While many economists argue that taxing carbon dioxide is the most efficient and effective way to reduce U.S. greenhouse gas emissions, new work by noted energy and environment economist Severin Borenstein, head of the Haas Energy Institute at the University of California Berkeley, will fuel skepticism about the conventional economic wisdom.
Borenstein has long been agnostic about carbon taxes, writing over three years ago, “The idea that we can ratchet up the tax until we hit the desired emissions doesn’t recognize that most of the global emissions are now coming from relatively poor countries. Politically, they are even less likely than the developed world to accept a large carbon tax. And economically, a big tax, given current technologies, would significantly slow their climb out of poverty.”
His latest report, “Carbon Pricing, Clean Electricity Standards, and Clean Electricity Subsidies on the Path to Zero Emissions”, done with Haas associate Ryan Kellogg, argues that alternatives such as a “clean energy standard” (CES) or direct subsidies for zero carbon resources may be preferrable. When it comes to reducing CO2 from the electricity sector, the paper concludes, “Large pre-existing markups of retail electricity prices over marginal costs are likely to considerably weaken or even reverse the usual assumed efficiency advantage of carbon pricing policies over alternatives, including direct subsidization of clean electricity generation.”
In a Zoom webinar this week, Borenstein said that a carbon tax on electric power won’t necessarily result in the “right price” for retail electricity, because electricity is already over-priced. Gasoline, on the other hand, is under-priced.
In a Haas blog posting, Borenstein and Kellogg say one of the most touted virtues of a carbon tax is that it would target coal-fired emissions, the most significant of the greenhouse gases, first, is overstated. That’s because “CES or zero-emissions subsidies are also likely to do that. A carbon tax internalizes the GHG externality, so it incentivizes producers to first drop the sources that have the highest social cost, which would be coal. The other two policies tell producers to get rid of fossil plants but without the extra incentive to get rid of the big polluters. In that case, companies dump the most expensive plants first. But, if the private ongoing cost of running a plant is positively correlated with emissions, then the CES or clean subsidy policies also get rid of coal plants first.”
In an earlier paper, Borenstein and James Bushnell note, “Economists favor pricing pollution in part so that consumers face the full social marginal cost (SMC) of goods and services. But even without valuing externalities, retail electricity prices typically exceed private marginal cost, due to a utility’s need to cover average costs. Furthermore, due to costly storage, the marginal cost of electricity can fluctuate widely hour-to-hour, while retail prices do not. We show that residential electricity rates exceed average SMC in most of the US, but there is large variation, both geographically and temporally.”
At the bottom line, Borenstein and Kellogg argue that when it comes to electric greenhouse gas emissions, “Taxing carbon, mandating clean energy shares, and subsidizing clean energy each has pros and cons, from both economic and political perspectives. Our paper shows that the economic case for carbon pricing in the US electricity sector isn’t as strong as we and many others once thought. But it still has an important place in the quiver—especially for decarbonizing transportation and industrial energy—and implementing any of these three policies would be far better than sitting on our hands and doing nothing.”
What about transportation emissions? Because gasoline prices are too low (which conventional wisdom asserts are too high) a carbon tax would have the desired effect to raise the price and reduce the emissions. “What sort of autos does a ‘clean car mandate’ or EV subsidies crowd out? So far, at least, they look to be substituting for other small and medium sedans, rather than substituting for gas-slurping SUVs, muscle cars, and trucks,” they write. Noting that “almost everywhere in the US, gasoline is priced below its social cost. And gas being too cheap not only means EVs are less attractive, it also means that people drive more than they would if gas prices reflected the full social cost. The same logic applies to large industrial users of coal and natural gas, for which they pay well below social cost.”
–Kennedy Maize
Twitter (@kennedymaize)