Price Short-Lived Climate Pollutants
Barry Rabe - University of Michigan
University of Michigan
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Applying market-based policy tools such as taxes to climate pollutants would seemingly constitute a political long shot in the United States. Not only carbon, which is off the table, but also highly intensive climate pollutants, which are responsible for more than one-third of the global warming to date and loom large in future estimates. They are a more attractive target since repeated federal efforts to place some semblance of a price on carbon emissions themselves have failed, most recently in the 117th Congress, where the United States instead embraced a subsidy-centered climate strategy.

However, even in the pricing-averse United States, oil-and-gas-sector methane fees were adopted under the same legislation, the Inflation Reduction Act passed last year. As a result, the nation has emerged as the lone G-7 member with a national methane price but no semblance of a national carbon price, at the very time the European Union, the United Kingdom, and Canada have doubled down on pricing as a primary carbon mitigation tool.

The new American fees are not a stand-alone effort but rather are designed to complement expanding regulatory and subsidy policies. If effectively implemented, these policies would place this sector on track to meet or surpass America’s share of global emission reductions under the Global Methane Pledge that the United States has championed in partnership with Europe.

New methane fees go into effect in 2024, well before EPA can plausibly implement expanded performance standards. Firms with very low methane loss rates are exempt from the fee if states comply fully with federal standards, incentivizing regulatory cooperation. In turn, the IRA adopts the first major increase in oil-and-gas royalty rates on federal lands and offshore since the Woodrow Wilson era. They address formally methane lost through venting, flaring, or negligence. This places methane pricing at the point of energy production, tapping into the political advantages long associated with upstream severance taxes over downstream excise taxes.

The royalty reforms employ the same approach that production states such as North Dakota and Wyoming have periodically considered to eliminate methane exemptions from long-standing severance taxes, only to recoil upon facing withering industry opposition.

Decades ago, Norway pioneered energy-sector methane taxation that complements rigorous performance standards, producing gas-capture levels that continue to lead the world. New Zealand is advancing a pricing strategy for agriculture and livestock methane in a sector where subsidy and voluntary programs abound globally but generally produce negligible emission reductions.

European climate border adjustment development contemplates possible levies on methane released from domestic energy production and by nations from which it imports oil and gas, historically dominated by Russia with its jaw-dropping methane loss rates. Growing precision in measuring releases within jurisdictional boundaries via satellite and other advanced methods raises the possibility that nations could credibly factor methane emissions into climate-focused tariffs.

Methane is not the only short-lived climate pollutant being priced. Five EU nations have adopted HFC taxes to complement Kigali Amendment implementation, adding a price signal to aggressive phase-down timetables, and deploying funds to accelerate the transition toward climate-friendly refrigeration and air conditioning chemicals.

Europe’s Emissions Trading System already addresses perfluorocarbons, a greenhouse gas used commonly in aluminum production, while the United States prepares to auction declining HFC allowances using a cap-and-trade system under bipartisan 2020 legislation aligning it with Kigali reductions.

Most global methane and HFC pricing policies did not exist five years ago, raising the possibility that pricing diffusion may be more rapid politically for short-lived climate pollutants—especially when their potency is so much higher than carbon’s.

Ensuring Efficiency, Expediency, Equity
Caroline Cecot - George Mason University
George Mason University
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A free market, the hallmark of a capitalist system, facilitates beneficial exchanges in goods and services and incentivizes effort toward ends that are valued most by society. But a blind spot in this efficiency-promoting system has been the environment, where relevant resources might be unowned and important effects undervalued. Society has tried to manage environmental concerns instead through regulation and litigation—with success, but some increasingly noticeable failures.

A more productive approach would explicitly thrust environmental concerns into the market. An environmental tax—whether a price on carbon or some other pollutant—will provide an incentive to reduce or reorient productive activities.

That all sounds good, but I highlight three concerns—related to efficiency, expediency, and equity. First, efficiency: For the proposal to succeed, the market must be free from distortions. A significant one relates to the longstanding subsidies enjoyed by fossil fuel companies that have given them an advantage over newer industries as well as a stake in the status quo. Another relates to the incentives regulated utilities face to undertake even imprudent capital-intensive projects that serve to entrench commitments and impede innovation and flexibility.

But there are others. For example, in a recent article, Professor Joshua Macey explains how a carbon tax might not have the intended effect of shifting electricity generation to less carbon-intensive sources. That’s because many utilities still enjoy protection from market forces, and they can use this protection to gain a competitive advantage over independent power producers and entrench their preferred generation sources. In particular, he discusses fuel adjustment clauses that allow such utilities to pass their fuel costs, including any carbon tax, onto captive ratepayers. Putting our faith in capitalism will require ensuring truly competitive markets.

Second, expediency: One explanation for the current standstill on environmental issues is the idea that winners and losers are well-defined and fixed—and roughly fall along political lines. It is difficult for people to support policies that they think will leave them worse off—even if they think it will leave society better off.

Shaking things up by picking new winners could loosen that rigidity and create better conditions for creating bipartisan coalitions that could ultimately support a system of environmental taxes. In a New York Times op-ed, David Wallace-Wells highlighted this potential benefit of the subsidies in the Inflation Reduction Act, which will benefit red states with vast clean-energy resources.

