The United States government should legislate and enforce a market-based climate mitigation strategy. The strategies I recommend are either cap-and-trade or a carbon tax and dividend. The goal of both systems is to reduce greenhouse gas emissions and incentivize a shift in energy use toward less carbon intensive fuels. These strategies would not only protect our environment, but allow the American economy to prosper.
(1) Why We Need to Legislate Now
Establishment of a market-based climate change strategy is critical to protect our environment and the home of our future generations. The goal of my recommended strategies is to reduce greenhouse gas emissions, and, in turn, reduce the effects of global warming. Greenhouse gases are gases that trap heat in the atmosphere, causing Earth’s atmosphere to warm. This warming is predicted to cause more intense, frequent Atlantic hurricanes, changes in precipitation patterns, the melting of ice in the Arctic Ocean, and a 1-4 feet sea level rise by 2100.1Human drivers of climate change include emissions from burning coal, natural gas and oil in power plants and cars, deforestation, and pollution.
In January 2019, United States carbon emissions started to rise again after a three-year decline.2 The United States should reclaim its role as a leader on environmental issues and protect its future generations by legislating a market-based climate change mitigation strategy.
Cap-and-trade is a program designed to limit industrial emissions of environmentally harmful gases and chemicals. Cap-and-trade functions by the government issuing a limited number of yearly permits.3 The permits allow companies to emit a certain amount of an environmentally harmful substance. The total amount of emissions the permits allow becomes the “cap.” If businesses emit less than their yearly entitlement, they can trade unused permits to other companies. However, if companies emit more than their permits allow, they will face a tax penalty.
To meet emissions reductions, the federal government has to reduce the number of available credits over time.4 Since supply of the permits will fall, their price will rise yearly. This creates a market incentive for businesses to invest in cleaner energy technologies that are becoming cheaper relative to buying permits.
Cap-and-trade systems have numerous advantages. First, allowing trading within the cap allows for emission reduction at a lower cost than command and control approaches.5 The ability to trade permits allows businesses to have flexibility to determine what is most cost-effective for them. Since the cap-and-trade market determines the price of carbon, there is a reduced risk of price shocks since the market is more stable compared to other approaches. Perhaps the greatest benefit is that cap-and-trade helps firms identify low-cost methods of reducing emissions on site, such as investing in energy efficiency, which can lead to a reduction in overheads.5 The business will be more sustainable for the future and can influence other business’s practices.
Cap-and-trade systems have already been established and are functioning well in the United States. California’s cap-and-trade program was launched in 2013. The program is the fourth largest in the world. California’s emissions trading system (ETS) is expected to reduce greenhouse gas emissions from regulated entities by more than 16 percent between 2013 and 2020, and by an additional 40 percent by 2030.6 The cap-and-trade rule applies to large electric power plants, large industrial plants, and fuel distributors.
(3) Carbon Tax and Dividends
A carbon tax/fee and dividend is a market-based regulation that levies a progressively rising tax on the utilization of carbon-based fuels and returns all of that revenue to the public as a regular energy dividend. The following steps describe the basic components of this concept: 7
- A fee or tax is levied on carbon-based fuels when the fuels enter the economy based on their carbon content. A commonly proposed starting point for a fee is $10 to $16 per ton of carbon that will be emitted when the fuel is burned.
- The carbon fee is progressively increased through time to incentivize companies and citizens to transition to other low-carbon energy sources and products.
- Establishment of a border tax adjustment, or import fees levied by carbon-taxing countries on goods manufactured in non-carbon-taxing countries.8
- The federal government will return all of the profit made from carbon fees to citizens through equal dividends.
There are a number of advantages to a carbon fee and dividend system. First, the idea is politically feasible in the U.S. A carbon fee and dividend is very bipartisan. On January 24, 2019, a group of lawmakers in the U.S. House of Representatives reintroduced the Energy Innovation and Carbon Dividend Act. This Act, similar to what I am recommending, was supported by Democrats and Republicans alike in the House of Representatives.9 Not only is a carbon fee and dividend system bipartisan, but the idea has widespread support from American citizens. A recent Yale poll conducted in August of 2018 showed nationwide support for a neutral carbon tax.10 While this system is politically feasible and has widespread support, adoption of the idea has still been slow due to disagreement over how to price the fee.
