Carbon Pricing: Wasting Time We Cannot Spare on the Optimal Steering Mechanism for the Titanic

I am a climate-energy economist open to incorporating in my analysis and policy prescriptions lessons from other disciplines, in this case political science and social psychology. This is why almost 20 years ago I started studying and writing about 'market-oriented regulations’, which I now refer to as 'flex-regs.' It is also why, 14 years ago, I proposed a ‘carbon management standard’ in my book, Sustainable Fossil Fuels. And it is why I have explained for over a decade to sincere politicians and their advisors how to integrate political acceptability as a policy evaluation criterion alongside cost-effectiveness. Sadly, whenever sincere politicians get interested in climate policy, voices like mine can get drowned out by suggestions from people who have never been interested in the empirical research, especially on the challenges of carbon pricing in first-past-the-post electoral systems where victory often depends on a tiny percentage of voters in a few swing suburban ridings. Also, these people seem to naively assume that this small percentage of voters are willing to invest the necessary time and smarts to carefully assess the verity of misinformation campaigns claiming that carbon pricing is highly punitive and economically disastrous.

Is it any surprise that many in the fossil fuel industry are keen to propose carbon pricing for all emissions of domestic consumers, but only a tiny percentage of their emissions?

Much more to come in a book I have written but not yet published.

Here is a link to my article in the December 15 Globe and Mail and the text is below:

Divisive carbon pricing. Much ado about nothing.

I am a climate-energy economist. Most of us tell politicians: “You must price carbon to succeed against climate change.” Later, after an election, we say, “You opposed carbon pricing and won. That’s bad policy.” Or, we say, “You promised carbon pricing and were defeated. You would have won had I designed and explained it. My students say I’d have been a great politician.”

Fiction? Think again. This has been the economists’ narrative for decades as politicians wrestle with the unforgiving task of decarbonization.

But guess what? Carbon pricing is not essential to stop burning coal and gasoline. We economists only say it is because we prefer it. If we were honest, we would explain that decarbonization can be achieved entirely with regulations. These will cost more, but not a great deal more if policy-makers use flexible regulations, or “flex-regs,” that allow companies and individuals to determine their cheapest way to decarbonize.

Thus, policy-makers can require the phase-out of coal plants while allowing competing electricity generators to determine the cheapest mix of low-emission wind, solar, hydro, geothermal, nuclear, wood, biomethane and natural gas. Likewise, policy-makers can require the phase-out of gasoline vehicles while allowing manufacturers and consumers to determine the contributions of electric, biofuel and hydrogen vehicles.

We economists should also explain that while carbon pricing gets all the media attention, flex-regs quietly do the heavy lifting. A decade ago, I helped design British Columbia’s mix of a carbon tax and flex-regs. One flex-reg caused BC Hydro to cancel intended coal and natural gas plants and instead develop low-carbon options from competitive bids. This flex-reg is three times more effective than B.C.’s carbon tax, and it faced no opposition. Last week, the B.C. government copied Quebec in implementing a zero-emission vehicle standard, a flex-reg to eliminate the purchase of gasoline vehicles by 2040.

The California Air Resources Board acknowledges that California’s carbon-pricing policy, which Quebec shares and Ontario did briefly, accounts for only 15 per cent of recent and projected emission reductions in California. Again, the key policies are flex-regs, namely electricity’s renewable portfolio standard and transportation’s low carbon-fuel standard and zero-emission vehicle standard.

Pollsters say Alberta Premier Rachel Notley’s carbon tax contributes significantly to her dim re-election prospects. Ironically, my research team finds the new tax will cause no more than 5 per cent of her climate plan’s projected reductions. The heavy lifting is from her coal-plant phase-out, methane regulations, a pre-existing flex-reg on large industries, and a cap on oil sands emissions. I’ll bet she wishes an economist had told her she didn’t need the tax, and that it does almost nothing anyway.

According to analysis by my research team, Prime Minister Justin Trudeau’s court-challenged carbon tax contributes 15 per cent of his climate plan’s reductions. He can easily replace it by tightening the stringency of his planned clean fuel standard, a flex-reg that applies to the same fuels as the carbon price. I’ll bet he wishes an economist had told him that, as I tried to in an article in Policy Options magazine shortly after his election.

But if carbon pricing is doing little to decarbonize the economy, why does it get all the attention? The reason is obvious to political scientists.

Surveys have long shown that taxes are a toxic issue for some voters. Unless it is an obvious tax cut, any other tax change for societal benefit can easily be framed by opponents as economically harmful. A politician proposing carbon pricing presents an irresistible target, especially if political opponents only need to swing 5 per cent of voters in key suburban ridings for electoral success.

Even if most voters support carbon pricing, this doesn’t matter in our first-past-the-post electoral system. What matters is small success with misinformation campaigns claiming that carbon taxes hurt middle-class suburbanites and rural residents. Some will believe it, and even if government returns carbon-tax revenue as tax cuts or dividend payments, some of these voters will still accept the untruths that carbon pricing is personally punitive.

Thus, a carbon tax puts a bulls-eye on a politician’s back, making it easier for opponents to promise to axe the tax and replace it with ineffective policies they untruthfully claim will cause decarbonization. They might even hint at regulations, without giving a timeline.

In 2008, then-Liberal leader Stéphane Dion asked to meet with me to discuss his plan to campaign on a carbon tax. I told him this was good policy, but bad politics, and that it would cost him the election. He did it anyway. Sure enough, Stephen Harper focused his campaign on “job-killing carbon taxes.” Mr. Harper’s victory ensured a lost decade of faking-it climate policies.

This time last year, I gave talks in France at the invitation of some academics trying to warn President Emmanuel Macron’s advisers that relying on carbon taxes would be a political disaster, stalling rather than advancing decarbonization. Unfortunately, their warning went unheeded, and now the violent gilets jaune protests in Paris have forced Mr. Macron to backpedal on the plan.

As long as we economists tell politicians they must price carbon, instead of admitting that flex-regs and other mechanisms can do it all, humanity will continue to flounder in the face of the decarbonization challenge. Sincere politicians cannot use carbon pricing as their lead policy. Even modest pricing efforts can help elect insincere politicians. But fortunately, we don’t need to price carbon. 

When allocating blame for humanity’s inaction on climate, it’s time for us economists to look in the mirror – instead of convincing our students what great politicians we would have been.