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A carbon tax would be more economically efficient for curbing greenhouse gas emissions from electricity by 2040 than renewable portfolio standards or production tax credits, according to a recent report.
The analysis published last month by Ohio State University researchers highlights the contrast between what would be least costly from an economic standpoint and how politicians have favored piecemeal steps to address climate change.
So far, the United States has shied away from a carbon tax. Under a tax, the market price of fossil fuel generation would increase to reflect the health, climate and other social impacts that polluters currently shift to the public.
Instead, the federal government has used production tax credits. And various states have renewable portfolio standards. Ohio was among those states, but its clean energy standards were gutted by House Bill 6, the passage of which is now the focus of a federal corruption case.
The researchers compared the costs of those three potential policy solutions for cutting greenhouse gas emissions from electricity generation by 80% by 2040. Getting to an energy mix that would provide that result would cost less with a carbon tax than either renewable portfolio standards or production tax credits, the team reported in the journal Energy Markets.
“Unsurprisingly, we found that the policy mechanisms that we are willing to use are relatively expensive,” compared to the carbon tax that politicians have so far been unwilling to impose, said economist Ramteen Sioshansi at Ohio State.
A well-calculated carbon tax would make the costs of fossil fuel use obvious and apparent, by making energy prices reflect the emissions’ cost to society. In contrast, the higher costs of production tax credits and renewable portfolio standards are not as directly apparent.
Production tax credits reduce total tax liability for a share of the cost of certain clean energy investments. They can be viewed either as partial compensation for public benefit provided by the investments or as subsidies to encourage those investments. But people don’t see them as part of their energy bill.
Renewable portfolio standards require a certain percentage of generation from renewable sources. The standards can help spur demand for renewable energy, but let the market determine which renewable resources will be procured.
“I think the study itself is strong for what it is,” said Greg Lawson, a research fellow at the Buckeye Institute, which advocates for free-market public policies. In his view, the analysis “makes sense given the assumptions.”
“In the real world, it’s very unlikely all those things are going to happen, and you’re going to end up with disproportionate impacts,” Lawson said.
Politicians likely would hesitate to impose a carbon tax at the level necessary to achieve those emissions in time, said energy analyst Dennis Wamsted at the Institute for Energy Economics and Financial Analysis. That would cause further delay in a situation where there’s already a very short time frame in which the United States needs to take action to address climate change, he noted. Climate scientists have warned about environmental tipping points if action is not taken to address climate change in a timely manner.
Wamsted also noted that more recent data show that costs for renewable energy and natural gas have both come down since studies noted in the Ohio State report. He likewise questioned the possible addition of nuclear energy in the mix used for the analysis, especially since small nuclear reactors aren’t projected to come online until at least the mid-2030s.
“The costs of these technologies have changed since we conducted the study and will continue doing so,” Sioshansi said. “These changes certainly will lead to changes in the magnitude of the costs that are reported in the results. However, the relative cost differences will remain.” In other words, “I do not expect that the headline finding that carbon pricing is more efficient than the other policy mechanisms would change.”
Likewise, while local opposition can cause delays in various types of generation being built, “I doubt these types of delays would be more prevalent under one policy scenario compared to another,” Sioshansi said.
Public support for a carbon tax appears to be growing despite others’ doubts about its political chances for success, suggested Stefano Carattini, an economist at Georgia State University in Atlanta. In 2019, he and researchers at the CICERO Center for International Climate Research in Norway surveyed people in five countries about the acceptability of a global carbon tax.
Three proposals got support from a majority of those surveyed in the United States, Australia, India, South Africa and the United Kingdom. The first two plans called for lowering income taxes or redistributing benefits to each citizen. Both could be achieved through so-called harmonized carbon taxes, which would work somewhat similarly to the way the United States distributed COVID-19 assistance checks last year.
The third proposal that got majority support in all five countries would earmark funds for climate change mitigation programs in all countries. That approach would require international agreement on a global carbon tax. The group shared its analysis in the journal Nature in 2019.
Since then, “there’s quite a bit of momentum behind carbon pricing,” Carattini said. “Carbon pricing is the most cost-effective, or some people would say efficient, way to reduce greenhouse gas emissions.”
An advantage of harmonized carbon taxes is that they could offset what might otherwise be regressive impacts, Carattini noted, because far more people are in lower tax brackets. He also pointed to the example of Canada, which began revenue-neutral carbon pricing in 2019.
Early projections from the Canadian government showed that 70% of people would get more back from the carbon tax than the extra costs paid for electricity, with savings to increase over time as the carbon tax goes up. So most people are “actually getting richer thanks to the carbon tax,” Carattini said.
More businesses appear to be coming around to the concept of a carbon tax as well. In September the Business Roundtable announced support for carbon pricing. And earlier this month, a draft statement from the American Petroleum Institute suggested the organization might “support economy-wide carbon pricing as the primary government climate policy instrument to reduce CO2 emissions while helping keep energy affordable, instead of mandates or prescriptive regulatory action.”
Prescriptive regulatory action, such as emissions limits, also can have the effect of driving innovation and causing shifts in the market, Wamsted said. That technology-forcing approach drove innovation after the 1990 amendments to the Clean Air Act were passed, he noted. More recently, the growth in renewable generation nationwide has encouraged growth in the battery storage market, he added.
In any case, scientists have warned about mounting risks as climate change continues. And the Biden administration has made clear that dealing with climate change is a priority. It remains to be seen what policies the administration actually proposes and can get passed through Congress.
Until now, though, “the things that we have political willingness to do to address climate change are the most inefficient ways from a policy perspective of doing it,” Sioshansi said. “The thing that would be much less expensive, we are not willing to do. Politics are getting in the way of doing this most cost-effectively.”