Why Carbon Pricing Matters

Following news coverage can be easy. Understanding some of the terms it uses, less so. In our Flashcard series, The Atlantic explains ideas you may read about but never see spelled out. In this installment, we dig into the case for carbon pricing.

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The News

President Obama's first Oval Office address on the Gulf oil spill was panned in the press for (among other things) his failure to demand a price for carbon emissions. Senators Joe Lieberman and John Kerry have presented a bill with a carbon price under cap-and-trade, but other Democrats are leaving environmentalists in dismay by pushing energy plans that would skirt the issue entirely. What is a carbon price and why is it so important to the global warming debate?

The Gist

Modern, thriving economies produce a lot of dirty energy. At the current rate, global carbon dioxide emissions will triple by the year 2100. Many scientists project a five-to-six degree increase in temperatures over the next century, which would trigger unknowable shifts in sea levels, air quality and natural resources. If we want to slow global warming, we have to slow carbon emissions.

When something is free, you tend to use more of it. It's true for buffets and open bars, and it's the same with carbon. Today producers and consumers can burn coal and drive gas-guzzlers without fully paying for their contribution to rising carbon dioxide levels. Carbon emissions have a cost, but carbon emitters don't pay the price. Economists call this a "market failure." You can call it, "a recipe for toasting the planet."

We normally talk about two ways to price carbon: a carbon tax or a cap-and-trade system. These policies would be imposed on producers, but it's easier to think about them as if they focused on you. Imagine the government added 75 cents to every gallon of gasoline. You'd strongly consider using less of it. That's the carbon tax. Now imagine the government limited every American's driving privileges to 100 miles per week. That's a cap. If I needed to drive more, I'd "buy" extra miles from my friend who drives less. That's the trade. Both policies raise the price of carbon in the hopes that producers shift toward cleaner technologies and consumers use less dirty energy.

The Debate

There are basically three arguments against carbon pricing that enclose each other like Russian nesting dolls. The Big Doll objection is that global warming is not real. The Medium Doll objection is that global warming is real, but we're exaggerating its negative consequences -- or we're not sure emissions are to blame. The Small Doll objection is that global warming is real, and we're not exaggerating its negative consequences, but we should focus on less ambitious solutions, like targeted subsidies for low-carbon technologies (e.g., cash for wind farms, sun panels, grassy roofs...).

The Big Doll objection is almost certainly wrong. The Medium Doll objection is serious, but at the very least, climate change policy should be considered as social insurance against the likelihood of global climate catastrophe. The Small Doll objection is misguided because it assumes the government knows which technologies to fund. It's better to assume the government knows nothing about technology, period. Carbon prices send a price signal but allow the private economy to determine how to save money and create the smartest energy technologies without the government's big thumb on the scale.

There are some legitimate arguments about setting a carbon price that is too high, especially if other countries continue to pursue cheap and dirty energy. But an appropriate carbon price can achieve two goals. First, we nudge the private economy toward green tech in anticipation of rabid worldwide demand for clean energy in the next century. Second, government can use any profits from carbon prices to pay down the deficit and even reduce other taxes on Americans.
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For more Flashcard posts:

The Value-Added Tax

The Contagion Effect

Deficit Spending (Stimulus)

The Oil Spill Liability Cap

Carbon Pricing

Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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