The new roadmap for stopping climate change bypasses the land of carbon taxes

For many, effective climate policy is synonymous with high carbon taxes or permit prices. Because these are politically unpopular, climate change has seemed politically intractable. But pollution taxes don’t actually fit the problem of climate change, which is shaped by the need to completely eliminate, rather than simply slow down, CO₂ emissions. There are other policy instruments that do fit climate change, and are also politically feasible. The new roadmap for solving climate change focuses first on supporting new technologies to enter the market and become established, and only then on bringing down emissions. There are positive signs that this approach is working.
 

The birth of pollution taxes and fees

To appreciate the death of carbon taxes, it makes sense to understand their birth. In the 1980s, many economists reached a curious conclusion: we were doing too much to stop pollution. In Europe and North America, there had just been a wave of new environmental laws, focusing on clean air, clean water, and endangered species protection. The laws combined strict regulation with lofty ambitions. In the case of air quality, for example, the laws mandated cleaning up smokestacks and automobile tailpipes to the extent that nobody would suffer any adverse health effects from pollutants, even if this meant that factories would close down and cheap cars could no longer be built.

The economists suggested a different approach. We ought to clean up the environment as long as the benefits of doing so exceeded the costs. Imagine that every ton of sulphur dioxide (SO₂), a common air pollutant, was costing society $50 through environmental and health effects. Wherever we could eliminate a ton of SO₂ for $50 or less we should do so, but where the costs exceeded $50, then it would make sense to simply let the pollution continue.

The easiest way to get this to happen would be to force factory owners to pay $50 for each ton they emitted. This can be structured as a tax on pollution, or as a system whereby they have to purchase pollution permits. In either case, the government could solve the problem without mandating a single technology or setting a single target; it would just pass on the cost of polluting to the polluters, and let profit-seeking factory owners decide the rest. Some would reduce pollution, others not, and it was all good. The idea perfectly fit the Zeitgeist of the 1980s and 1990s, where scaling back government was a large ambition. The second wave of environmental laws was built around so-called “market-based instruments”. The government puts the right price on pollution, and the market adjusts.
 

Enter carbon taxes

Meanwhile climate change emerged as the environmental issue of highest political concern, and everyone was on board for using market-based instruments as the solution. The Kyoto Protocol was designed as a giant carbon market; industrialized countries each received fixed rights to emit carbon dioxide (CO₂), rights that they could buy and sell among themselves to ensure that emissions reductions would take place in those countries where the costs were lowest. The European Union implemented the Emissions Trading System as its centrepiece climate legislation, which forced industrial emitters to purchase carbon allowances on a European-wide exchange. And academics were cheering this on. The economist William Nordhaus, who would later receive the Nobel Prize for his work, advocated strongly for a global carbon tax as the main policy tool to achieve the efficient level of emissions (1). For many, “climate policy” and “carbon prices” became synonyms (2).

The only problem was that it didn’t work.

The first issue was political. People didn’t like carbon prices, since of course they make energy, and products requiring a lot of energy to manufacture, more expensive. In the mid-1990s, US President Bill Clinton tried to implement an ambitious economy-wide carbon tax in the United States; in the end, all he could get was a tax of $0.05 per gallon, or little more than $0.01 per litre, on gasoline. The story has been repeated again and again. Economic analysis suggested that CO₂ ought to be taxed at $50 – 100 per ton. With only a few exceptions, primarily in Scandinavian countries, whatever carbon prices have been enacted have been closer to $1 per ton. The most recent example of political failure is in France, where working class people went to the streets wearing yellow vests to protest an environmental tax put on gasoline and diesel fuel; the government responded by lowering it.

But it turns out that even where countries have managed to implement higher carbon prices, they have failed to bring about the kinds of changes that need to occur. That’s actually the more important story, and the one that is less well appreciated.
 

Carbon taxes don’t drive technological change

Unlike most other pollutants, CO₂ in the atmosphere doesn’t break down over the course of a few weeks, months, or years. It gets absorbed by plants, but then those plants die and decompose, releasing it again. For every ton of CO₂ we put into the air by burning fossil fuels – which came out of the ground, and a plant that grew millions of years ago, not yesterday – we are effectively raising atmospheric concentrations for centuries to come. As long as we keep burning any fossil fuels at all, atmospheric CO₂ concentrations will continue to rise, the Earth will warm even faster, and the climate will get more and more crazy. So fixing climate change isn’t about reducing rates of pollution – like it is with most other environmental problems – but about eliminating new pollution entirely.

