Giving up on the economy-wide carbon pricing dream
A conversation with Cullenward & Victor, part one.
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All right, to business!
Getting geeky with the authors of a new book on carbon policy
I warned y’all at launch that we are going to get into some serious climate policy wonkery here at Volts, so buckle up — you’re about to get a whole week of it.
I recently had a long and meaty conversation with Danny Cullenward and David Victor, the two authors of a new book called Making Climate Policy Work. It’s an extended argument, not just that carbon pricing isn’t working, but that, at least in terms of its more grandiose aspirations, it can’t work. It flies in the face of fundamental political forces.
Both authors are longtime carbon policy veterans with experience in both academia and real-world policymaking. Cullenward is the policy director at CarbonPlan and a lecturer at Stanford Law School; Victor is the co-director of the Deep Decarbonization Initiative and a professor at the University of California - San Diego. (They will be doing an online book launch event on Weds. Dec. 16th at noon Eastern, free to the public.)
Climate discourse often consists in clarion moral calls coupled with pie-in-the-sky policy schemes. Politics — the mechanics of passing, implementing, and enforcing policies in the real world — gets waved away with the cursed term “political will.”
But understanding and planning around political economy is just as important as understanding and planning around physics. Neither can be be bypassed or overcome with sheer will.
Cullenward and Victor take political economy seriously. After an opening chapter that summarizes the history of carbon pricing and how it came to its dominant place in the policy conversation, chapters two through six each take on one of the aspirations of carbon pricing and shows how it has fallen short of its promise. (They primarily focus on cap-and-trade systems, since those account for most real-world carbon pricing, but many of the critiques also apply to carbon taxes.)
The aspirations they examine and deflate are:
Ambition: Even if carbon pricing programs began flawed, with modest targets, lots of offsets, and narrow coverage, it was said that they would inevitably increase their ambitions and grow. That mostly has not happened.
Coverage: The economic appeal of a carbon price is that it covers every sector of the economy equally. In practice, sectoral coverage has been narrow and allocation has been distorted by handouts and special favors.
Revenue: It is often boasted that carbon prices will raise money for further carbon-reduction spending, but in practice, that spending has been modest and its impacts poorly tracked.
Offsets: The practice of paying industries outside the carbon pricing system not to pollute — carbon offsetting — was going to ensure emission reductions while holding down costs. It has done the latter but not the former.
Linking: It was assumed that regional carbon pricing programs would draw in other states and eventually link to other regional programs, inexorably spreading. In practice, linkages have been few and far between.
None of these failures are accidents, Cullenward and Victor argue. In each case, the basic imperatives of politics work against the goal. By linking more industries and jurisdictions together, carbon pricing systems end up aggregating political opposition, making themselves vulnerable to attack, and being reduced to the lowest common denominator.
Carbon pricing isn’t useless. The last two chapters describe a better approach: more targeted at relatively mature individual sectors, more like a tax. But they are clear that the real carbon reductions happening today — even in places with carbon pricing systems — are being achieved through sector-specific regulations, i.e., good old industrial policy. And that is likely to be true going forward as well. We’re all better off not fooling ourselves about it.
I found the book incredibly illuminating. It helped give structure and coherence to reservations about carbon pricing I’ve been trying to express for years.
I also found our conversation illuminating, so I cleaned it up, I but didn’t cut much. I’m going to share it with you, even though it’s long. I’ll split it up over three days this week: today, Thursday, and Friday. It’s a smorgasbord of wonkery all week here at Volts.
Let’s jump in! In today’s edition, we talk about the enduring attraction of carbon pricing, why sectoral coverage has not expanded as advertised (and likely never will), and why political science has not fully engaged with climate change.
The enduring allure of carbon pricing
Putting aside the political difficulties of carbon pricing for a moment, maybe you could start by articulating the attraction of carbon pricing, the reason it has captured so much political focus for so long. As you say in the book, the theory makes sense!
The promise of carbon pricing is intricately linked to the scale and complexity of the climate problem itself. It’s massive. It's extremely difficult to get your head around. If you're serious about the scale of the transformation required, it means changing over the entire capital stock of every major industry in every major country over the course of our lifetimes. That's a pretty big lift.
