An idea to move the carbon pricing conversation along

Here’s an idea that might help advance the conversation on pricing carbon.

In discussing CCL’s support for the Manchin-Barrasso permitting reform bill with my chapter’s leader, he said something along the lines of: There’s ¾ of a loaf on the table. Let’s take it.

In a similar vein, I wonder if CCL might be wise to take a less purist approach to carbon pricing. We all know that CFD is fair and elegant, practical and smart. But we also know that the politics and post-implementation communication are more than a little challenging.

What if, for now, we were to push something a little less elegant and a little less efficient, but possibly much more politically palatable. Namely, I’m thinking of a tax on the emissions from a subset of the products covered by the PROVE IT Act—aluminum, steel, and cement, plus aviation fuel and cargo shipping fuel.

Why these products in particular? For one, they collectively account for a pretty sizeable percentage of global emissions, while contributing only a little to the overall price of the final products or services that they go into. The best example is cement, which is only a small percentage (by weight) of concrete, which itself makes up about 1% of the cost of an average residential building. We can afford to have cement cost a lot more before consumers will care, or even notice. Contrast that with gasoline prices, and you can see why cement could be a ripe target for a carbon fee. The numbers are a little less dramatic for the other products I listed above, but they are still in the favorable range.

Next, the products I’m suggesting all have good prospects for governments to make advance market commitments to incentivize faster development/deployment of cleaner alternatives. By promising to buy clean products, governments can open up investment opportunities for companies that haven’t yet been able to scale production of things like green cement and steel. In practice, the revenue from taxing the dirty versions of cement, steel, bunker fuel, etc. could be used to pay for any green premium associated with the early stages of those advance market commitments. The federal government itself buys a lot of this stuff (on the fuels, think military applications), but could also use some of the revenue to incentivize states and localities to join in making advance market commitments. Governments at all levels build a lot of stuff. Yes, I am suggesting that we ditch the dividend for these fees and use the proceeds to buy greener products.

A big disadvantage to this approach is that it is more complicated than CCL’s longstanding, straightforward CFD approach. On the plus side, we’re already advocating for the PROVE IT Act, which would require a lot of the work needed to carry out a plan like this. The biggest advantage, I think, is that the effects on the daily economic lives of consumers/voters would be hard to notice, and therefore not politically contentious (too optimistic?), while the potential climate benefits could be non-trivial.

This kind of approach seems consistent with CCL’s idea of getting people somehow to yes on a small thing, and then building on that to get to bigger and better things.

The other place that carbon fees can be used with relatively small political risk is in markets that have well-developed and widely accessible clean alternatives. In these cases, the carbon fee does the work of speeding up a transition already well underway. We may be getting close to that on gasoline for passenger vehicles and residential natural gas, but I don’t think we’re quite there. In the case of gasoline (to be replaced by EV batteries), I’m thinking of all the unreliable chargers out there, all the folks with no place to charge at home, and the lag in EV penetration into the used car market, which serves more economically vulnerable folks. With regard to residential gas, we’ll have to see how much of the lift is accomplished by the HOMES / HER programs. Maybe coal used in power plants would be a good target. It’s a pretty crazy thing to be using, and a carbon tax would make the economics easier to figure out for the power companies.

Would love to hear what others think.