Everyone’s Favorite Climate Change Fix

In Brussels and in Beijing, at top universities, in board rooms of the world’s largest companies, in city and state capitals throughout the US and beyond, and across the liberal-conservative spectrum, momentum is building behind the wonky financial tools that make carbon emissions more expensive.  Taxes and markets have been used to solve global environmental problems of the past.  Now there’s hope they can address today’s climate challenge.  It’s a viewpoint espoused by nonprofits like the Sierra Club.  But it also gets the backing of energy multinationals like Royal Dutch Shell.

“The transition to a cleaner future will require government action and the right incentives,” Rachel Kyte, the World Bank’s vice president and special envoy for climate change, wrote in an email to the Monitor.  “At the center should be strong public policy that puts a price on carbon pollution.” 

The idea is simple.  We consider carbon-heavy fuels like coal cheap because we usually don’t factor environmental costs into the final market price.  Inflating that price – either through a tax on carbon emissions or carbon credits that emitters can buy and sell – sends a clear and strong signal in the universal language of money.  Markets adapt to the added cost burden, discouraging emissions-heavy fuels and encouraging lower-carbon ones like natural gas, or zero-carbon sources like nuclear power and renewable energy.  Unlike clean-energy quotas or other top-down policies, carbon pricing offers a certain level of predictability, flexibility and efficiency that makes it attractive to a wide range of diverse constituencies.  Carbon taxes and emissions trading tell producers to reduce carbon emissions, but it allows each producer to determine for itself how to do so.

Putting the idea into practice, however, is another story.  Exactly how much should carbon cost?  Set the price too high and there’s a risk of public backlash against more expensive gasoline and other everyday goods.  Set it too low and emitters have little incentive to change their behavior.  Europe experienced the latter when it rolled out an emissions trading system in 2005.  US efforts to implement a similar cap-and-trade system stalled in the Senate.  Australia implemented a carbon tax in 2012, only to repeal it three years later amid shifting politics.

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