The Cost of Reducing Carbon for Various U.S. Policies
Source: Put a Price on It: The How and Why of Pricing Carbon, U.S. Energy & Climate Roadmap, March 2021
The Biden administration made climate change a priority this year. But will its approach achieve the largest carbon emissions reductions per dollar spent? How can the United States get inexpensive carbon reductions?
The United States’ current approach to reducing carbon relies on a range of piecemeal sector- and technology-specific policies that chip away at emissions, but often in a way that makes them unnecessarily expensive. The chart shows estimates of the cost per ton abated for a range of proposed or implemented carbon reduction policies. While some policies, such as the Obama administration’s Clean Power Plan, show a high level of emissions reductions per dollar spent, others, such as the Weatherization Assistance Program, cost several hundred dollars per ton reduced. The price society pays for a given unit of climate mitigation varies widely across programs, and frequently far exceeds conventional estimates of the climate change damage caused by each ton of emissions. The Biden administration set an interim social cost of carbon at $51 per ton. To adjust to changes in global capital markets, using a lower discount rate of 2 percent brings the social cost of carbon to $125 per ton.
Regulations that prescribe a specific mechanism for reducing emissions have been an unreliable path to cutting emissions. The Biden administration could instead put a price on carbon. This approach, widely held by economists as the most cost-effective method to combat climate change, will ensure that firms and consumers choose the lowest cost actions that reduce emissions, thereby maximizing the emissions reductions that can be achieved for a given cost to the economy.
To design an optional carbon price policy, Michael Greenstone and Ishan Nath propose a few ingredients. First, carbon pricing minimizes costs by maximizing flexibility, and therefore should not include mandates on specific technologies and methods for reducing emissions that could make it more expensive to achieve the emissions reductions. Second, policymakers can choose between using a tax or a cap-and-trade system depending on their goals—both are efficient ways to reduce emissions. Third, because of market failures that hold back some private sector investment into clean energy, some of the revenue from a carbon price could be used to supplement government clean energy R&D, while some could be refunded to low-income households to ensure that the policy is equitable. Finally, it is vital that a carbon pricing policy encourage climate action in other countries. U.S. policymakers should align goals and harmonize policy mechanisms across countries.
Enacting a national, market-based framework to put a price on carbon can achieve ambitious climate change goals while minimizing the cost to the American economy. The most effective climate policy will be one that establishes a national carbon price and that incentivizes other countries to reduce their emissions as well.