1) 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.
2) Solely relying on market actors to make critical choices about the character, structure, and distribution of energy would fail to achieve a coherent, effective, and equitable clean energy system.
3) A one-dimensional carbon price optimizes carbon reductions but cannot optimize the multi-dimensional features of a clean energy transition.
4) Uneven responses to a market signal could fail to spur transformative change across all emitting sectors.
5) 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.
6) 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.
With federal climate legislation once again part of the national conversation, the role of carbon pricing continues to be a hot-button issue.[i] Some bipartisan initiatives center on a federal carbon fee,[ii] while the Green New Deal resolution[iii] introduced in the House is silent on market mechanisms, reflecting continuing policy debates among the diverse groups engaged in the initiative. This issue brief explains how carbon pricing is necessary, and then argues that it is both practically and politically insufficient for achieving a clean energy transition.
The challenge is not simply reducing a single pollutant at the margins. To avoid catastrophic climate impacts, a profound transition to a clean energy economy and away from a fossil-fuel dependent one is necessary. Without a larger vision for a green transition, and without mechanisms for planning and coordination, a carbon price, on its own, is likely to lead to fragmented and potentially short-sighted decisions that could fail to accomplish an effective, efficient, and fair transition. Market prices cannot address the systemic implications of relinquishing fossil fuels. From a political perspective, carbon prices look threatening, no matter how much their promoters tout the economic and environmental benefits they could engender. Moreover, a price mechanism puts private entities, not the public, in the driver’s seat for change. As a practical matter, it is hard to properly calibrate a market-based system because we are politically unlikely to set prices high enough to induce the necessary change (nor should we), and both cap-and-trade programs and carbon taxes are inherently uncertain.
This is not to say that there is an “ideal” alternative; all policy options have their strengths and weaknesses, and a mix of policy options are our best bet. U.S. climate policy should include a carbon price that maintains a steady background signal for innovation and that generates the revenue needed for an equitable transition and increasingly urgent climate adaptation.
Overall, however, to the degree policymakers hope that a carbon price will provide the primary impetus for needed change, it is important to recognize that a carbon price should supplement the more deliberative and coordinated mechanisms that will be essential to achieving a democratically accountable, effective, and equitable transition.
[i] This issue brief is drawn from a longer article: Alice Kaswan, Energy, Governance, and Market Mechanisms, 72 Miami L. Rev. 476 (2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3191433.
[ii] H.R. 763 Energy Innovation and Carbon Dividend Act (116th Cong.), Congress.gov, https://www.congress.gov/bill/116th-congress/house-bill/763?r=27&s=1.
[iii] H.R. 109, Recognizing the Duty of the Federal Government to Create a Green New Deal (116th Cong.), Congress.gov, https://www.congress.gov/bill/116th-congress/house-resolution/109/text.