Thread by @JesseJenkins

Why do we keep falling short on #carbon pricing? (And what to do about it)

A thread on how policy can accelerate the pace of progress towards a low-carbon #energy system commensurate with the threat posed by #climatechange...

Putting a price on carbon.

The IPCC report on holding global warming to 1.5°C released Sunday calls for it. A share of the Nobel in Economics was awarded to William Nordhaus this week for championing it. It's arguably the most efficient and powerful climate policy available.

So why do governments around the world keep falling short on carbon pricing, and how can break this logjam? I discussed these challenges with the @NYTimes @BradPlumer in an article appearing in yesterday's paper. nytimes.com/2018/10/08/cli…

Carbon pricing is a poweful tool in the climate policy arsenal. Unfortunately, despite clear efficiency advantages, governments throughout the world routinely fail to price the full damages caused by carbon dioxide emissions. See this infographic for the state of play as of 2015.

According to a recent OECD report, carbon pricing policies are expanding worldwide, but are uniformly too low to drive rapid decarbonization. ~90% of total GHG emissions face a CO2 price less than €30/ton. ~55% of global emissions are not priced at all. threadreaderapp.com/thread/1043162…

Based on my research (and the work of others), I believe this “carbon pricing gap” -- and the potential solutions to overcome it -- can be best explained by paying closer attention to the political economy of carbon pricing. bit.ly/PoliticalConst…

Carbon pricing might lower the cost of climate policy across the entire economy. But pricing carbon also creates winners and losers within the economy. These distributional impacts will fundamentally shape what can and can't be accomplished in the political realm.

In the case of carbon pricing, the "losers" may include fossil fuel sectors, firms with significant capital invested in coal or gas power plants, energy-intensive industries, and agricultural interests, which are all concentrated and well organized to defend their interests.

The benefits of carbon pricing on the other hand, are more diffuse. Support for clean energy is more indirect than mandates or subsidies directly benefiting popular renewable energy sources or making the purchase of clean vehicles or appliances less costly for consumers.

And of course, the substantial gains from avoiding climate damages are shared broadly by everyone in the world and for generations to come. It is hard to think of a more diffuse set of beneficiaries for policy intervention than that...

Policymakers thus favor policies that minimize salient impacts on business, households & key sectors, redistribute benefits to secure a politically-durable coalition, and/or spread costs broadly &indirectly (e.g. across tax base or through indirect costs of regulatory compliance)

And where carbon prices are implemented, they almost universally fall short of the optimal prices needed to avert climate damages. vox.com/2016/4/26/1147…

As an economist might say (see rodrik.typepad.com/dani_rodriks_w…), we live in a "second best" world.

In my view, that world demands creative policy solutions to make the kind of progress we need to see to confront climate change.

I discuss this in depth in two previous papers (here bit.ly/PoliticalConst… & here wider.unu.edu/publication/ca…) and summarize the key argument below...

In my view, we must not only pursue higher carbon prices, but also pay closer attention to policies that can drive two positive feedback loops that might be able to accelerate carbon reductions over time to the pace needed to avoid the most dangerous effects of climate change...

First, policies that spur innovation and maturation of emerging technologies can drive down the cost of cleaner alternatives to fossil fuels, such as solar power or electric vehicles, which in turn enables much greater carbon reductions within a given political constraint.

The costs of solar and wind power have both declined by roughly two-thirds to three-quarters over the last decade alone, for example. That means we can now accomplish three to four times more carbon reductions from these technologies with a fixed amount of "political will."

At the same time, the availability of cheaper climate solutions can bolster politicians' confidence in adopting more stringent climate policies, as @GernotWagner, @ClimateOpp et al. argue in a @Nature Comment here nature.com/news/energy-po…

As I've argued for years (eg bit.ly/JenkinsTestimo…), innovation and technology policy to make climate solutions cheap is thus a powerful lever -- perhaps the greatest at our disposal -- to accelerate carbon reductions and climate ambition over time.

Second, policies that are narrower in scope or less efficient than a CO2 price may nevertheless be more politically viable, including standards requiring more zero emissions electricity or vehicles, subsidies for these resources, or regulations to reduce air and water pollution.

Indeed, as my work with MIT's @vjkarplus demonstrates (wider.unu.edu/publication/ca…), when facing political constraints that limit carbon pricing to suboptimal levels, subsidies or mandates requiring additional mitigation can be welfare enhancing, so long as...

...so long as the marginal cost of economic distortions caused by "second best" policies remains below the reduction in marginal climate damages not yet internalized in market transactions. In some cases, well designed policies can come very close to first best outcomes.

In addition, these "second best" (or even "third best") policies may help reshape the political economy of climate policy over time to enable more ambitious (and efficient) actions, by strengthening clean energy interests and weakening incumbent sectors.

Thinking carefully about how to sequence immediately feasible policies to accelerate policy ambition -- and avoid pernicious lock-in effects -- is thus extremely important as well. See this excellent @NatureEnergyJnl paper by @jonasmeckling @GernotWagner nature.com/articles/s4156…

In sum, if the world is going to get on track to slash CO2 , policy makers have to harness all 3 of these powerful levers: (1) carbon pricing; (2) policy to reduce cost of climate solutions; and (3) sequencing "complementary" policies to reshape political constraints over time.

That's the end of this thread. I welcome feedback, pointers to good research or researchers on these topics, and ideas on how we can best accelerate the inadequate pace of carbon reductions over time. The stakes are high. Creative solutions are needed now more than ever. /End

Here is this entire thread on one page courtesy of the indispensible @threadreaderapp threadreaderapp.com/thread/1050022…

p.s. For those who want to dive deeper on this topic, I've just assembled a bibliography of key works on the political economy of carbon pricing and climate policy here docs.google.com/document/d/1uH…

I'll keep this updated, so if you have suggestions, please message me.