To the extent there's a simple and elegant way to do it, one focused on making it as cheap as possible, you've got to reach for that to start. So it's not a surprise that a variety of people from different political and ideological backgrounds latched on to this idea. It gives you a tool to solve a massive problem that spans every sector and every aspect of day-to-day and industrial life. If you can achieve the ideals of it, it gets you most of what you want, as cheaply as possible.
We wrote a book that says that will never happen, for a variety of reasons. But it's really important to emphasize, we don't reject the promise [of carbon pricing] or the attractiveness of those motivations. We’re all grappling with the fundamental scale of the problem and the question of how you're going to pay for it in a world where there are so many competing priorities.
The motivation [for carbon pricing support] is important to understand, because if we're not going to achieve those things through carbon pricing, we're going to need to get them through other strategies. The simple carbon-pricing-good / carbon-pricing-bad discussion isn't answering the question: how do we make effective policy happen?
There are a lot of industries out there. There’s something intellectually appealing about the idea of a single lever that can move all of them at once.
And if you pull that single lever, you believe capital and other forms of effort are going to be allocated efficiently and fluidly across the economy. It’s going to make all these administrative problems magically easier.
We argue for the opposite: you need to work on this problem almost industry by industry.
One reason we wrote the book is that people believe the world is implementing carbon pricing and it is working. They have this goal of a simple instrument with big impacts — least-cost, fluidity across the economy, super elegant — and they believe that all these policymakers are following that advice. But in regimes that have carbon pricing, when you look closely at whether the carbon price is actually doing much work, you realize the story is totally different.
In some settings it works better than others — especially in the electric power industry, especially with high-quality institutions, like in Europe, and especially when you're dealing with mature technologies, using carbon pricing as a way to encourage static optimization. When industry is using choosing the best among known technologies, carbon pricing has a role. But administratively, that's the easy part of deep decarbonization.
When you're trying to go from coal to gas, it's a great tool. When you’re trying to invent a new technology, it's a struggle.
Why carbon pricing systems are never economy-wide (or close to it)
The core thesis of the book is that carbon pricing is attractive in theory but inevitably falls short in political reality. And that’s not just bad luck or circumstance, but intrinsic tensions between the theory of carbon pricing and the needs and demands of political constituencies.
One area where theory and practice clash is sectoral coverage. In economic theory, imposing the same per-ton price [on carbon] in every sector alike is part of the attraction. That’s how you find the cheapest carbon reductions first. But in practice, it turns out to be almost impossible to treat all sectors the same. Why is that?
There are two reasons. One is that the politics in each sector are different. In the transportation sector, for example, voters are super-sensitive to anything that visibly raises the cost of transportation fuels. Policies in that sector that have a visible impact on cost are politically toxic.
Whereas in a lot of other sectors — electric power, a lot of industry — you can impose costs and people are willing to go along with it, in part because they don't know, in part because the government has ways of compensating firms that are well organized politically.
By linking all the sectors together, in effect you are linking the politics together. And then the whole program becomes connected to the sea anchor of the least ambitious politics.
The other reason is that deep decarbonization is mostly a frontier technological-change problem. Most of the technologies don't exist, or there are only a few places where they exist. Each sector is very different in where and how you would want to apply resources to develop and test out new technologies. That can't be done with an economy-wide measure, it has to be done in a much more tailored and industrial-policy fashion.
Economics tells you the more sectors, the broader the coverage, the more efficient your overall program. And that's absolutely right as a theoretical claim. The problem is, the political logic works in reverse. The more sectors you combine together, the more you create this lowest-common-denominator problem.
The best example of this is the California cap-and-trade program, which boasts probably the most comprehensive coverage of any of large cap-and-trade or carbon tax program. It includes the electricity sector, the industrial sector, and now also transportation fuels, so it gets at somewhere around 75% of the state's emissions.
The problem is, the thing that's absolutely most sensitive of all is transportation prices. It's a very politically toxic thing to talk about. Any effort to increase the ambition of the overall system means that your opponents can run attack ads saying you’re trying to raise the price of gasoline, which is one of the things politicians hate to be seen doing the most. Everyone can fight you.
Conversely, if you have sector-specific programs, proponents of more aggressive policy only have to fight one industry at a time. That practical political insight has been almost completely lost in an otherwise sensible discussion about the economic benefits of broad coverage, which again, are unassailable as far as that logic goes. But the practical day-to-day politics means the more people you have inside the tent, the harder the fight.
