We May Have Been Thinking About a Carbon Price All Wrong

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Putting a price on carbon is a key element of climate policy. The idea is simple: Carbon pollution is making the Earth uninhabitable, but companies have no incentive to stop polluting because they’re sociopathic. So slap a fee on every ton emitted, and it should (in theory) cause companies to find other, less polluting ways of producing widgets, sprockets, and whatnot.

Conventional wisdom has suggested starting with a low price and ramping it up over time. But a new paper published Tuesday in the Proceedings of the National Academy of Sciences turns that logic on its head, suggesting the price should start high and, after a few years of ramping up, decline over time. That’s not to say the approach is the be all, end all, but it could offer a new pathway to make carbon pricing more effective and reduce climate damages.

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Pricing climate pollution, whether it’s through a carbon market or a carbon tax, has become a sort of holy grail across the political spectrum. Splinter’s Hamilton Nolan is a proponent; Republicans in Congress have sponsored carbon tax legislation numerous times (though it’s gone nowhere); and a bipartisan bunch of economists are into it. The general structure is that the price per ton of carbon would start low (around $35-$40) and rise each year thereafter. The thought is that we’ll all be richer in the future and that the market will innovate over time to clean up the carbon mess before it gets out of hand.

But the new research suggests that thinking could be all backwards. Economists from New York University, Columbia University, Kepos Capital—a private financial firm—and formerly Goldman Sachs put together a new model that includes concerns about climate uncertainty in their price calculation. With climate change, we know there are a range of outcomes ranging from pretty damn bad to extremely screwed and that the range gets even wider farther into the future. That’s actually an argument to act quickly now to constrain emissions and avoid the worst-case scenario. Or put in the language of the financial models that this new framework borrows from, it’s all about managing risk.

“People in 2300 will know more about the climate in 2300 than we do today,” Gernot Wagner, an economist from NYU who worked on the paper, told Earther. “Uncertainty clears up over time.”

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The findings show that carbon pricing should start much higher than current estimates of the best available price. It should then rise for a few years before falling steadily hundreds of years into the future (the study models out to 2300, which Wagner said is fairly standard practice for this type of work).

“The critical insight is that the benefits of emissions reductions are massively influenced by avoiding the possibility of catastrophic outcomes,” Noah Kaufman, a research scholar at Columbia’s Center on Global Energy Policy who wasn’t involved with the new study, told Earther in an email. “I know, I know, this is already obvious to everyone except economists, but it’s a point that still needs to be made because social cost of carbon estimates that ignore the benefits of risk reduction are still influential.”

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The social cost of carbon is an idea that underpins nearly all climate economics modeling. It focuses on the harm a ton of carbon pollution will do in the future. The U.S. government’s best estimates peg the current social cost of carbon at $40 per ton, while other estimates vary and in many cases are much, much higher, given the potential catastrophic impacts of climate change.

Wagner said he believes the model “conveys something about climate risk that other views of the world don’t... [and] that there is a reason in the long run to think about how to design climate policy to take these kinds of risks and uncertainties much more seriously, which does mean a much higher carbon price today.”

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But whether that can be done in the current political climate is a whole other question. There are 57 carbon-pricing initiatives around the globe covering 20 percent of all emissions, according to the World Bank. Yet only 5 percent of those emissions are being priced at a level consistent with what the current “optimal” price would be, to say nothing of the much higher prices the new research argues would be more effective (there are also arguments against a carbon price and using market mechanisms in general to as the main methods of combatting climate change, but that’s another article).

“For me, the crux of the paper is that it points to the value of acting now—this emerges clearly and it is still perhaps not as forcefully appreciated as it should be,” Cameron Hepburn, the director of Oxford’s Smith School of Enterprise and the Environment, told Earther in an email. “The challenge with the paper is the inadequate reference to real-world politics, which is a bit surprising given the authors.”

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But like Kaufman, he argued the paper makes one thing blindingly clear: Humanity needs to get its act together and, well, act to reduce emissions ASAP.

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