Furthermore, other countries have been successful in implementing carbon tax and dividend programs. A key part of the system, the fee, has been legislated successfully in countries like Australia. Australia gives convincing proof that carbon taxes work. The country instituted a carbon tax in July 2012 but repealed it two years later in July of 2014. A report published in May 2013 assessed whether the Australian carbon tax was functioning. The report showed that in fact it was, and carbon emissions were down 7.7 percent from the previous nine months.11 A graph from Australia’s Guardian below also gives convincing evidence for the effectiveness of a carbon tax at reducing carbon emissions. The graph shows that Australian carbon emissions declined from July 2012 to July 2014 and then began to rise again once the tax was repealed.11
(5) Final Considerations
A carbon tax and cap-and trade do not only have to be used to reduce carbon dioxide emissions. If the United States ever takes my recommendation and adopts one of these market-based strategies, they should be applied to reduce other greenhouse gas emissions like methane and other environmentally-harmful chemicals.
The most recent development in institution of a federal carbon tax in the United States was the Energy Innovation and Carbon Dividend Act of 2019. The House bill proposes a fee on carbon to encourage market-driven innovation of clean energy technologies to reduce greenhouse gas emissions. The fees are recycled to citizens in monthly dividends.
The most recent development in institution of a cap-and-trade system in the United States is California’s cap-and-trade system mentioned previously as well as Regional Greenhouse Gas Initiative (RGGI). RGGI is the cooperative effort among the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont to cap and reduce carbon dioxide emissions from the power sector. RGGI compliance applies to fossil-fueled power plants 25MW and larger within the region.
- NASA, “How Climate is Changing,” https://climate.nasa.gov/effects/, (April 12, 2019)
- Umair Irfan, “After years of decline, US carbon emissions are rising again,” https://www.vox.com/2019/1/8/18174082/us-carbon-emissions-2018, (January 9, 2019)
- EPA, “What is Emissions Trading,” https://www.epa.gov/emissions-trading-resources/what-emissions-trading, (2019)
- Union of Concerned Scientists, “Carbon Pricing 101,” https://www.ucsusa.org/global-warming/reduce-emissions/cap-trade-carbon-tax, (2018)
- International Emissions Trading Association, “Benefits of Emissions Trading,” https://www.ieta.org/resources/Resources/101s/ieta-emissions-trading-101-library-april2015.pdf, (March 2015)
- Center for Climate and Energy Solutions, “California Cap and Trade,” https://www.c2es.org/content/california-cap-and-trade/, (2018)
- Citizen’s Climate Lobby, “The Basics of Carbon Fee and Dividend,” https://citizensclimatelobby.org/basics-carbon-fee-dividend/, (2018)
- Carbon Tax Center, “Border Adjustments,” https://www.carbontax.org/nuts-and-bolts/border-adjustments/, (2018)
- Energy Innovation Act, “The Bipartisan Climate Solution,” https://energyinnovationact.org/, (2018)
- Citizen’s Climate Lobby, “Yale poll shows nationwide support for revenue-neutral carbon tax,” https://citizensclimatelobby.org/yale-poll-shows-nationwide-support-for-revenue-neutral-carbon-tax/, (2018)
- Carbon Tax Center, “Where Carbon is Taxed,” https://www.carbontax.org/where-carbon-is-taxed/#Australia, (2019)
2 thoughts on “The United States Needs a Market-Based Climate Mitigation Strategy”
I enjoyed reading this comprehensive overview of some of the key strategies we can use to combat climate change in the United States! I agree that there are two key policy methods that could be implemented, although they should not be mutually exclusive. In my opinion, we should aim to combat the use of carbon in our nation’s economy in any way that we can, so I would encourage my legislators to support either of the policies you proposed. I see the success of California’s cap-and-trade program, but I am hesitant that it would function as effectively on a nationwide scale. California’s economy is built on innovation and constantly inventing new technologies, while other states, particularly those with heavy reserves of oil and natural gas, are going to be less likely to transition to a carbon-free economy. As a result of this, most of the tradable permits will end up in the hands of a few states who rely heavily on carbon-based energy for jobs. However, there is still a lot of merit to this proposal, and it should be seriously considered in the legislature.
This is a great blog post that highlights the merits of a market-based approach to environmental regulation. As we’ve discussed in class, cap-and-trade or tax-based policy instruments can be a more economically efficient means of controlling greenhouse gas emissions than traditional, command-and-control approaches are. However, I think an important consideration to note is the potential distribution effects of these market-based policies. While they may be more efficient in terms of getting polluters to limit their pollution, significant equity concerns arise in terms of thinking about how firms will curb their pollution to meet the caps set by the government. Specifically, will the firms then shift their pollution to places where polluting is essentially cheaper, oftentimes in marginalized, low-income or rural areas? Policymakers will need to consider these distribution effects when designing equitable market-based environmental policies.