Want a Global Carbon Price? Help Out Renewable Companies First

In the run-up to the latest round of U.N. climate negotiations in Paris this December, policymakers have been placing a lot of emphasis on the top-down diplomacy approach to the global climate dilemma.  But a new paper by Jonas Meckling and colleagues from UC Berkeley argues that what climate policy is really missing is more pro-climate coalitions.  To build them, we have to start with industrial policy on the domestic level, not with the United Nations.

It’s all about what the authors refer to as green industrial policy.  By incentivizing green growth on the industrial front (as opposed to, say, the regulatory front or the diplomacy front), policymakers can build coalitions with well-organized actors like low-carbon industries and investors, who stand to benefit from these policies.  These coalitions can, in turn, help build momentum for broader, more efficient climate action.  And this kind of national or subnational approach can be more viable than international efforts, if only because it more easily lends itself to cooperation.  As the authors write in Science:

How do we create and maintain political and entrepreneurial will for the fundamental transformations in our economy, infrastructure, and institutions needed to decarbonize our energy systems?

Empirical research on actual decarbonization strategies gives an answer: Providing economic benefits supports effective policy-making in a way that penalizing industrial polluters does not.  Green industrial policy creates and enhances low-carbon industries, which brings economic constituencies into coalitions for decarbonization, as well as giving feedback that drives progress toward more comprehensive climate policy.

It’s a relatively straightforward insight, but Meckling and colleagues back it up with some fairly compelling evidence.  The two most common varieties of green industrial policies are renewable portfolio standards — in which nations, states, or utilities are required to generate a certain percentage of electricity using renewable sources — and feed-in tariffs — in which homeowners and some companies can sell renewable energy they produce (through solar panels or other means) to the grid.  The Science paper reports that of the 54 entities that had managed to adopt a carbon pricing scheme before 2013, nearly two-thirds had set up one of those industrial policy instruments first.

The authors argue that renewable portfolio standards and feed-in tariffs help create the necessary political lubricant for implementing a carbon price.  (Compare these cases to the United States’ failed attempt at passing a cap-and-trade scheme without first enacting substantial federal renewable energy policies.)  What’s particularly interesting about the argument is that while it does acknowledge that a carbon tax is probably the most efficient mechanism for reducing greenhouse gas emissions, it points out that we can’t implement one just because we want to:

Progress is slow because carbon regulation imposes costs on the powerful few — well-organized energy and energy-intensive manufacturing firms — and provides dispersed benefits to the weak many — the broader public.  The few regulatory losers have greater incentives and capacity to organize politically and prevent policy implementation.  So policies focused on imposing a cost on carbon often fail.  Even when carbon pricing schemes are created, they accommodate the demands of polluters, which renders them only marginally effective.

Read more at Want a Global Carbon Price? Help Out Renewable Companies First