So right here is one signal that carbon taxes might not be the appropriate tool to make this happen. Remember, market-based instruments were designed to fix the issue of the government doing too much, not too little, to curb pollution. The premise is that there is some rate of pollution, greater than zero, that makes sense, and market-based instruments make sure that across a diverse group of societal actors emissions either continue, or get cut, in a manner that is cost effective. For pollutants like SO₂ the search for low-hanging fruit made sense. But with CO₂ it can be a waste of valuable time; we don’t need to allocate emissions wisely, but rather get rid of them all.

And yet, we can’t prohibit CO₂. Not yet. The global economy requires huge amounts of energy to feed, clothe, and keep seven billion people busy, and ever since the Industrial Revolution fossil fuels have played an indispensable role. Prohibiting fossil fuels, before we have a working alternative energy supply in place, would leave us starving and cold. The hard part of solving climate change is inventing and then building that new energy system. Once we have done that, prohibiting fossil CO₂ emissions is likely to be easy.

So researchers began investigating whether carbon taxes would be up to this somewhat different challenge. Would carbon taxes be able, not to reduce or eliminate emissions, but to stimulate innovation and investment in a new energy system? The answer they discovered was no. The data showed that carbon taxes did lead to a decline in energy use, but not to a switch to non-fossil energy sources (3). And that makes sense. Carbon taxes, by design, encourage people to reduce emissions in ways that are cheap and easy, rather than expensive and complicated. It is almost always cheaper and easier to reduce emissions by using less energy, rather than inventing and investing in ways to get that energy from non-fossil sources. Yet eliminating emissions requires that 100% of our energy comes from non-fossil sources, and once that happens, it doesn’t matter – at least not for the climate – how much energy we use.
 

If not carbon taxes and fees, then what?

Let me summarize: The legal mechanism that people have been counting on to stop climate change is not only politically unpopular, but doesn’t even work very well for the task at hand. So stopping climate change is a lost cause, right?

Wrong. Amazingly, climate policy experts are now starting to become confident that we can end CO₂ emissions, perhaps even quickly, and put a stop to climate change. The mood has shifted from one of gloom and doom to a sense of guarded optimism. What’s going on?

As emissions from fossil fuels have been rising, there has also been an explosion of innovation in renewable energy technologies, and this innovation is finally starting to tip the playing field in a different direction. Twenty years ago, it cost ten times more to generate electricity from sunshine or wind than it did from fossil fuels like coal or natural gas. Five years ago, the costs were about equal. And now finally, within the last year, the costs have become equal once you also factor in the cost of storing the solar or wind energy in a battery, putting it on an equal footing with fossil fuels in terms of reliability. And when you factor in other things like the local costs of air pollution, renewable energy is now the cheaper option for communities around the world.

Markets have responded. In 2019, close to 80% of new investment in the energy sector was in renewables, and for the first time in history, global emissions fell at the same time that the overall economy was doing well (4). The growth in renewable energy has been exponential, meaning that the rate at which new capacity gets added keeps increasing. Since about 2000, installed capacity has been doubling about every three years. Few noticed when they went from half of 1% of the overall energy system to 1%, then from 1% to 2%, then from 2% to 4%. But the jumps keep getting bigger. Reaching 100% of the energy system requires keeping up this kind of growth for another 15 or 20 years.

This didn’t just happen on its own. The cost reductions came about because national governments, on top of funding research and development (R&D), began supporting the early market diffusion of renewable energy. This diffusion has proven crucial, because the kind of innovation that results in cost reductions doesn’t typically happen in the laboratory, but on the factory floor. Most of the drop in the cost of solar power can be attributed not to a change in the solar technology itself, but to the manufacturing processes becoming more efficient (5). It is the growth in the renewable energy industry that has mattered.

To get this growth, policies that directly support that new technology have proven far less costly and politically more attractive than carbon taxes. Imagine the following situation. A few years ago, you governed a country with an energy system that was nearly all fossil, and your goal was to bring renewables – which were then twice as expensive – up to 5% of the total energy mix. If you had used a carbon tax to incentivise investment, the tax would have needed to be so high as to double the cost of using fossil fuels to put renewables on an equal footing, in turn doubling the average price of energy to consumers. Economically disruptive, and politically unpopular. What you did instead was to stimulate investment in renewables by directly compensating renewable energy providers for their actual costs. You financed this with a new tax on energy, although you could have also raised taxes on something else, like income, to come up with the needed money. Here is the crucial difference: you didn’t count on the tax to bring about change, but rather how you spent the money. The renewables were expensive, but made little difference to the average cost of energy because of their low market share. Nobody noticed the tax that covered the subsidies. You achieved your goal, and pushed renewable energy down the learning curve, without sparking voter anger.

