Let’s play “The Price is Right”

One thing we can all agree on is that carbon emissions impose a cost beyond the smokestack. Air pollution from carbon emissions leads to respiratory and cardiovascular diseases, lung cancer, asthma, and premature mortality. The health costs of air pollution include medical expenses, lost productivity, and reduced quality of life, disproportionately affecting vulnerable populations such as children, the elderly, and low-income communities. Professor Max Roser, in The Argument for a Carbon Price, notes that the air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in countries around the world every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.

Climate change-related damages include crop failures, property damage from extreme weather events and wildfires, disruptions to supply chains, and loss of tourism revenue due to environmental degradation. 

So it makes sense to put a price on carbon emissions. But what’s the best way to calculate that price? Economists use Integrated Assessment Models (IAMs) to determine the Social Cost of Carbon (SCC). Per the Integrated Assessment Modeling Consortium, “Integrated assessment models are simplified representations of complex physical and social systems, focusing on the interaction between economy, society and the environment.” 

Different models, variables, and assumptions produce different estimates of the SCC. Governments reference the SCC when setting carbon taxes and crafting regulations. Canada’s carbon tax is set at $80/ton, and will rise annually by $15 until it reaches $170/ton by 2030. The official U.S. government estimate of $51/ton was recently re-calculated by the EPA to $190/ton. 

We’ll be eager to see what the UN’s International Maritime Organization comes up with when they determine a proposed global carbon tax on shipping. The New York Times reports, 

“The proposal would require shipping companies to pay a fee for every ton of carbon they emit by burning fuel. In other words, it’s a tax. That could raise a significant amount of money and lead to sweeping changes in the shipping industry. It would also be a first step toward the lofty goal of a carbon tax not limited to a particular country, but a global one. (Some 70 countries and states around the world have put a price on carbon, either through taxes or trading mechanisms.) Many activists and economists have argued that putting a price on carbon is crucial to addressing the collective threat of climate change, because it can both deter pollution and fund a cleaner, more resilient economy.”

Another method of pricing carbon emissions that takes a pragmatic approach to the calculation is  “target-consistent pricing” and has been advocated by, among others, prominent economists Joseph Stiglitz and Nicholas Stern. The Brookings Institution describes it as taking “a goal—say, reducing emissions of carbon dioxide by 50% by 2030—and then estimating how much it would cost each year to achieve a reduction of a ton of carbon.

In their Roosevelt Institute paper A Social Cost of Carbon Consistent With a Net-Zero Climate Goal Stern, Stiglitz, Kristina Karlsson, and Charlotte Taylor argue,

“Such a price pathway can be estimated by calculating the near-term marginal abatement cost (MAC)—that is, the cost to reduce an additional ton of emissions through actual public and private sector actions that can be taken over the next decade, when such actions are taken on sufficient scale to achieve the agreed upon targets. Not only is this approach designed to deliver on climate goals but it is also simpler to model and estimate and more robust relative to assumptions, overcoming key flaws in the IAM approach.”

They go on to say,

“Whereas estimating the SCC using IAMs requires identifying and quantifying all damages caused by rising temperatures worldwide over long time horizons, estimating the target-consistent price involves dealing with the costs associated with abating greenhouse gas emissions using mostly known technologies, domestically, and over a specified time horizon—and in the case of a net zero by 2050 target, the next three decades.”

There’s a strong argument to be made in favor of this target-consistent pricing. A similar argument can be made for Cap-and-Invest programs like the Climate Commitment Act in Washington state. After all, who knows better what it will cost to reduce emissions than those operations covered by the cap? 

Washington’s Cap-and-Invest Climate Commitment Act sets a science-based target for emissions that declines at a predictable pace year after year, until reaching net-zero in 2050. To meet the target, the state’s largest polluters can invest in cleaning up their operations, or they can purchase emission allowances at quarterly auctions – or even exchange with others that have spare allowances to trade since they’ve reduced their own emissions faster. Unlike a carbon tax, in a Cap-and-Invest system, the state does not set the price for carbon emissions. Instead, the market sets the price. (That price, in year one of the program, averaged $53/ton at auctions.) And because businesses can choose to clean up or pay up, the market price tends to settle close to the cost of the most efficient clean-up options.

The market knows what price is right.

That’s likely why the Cap-and-Invest market system introduced by the Climate Commitment Act is so strongly supported by energy companies, small businesses, transportation firms, technology entrepreneurs, labor, tribes, and environmental leaders across the Evergreen State.

Clean & Prosperous Washington is a project of the Washington Business Alliance. Contact us at info@cleanprosperouswa.com

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