Regulating Greenhouse Gases

Written by Ryan McGuine //

Today’s shift toward toward an energy system that emits less greenhouse gases than the current one is necessary to prevent catastrophic climate change. However, due to the dynamics of energy transitions, achieving this transition on a meaningful timescale is remarkably difficult. Acknowledging the importance of this transition, the UN chose “Climate Action” as the 13th Sustainable Development Goal, and policymakers have a number of tools available to accelerate it.

Many policy instruments aim to reduce the price difference between carbon-intensive fuels and less carbon-intensive ones. Most directly, this can be done by removing subsidies to fossil fuels. Typically, “subsidies” refer to direct cash transfers from governments to businesses, which create a difference between what consumers pay for a product and what it costs to produce. Globally, these types of direct subsidies to fossil fuels totaled nearly $296 billion in 2017. However, burning fossil fuels also creates negative externalities, which represent a type of subsidy, in that governments allow fossil fuel companies to place costs on others. The IMF estimates that including the full societal and environmental costs of burning fossil fuels, global subsidies are close to $5.2 trillion.

Finding an economist who argues that subsidies are good would be next to impossible. They distort prices, leading to economically inefficient outcomes. At best, fossil fuel subsidies are not the worst pro-poor tool for politicians in developing countries, where governance tends to be weak and energy tends to be a relatively large percentage of budgets. Where fossil fuel subsidies exist in high-income countries, they are mostly due to powerful industries using profits to buy protection from competition, rather than them being a sensible policy. While removing fossil fuel subsidies may be politically unpopular in the short term, it is the right thing to do in the long term, and can be done in a way that minimizes economic hardships.

In addition to removing direct government subsidies to fossil fuels, the distributed costs placed on society by fossil fuel companies must be addressed. One way to do so is by instituting a price on carbon. If consumers paid closer to the full societal and environmental costs of burning fossil fuels, they would probably burn less of them. There are numerous mechanisms for pricing carbon, but ultimately the details of the mechanism are less important than there being a price on carbon in the first place. No government could know everything necessary to mandate in advance where emissions reductions should occur, and with a carbon price, they would not need to — it allows market participants to identify the lowest-cost emissions reductions.

A carbon price is likely to spur incremental progress in carbon emissions reductions, whereby entrepreneurs build upon the existing knowledge base to tweak processes and products, making them slightly less carbon-emitting with each cycle. For example, utilities might switch fuels from coal to natural gas to generate electricity, industrial companies might tweak their process to become more energy efficient, and consumers might switch from driving internal combustion vehicles to hybrids or electric vehicles. Carbon prices should be permanent, since any amount of carbon emitted is bad for the climate, regardless of when it is emitted.

Shrinking the price difference between carbon-intensive energy sources and less carbon-intensive alternatives can also be done by making the latter less expensive. Governments can do this by incentivizing technological innovation. Technologies that are commonplace today, but were once revolutionary, did not become commonplace because their competitors became incrementally more expensive. Rather, they became commonplace because they did something radically better, and did so for cheaper, than their competitors. Research into new technology involves a high failure rate, but government intervention that works with private industry can produce significant breakthroughs.

Governments should determine ambitious missions with a broad scope, under which they offer incentives to tackle specific challenges. Using solar photovoltaic as an example, innovation can be accelerated through efforts to foster early-stage technologies that have yet to attract private finance, efforts to increase transfers of knowledge around those technologies, and efforts to foster a wider demand for them. The overall mission should be permanent, but most specific interventions should be rolled back once those technologies can compete on their own merit.

All measures discussed so far address the price difference between fossil fuels and alternatives. However, there are many reasons besides the price difference that less carbon-intensive sources of energy are not more widely used. For example, capital-intensive, risk-averse sectors like heavy industry, transportation, and buildings face significant inertia to change related to their dependence on existing infrastructure. Each sector will probably have its own set of solutions that would complement a reduction in the technology price differential.

No single policy tool is capable of driving down greenhouse gas emissions as quickly as is necessary. However, it is possible to develop a suite of policies capable of inducing the development of technologies and adoption of practices consistent with a healthy climate, at a reasonable cost. Historically, energy transitions have moved very slowly — it took coal 35 years to provide 25% of the global primary energy demand, oil 40 years to do the same, and natural gas 55 years. This transition should not be allowed to take so long.

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