Around the world, this is what actually happened. But the battle isn’t won yet, for two reasons. First, technology support policies have so far been used to bring a few critical technologies to market – solar and wind power, electric cars, heat pumps – but there are whole domains of the energy system that have gone ignored. These include heavy industry, shipping, and aviation. With aviation, for example, there are technologies coming out of the laboratory that can use solar power to synthesize carbon-neutral jet fuel from water and the CO₂ in the air (6). As with photovoltaics, it will probably take 10 to 20 years of market development to bring the costs down to be competitive with fossil jet fuel. The issue is only now coming onto the political agenda. The policy that makes sense is one that lets the producers of sustainable jet fuel be compensated for their actual costs. The money that is needed could come from an additional tax on flying, but it doesn’t need to.

Second, once a technology has gained a foothold in the market, there are other challenges associated with it moving from a niche to a dominant player. In some cases there are systemic barriers to scaling. When solar and wind power were only a tiny fraction of the power mix, it didn’t really matter when there was no wind or sunshine, because other generators took up the slack. But for wind and solar to be the main sources of energy, then system operators need to invest in batteries, or build long transmission lines to connect regions to where the wind blows strongest at different times of the year (7). In other cases, the challenges are associated with market segmentation. Most of the buyers of electric cars in Europe have been people who own their own garage, where they can easily charge their car overnight. But a larger share of European car-owners live in apartment buildings, and lack their own parking space (8). The next generation of electric-mobility policies – only starting in a few countries – ensures universal access to convenient charging infrastructure. The policies to address these challenges to market penetration are different from the ones that created a market foothold.
 

The new roadmap

We have a new roadmap for stopping climate change. At the national level it is a sequence of policies that first support R&D for zero-carbon technologies, second their market entry, and third their market penetration. Then, and only then, can policy makers turn to getting rid of emissions. Yes, it is an act of faith that they will reach that point. But the signs are encouraging, and indeed there are already some political jurisdictions that have reached the final stage in some sectors. The European Union will prohibit new building construction with fossil heating systems starting in 2021. Norway will prohibit the sale of gasoline and diesel cars starting in 2025. Prohibition laws are politically feasible once the earlier policy steps have been taken.

At the international level we need policies designed to help developing countries down the same path, without sacrificing the quest to raise living standards and accounting for their relative lack of technological, financial, and administrative resources. It is no accident that as policy-makers began to recognize the need to eliminate CO₂ emissions altogether, they encountered insurmountable challenges renegotiating the Kyoto Protocol, which had been designed around the use of market instruments to reduce, but not eliminate, emissions. Eventually they gave up trying, and in 2015 signed the Paris Agreement. Paris follows the new roadmap; its core elements enhance support from wealthy countries to developing ones for them to accelerate renewable energy and zero-carbon development (9).

And by the way, the Coronavirus hasn’t interfered with any of this. In fact it has helped, by causing major disruptions to the fossil fuel industry with barely a dent in the pace of renewable energy development.

The optimism among climate policy analysts is well justified. It follows the realization that carbon taxes, which have always been unpopular, were never the solution after all. It took us a couple of decades to learn this, but now that we have, we have a clear roadmap to follow. Assuming we are using that map to get somewhere by bicycle, we can’t stop pedalling, and there will be hills ahead. But knowing that the journey is finite, and that we will arrive, we can start to enjoy the scenery.

Anthony Patt

References:

1. Nordhaus, W. and Boyer, J., “Warming the world: economic modeling of global warming” MIT Press, Cambridge MA, 2000.
2. Patt, A., “Transforming energy: solving climate change with technology policy”, Cambridge University Press, New York, 2015.
3. Patt, A., et al. “Will policies to promote energy effiicency help or hinder achieving a 1.5°C climate target?” Energy Effic., 2018.
4. IRENA, “Global Renewables Outlook 2020” (2020), (available here).
5. Scrase, I., et al., “Transformative innovation: a report to the Department for Environment, Food and Rural Affairs”, 2009.
6. Romero, M. and Steinfeld, A., “Concentrating solar thermal power and thermochemical fuels”, Energy Environ. Sci., 2012.
7. Pfenninger, S., et al., “Potential for concentrating solar power to provide baseload and dispatchable power”. Nat. Clim. Chang., 2014.
8. Patt, A., et al., “Availability of private charging infrastructure influences readiness to buy electric cars”, Transp. Res. Part A Policy Pract., 2019.
9. Falkner, R., “The Paris Agreement and the new logic of international climate politics”, Int. Aff, 2016.

Received: 14.05.20, Ready: 04.06.20, Editors: Luisa Vernizzi, Alexander F. Brown.