical videos about the oil spill, “BP: you’re not mad enough to not drive your car.”

Carbon prices could have a greater effect in the long run, as everyone gradually replaces their cars, taking the new prices into account. This leads to the not-so-good news: the leading legislative proposals all have low ceilings on carbon prices, and release many more emission permits when the price hits the ceiling. The price ceilings vary between bills, generally falling around $30 - $40 per ton of CO₂ by 2020.

Every $1 per ton of CO₂ released is equivalent to $0.01 per gallon of gasoline. How much more would you think about fuel efficiency when you buy your next car if climate policy makes gasoline cost $0.30 - $0.40 per gallon more than it does today? The low price ceilings simply prevent the climate bills from doing much about oil consumption.

This problem is not unique to the current climate proposals. As Lesley McAllister has shown, many existing cap-and-trade programs have been set up with caps so high that they accomplished little or no emission reduction. In this case, limiting the price of carbon to no more than $30 - $40 per ton of CO₂ allows a modest effect on electricity generation, but very little on oil and transportation.

What carbon price would be needed to change our transportation system, and our use of oil? Western European countries, with a quality of life similar to ours, pay as much as $4 per gallon more than we do for gasoline, and have much lower transportation emissions per capita. To get to their level, we could adopt a carbon price of $400 per ton of CO₂ – for instance, by setting a very low cap on carbon emissions – and return most of the revenues to households on a per capita basis, as is done in Cantwell-Collins.

In a forthcoming research report (available in July), Elizabeth Stanton and I demonstrate that, even at very high tax rates, an appropriately designed rebate system can lead to net economic gains for every state, and for almost everyone except the richest 10 percent of the population. Moreover, at a high tax level, even when most of the revenues are returned to households, the undistributed remainder is a sizeable amount of money which can be used to finance mass transit, new vehicle technologies, and the transition from coal to clean energy technologies. Price incentives will work better and faster if supported by targeted programs to develop and deploy new, low-carbon technologies.

Yes, the current proposals for climate legislation will have little effect on oil dependence. That’s a reason to do more, not less, than Congress is contemplating.