Carbon pricing works! Doesn’t! Does!

In arguing for efficiency mandates, Joe Romm notes the failings of carbon pricing as a solution to climate change:

> That means a price of $400 a metric ton of carbon (whether achieved through a tax or a cap & trade system) would increase the price of gasoline a mere $1 a gallon. How much efficiency would that drive? Not bloody much!

Joe Romm more recently comments on the future of the electric car:

> If hybrids drop in price and gasoline resumes its peak-oil driven upward trend, then by, say 2015, it would simply not make sense to bother producing a non-hybrid version of any vehicle.

This analysis doesn’t quite compute. Carbon pricing doesn’t matter, but oil’s upward climb (another form of carbon price) is about to drive conventional cars out of existence? Granted, the supply-driven swings in oil price are far larger than anything we expect from carbon pricing in the near term, but there still seems to be something missing from the analysis.

The main problem is the confusion between demand for driving with demand for internal combustion engines. Gasoline prices rise and fall by dramatic amounts, and miles driven only seem to climb (until they don’t). Europeans pay enormous gasoline taxes, and still they won’t quit their cars. This point is often taken too far, but people really do seem to like to drive.

Well, of course they do: personal mobility is an incredible convenience and an economic necessity. People want it a lot, and even in lean times they’ll give up a many other things before they give up their driving.

Now consider spark plugs. Would anyone really miss spark plugs? Or consider spark plugs’ complementary good: gasoline. The piece missing (or at least inconsistently treated) in Romm’s analysis is the arrival of a new form of personal mobility — the hybrid electric — that is about as good and almost as cheap as the internal combustion engine. Without hybrids, carbon pricing is fairly hopeless as lever on gasoline consumption. With hybrids, pricing starts to matter a lot.

Of course, carbon pricing didn’t create hybrid electric cars. Neither did efficiency mandates. Carbon pricing won’t do a very good job curbing demand for driving. Neither will efficiency mandates. But both carbon pricing and efficiency mandates absolutely can help to create a market for electric cars. Moreover, carbon pricing helps to create a market for renewable energy to power those electric cars. Efficiency mandates don’t. Carbon pricing also makes meat more expensive and causes companies to move factories across oceans, both things efficiency mandates aren’t so good at.

To be clear, Romm isn’t opposed to carbon pricing. Rather, he appears to be opposed to the faintly ludicrous strawman notion that “we aren’t going to meet a 450 ppm target by just raising carbon prices alone,” a position advocated by roughly no one. Likewise, I’m all in favor of efficiency standards, which offer much faster emissions reductions than carbon pricing alone, in spite of my leeriness of the government’s execrable track record on this sort of thing.

Nevertheless, the notion that transportation emissions won’t yield to carbon pricing is not nearly so well supported by the evidence as Romm suggests. The recent surge in the price of oil coupled with coming technological advances suggest carbon price sensitivity is higher than many suppose.

Perhaps more importantly, a questionable premise underlies both Romm’s original analysis and similar criticism of cap-and-trade from less knowledgeable sources. That premise, in brief, is that we need Solution X to beat climate change; Solution X is only viable if carbon prices become really high; therefore carbon pricing is bound to fail.

For the Wall Street Journal, Solution X is clean coal. For Romm, it’s electric cars. Both may be worthy technologies (although my money is on electric cars), but if carbon pricing can’t wave them into being tomorrow, the problem may simply be that they’re not quite ready yet. Reality matters. If the technology exists, carbon pricing will favor it. If it doesn’t exist yet, carbon pricing will favor cheaper forms of emissions reductions. That’s how the system is supposed to work.

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adam

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  1. Tom Harrison - October 27, 2008

    Adam –
    Right on!
    Carbon pricing under any name is just one lever that can affect the problem. It cannot solve all problems, nor can any other “solution”.
    I wonder why we seem to throw out effective, but partial solutions to problems so readily?
    In “Earth, The Sequel”, Fred Krupp of the Environmental Defense Fund enumerates case after case of technologies and solutions having great potential to help us take steps, leaps and quantum bounds forward in how we use energy. His thesis is simple: most need just a nudge, a little help in order to prove (or even disprove) their potential. Typically, the nudge needed is a financial incentive, and he advocates carbon pricing in the form of cap and trade.
    Amory Lovins and the Rocky Mountain Institute have been working on rather significant technology foundations and strategies for greatly improved efficiency in transportation, power generation and what he calls “soft paths”, since the early 70′s. He was right then, and he’s right now. Again, the ideas are not silver bullets — they are incremental changes that are perfectly feasible.
    You all at TerraPass take an incremental approach. And I am guessing that it adds up … and all from the purely voluntary additional expenditures of citizens, and a few businesses.
    Gore and Pickens, and Obama all have 10 year plans. None alone “solves” our energy or climate issues. Does that mean they should all be scrapped? Do we have to choose?
    GM’s CEO was “surprised” by recent changes that have almost bankrupted the company. Surprised? Didn’t oil prices start climbing in around 2003?
    And perhaps most curious: our massive oil companies still insist that they are just oil companies instead of being energy companies. Yet they put as much effort into telling us that they are working on a greener future than they actually put on making one.
    I suppose my observation is that we, as a country, don’t seem to have great abilities to look at a problem with a hint of abstraction or from a slight distance. We look at binary outcomes and throw out all that are not complete. We look at anything longer-term than the next quarterly results and throw it out.
    A car need not have an internal combustion engine to be a car. A company whose product powers cars and heats buildings need not sell just one form of fuel. A building need not be heated or cooled with just one fuel. Electricity need not be produced with just one source. These and other fuels are all mostly fungible, and more and more every day, as hybrid cars and solar panels show.
    So any method that tips the balance in the right direction, even if just a little, is a good one.
    Carbon pricing has the ability to tip many balances as you point out. And in that is the wonder of the free market and economics. Even in this time when we are retreating from its excesses, this (partial) solution is one of the most important in our arsenal.
    Tom

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