WTF is “political will” in climate politics and why is nobody studying it
People might respond to these and similar pushbacks against carbon pricing by saying, well, of course it's going to be hard. It's a hard job, but it's important, so when you run into these political difficulties, you should just bull through them. You should apply more political will, which we’re going to have to muster regardless.
I did my PhD work in energy modeling and trained as an energy modeler. Proponents of bottom-up engineering-oriented solutions have had this fight about carbon pricing and technological change in Model Land for decades.
Well, what about politics? It's this black box. Everybody just invokes “political will.” Nobody has put structured thinking into how these politics operate. Not loose reporting or subjective stories, but real building blocks. We tried to do that, because we think that's missing. Once you do that, you can start to predict outcomes, test the validity of your theory, and compare the politics of different strategies to one another.
Our argument is that carbon pricing is structurally problematic and more difficult than other policy strategies. All climate strategies have political challenges. The problem is, this one requires you to take on the hardest ones every time. That's a structural problem.
This is an area where the academics have been slow to get their act together. In the field where I was originally trained, political science, there's almost no one engaged with the climate debate in a serious way.
I’ve been frustrated about that for years. Why is it?
Well, it's changing now, mainly with the younger generation. They're waiting for the older generation to die out. Part of the problem is the core disciplinary standards, which are very heavily anchored around classic theories of political choice, and very empirical.
One of the challenges in climate policy is that there's been a lot of talking, but not a lot of doing, until recently. So there's not a lot of data for political science. And then on top of that, the folks who care a lot about the climate problem end up being very activist about it and are not seen by the discipline as doing real science. I do think it's changing right now.
So I believe the phrase “political will” is nowhere in our book — it's only mentioned derisively.
When you look at California, if you look at the cap-and-trade system, it looks like we're doing $16-a-ton of effort. If you look at the low carbon fuel standard [LCFS], we're doing $200-a-ton of effort. If you look at a bunch of the regulatory programs, we're doing $2,000-a-ton of effort. That reveals that there is a lot of political will, if it's organized in a way that is politically sustainable. The problem with most of the carbon pricing schemes is that they're organized in a way that make the politics aggressively toxic.
What we're trying to do here is offer a very simple theory of politics that explains a lot of the variation in what we observe. We're hoping political scientists take that theory and formalize it and do empirical work with it.
Tune in Thursday for a thorough (and unforgiving) discussion of carbon offsets.
It's remarkable how little people are willing to pay for gas, which moves thousands of pounds of steel much farther and faster than they could by foot. Considering that burning fifty gallons of gas produces a ton of CO2 and moves an average 2017 model car 1250 miles (25 MPG), it's especially difficult to process that a carbon tax might add pennies per mile traveled. And when gas prices came down from the '08-'14 levels, people just got bigger, less efficient cars with the savings rather than pocketing it. It's maddening!
Canada's carbon tax is beyond a proposal or a plan. The initial implementation has shown durability and equity. It started April 2019 with a "dividend" (unfortunately through a tax credit rather than a monthly check) at the same time as the $20/ton broad-based (not sector-based) carbon tax took effect. For each Province they published the estimated dividend and the increased household costs. The carbon tax was the major Conservative opposition talking point in the 2019 elections and Trudeau and the carbon tax prevailed. In April 2020 in the midst of the pandemic, Trudeau issued the carbon dividend/tax credit and implemented the annual $10/ton increase to $30/ton. Trudeau's comment: “Our plan on pricing pollution puts more money upfront into people’s pockets than they would pay with the new price on pollution. We’re going to continue to focus on putting more money in people’s pockets to support them right across the country.” (Citing the response to Ontario's cap and trade and conflating it with the carbon tax policy is not sound. The lessons learned from cap and trade problems are generally not relevant to a discussion of carbon tax policy, e.g., fluctuating prices, regulatory programs undermining cap and trade and resource shuffling, cap forecasting.)
[Related note: Thanks for your assessment of offsets. It would be of high value if you both took on the issue of documenting the fundamental flaws and assessing alternatives to offsets. The big corporates/banks/Big Green are gearing up to push it hard. Trading desks have not had such an opportunity since the 2008 mortgage meltdown.]