Of course, subsidies encourage a targeted form of innovation, and the government’s track record, historically, in choosing winners wisely has been a poor one. But the role of subsidies in disrupting the usual political fronts on environmental issues could be valuable, at least in the short run.

Finally, equity: We can support a capitalist system that incorporates the value of the environment along with safety nets for those who will disproportionately bear the costs. Acknowledging pollution harms will undoubtedly, in the short run, result in price increases and job losses. Arguably, protecting people and industries from facing these impacts is what has hindered change. But a kinder approach would also take seriously concentrated effects on some groups. This includes supporting training and relocation programs to mitigate the effect of job losses. I would also consider using tax revenues to support lump-sum payments to low-income individuals disproportionately affected by higher prices for essential goods and services.

Capitalism is powerful because it ruthlessly encourages the most productive and valuable uses of our resources. Pricing environmental harms within this system might be our best bet for forcing meaningful change in the resulting tradeoffs. But we need to get consensus on change, shed constraints that will impede success, and take seriously the plight of those who will bear significant costs in this transition.

We Need Capitalism to Save Our Planet
Shi-Ling Hsu - Florida State University College of Law
Florida State University College of Law
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Tree Raining Money

Capitalism is under fire. Whatever people think capitalism is, increasing numbers are turning against it. Environmentalists see greed and pollution everywhere, seemingly working in concert to impoverish the entire Earth. Lately, too, some on the political right seem to be having second thoughts, as they grow increasingly irritated with investment firms offering funds focused on environmental, social and governance considerations, or ESG factors. For detractors of all stripes, a growing concern is that there is, in some vague way, “too much capitalism.”

We do not have too much capitalism. In fact, what we need in this moment of environmental crisis is, in a sense, more capitalism. What is needed now is a new, muscular, and re-directed capitalism oriented toward new industries and technologies that improve environmental conditions. The cornerstone of capitalist economies is market prices, and what is needed is a new set of prices that reflect all costs, including environmental harm. These taxes would include, for example, a carbon tax, a cattle head tax, a nutrient water pollution tax, and other levies that reflect some social or environmental damage resulting from human activity.

Proposing environmental taxes is nothing new. The idea of a Pigouvian tax—one levied on a unit of pollution—has been around for almost a century, even if the practice of environmental taxation has endured a very slow uptake. But this article makes a different point. The need for environmental taxes is not so much, as previous writers have argued, to reach some optimal level of pollution, balancing marginal costs and marginal benefits. The point is that capitalism is a powerful, transformative, and disruptive force that is steered by market prices. Guiding capitalist economies in a new, sustainable direction requires changing market prices. Environmental taxes are the way to change market prices, and hence to change direction. Globally, there are few things more entrenched than fossil fuel industries; dethroning them will require something powerful and disruptive, more so than even governments. What else is out there, other than capitalism, that is up to the task?

The history of capitalism is one of disruption. One need only briefly consider what the internet did to travel agencies, what Amazon has done to retailing, and what social media has done to news media, to appreciate the power of market forces in a capitalist society. These changes are clearly not unalloyed causes for celebration. In fact, one might even argue that humankind might be better off without some of them. But they are illustrations of the disruptive power of capitalism. In all of these cases, a change in prices—sometimes a modest one—was enough to cause massive change. Investors, sensing opportunity from these price changes, quickly pumped money into ventures to exploit them. Backed by investors, these companies quickly and brutally moved to displace incumbent businesses.

This kind of disruption has already occurred in the energy sector in the United States, in a way that has actually produced some climate benefits: the advent of hydraulic fracturing. Commonly called fracking, it is the cracking of geologic formations to extract previously unreachable bubbles of oil and natural gas. The result was a significant decrease in their prices. For electricity generation, inexpensive natural gas rapidly replaced coal, a much more greenhouse-gas-intensive fossil fuel. According to the U.S. Energy Information Agency, more electricity was generated in 2019 by renewable energy sources than by coal, the first time that was true since 1885.

It is also worth noting that in the roughly 35 years before fracking, the Environmental Protection Agency had been steadily tightening regulation of air pollution from coal-fired power plants. By no means where those efforts wasted or undesirable. Cost-benefit analyses of the Clean Air Act show that the health benefits of regulation were orders of magnitude greater than the compliance costs. There is no telling how polluted the world would have been without the law. But the Clean Air Act was never going to be an effective way to phase out coal production and combustion in the United States. Because of the inherently political nature of regulation, it was never going to be as powerful of a force as market prices.

Reducing coal consumption in the United States is only an intermediate step, however. Climate change is more serious than cautious, conservative scientists have predicted, and humankind cannot rely on natural gas for very long at all. Natural gas must serve as a very short bridge to a renewable energy future. Moreover, there are still roughly 50,000 jobs in the United States concerned with the extraction, distribution, and processing of coal. At the risk of sounding callous, these jobs must go. Society can no longer pay people to continue to engage in such a destructive industry. There are ameliorative steps that can and should be taken. A federal job retraining and relocation program, the Trade Adjustment Assistance Program, is in place to help workers affected by international trade, and it can be extended to coal workers. In fairly short order, this remedial help will have to extend to workers in the natural gas and petroleum industries as well.

It is wrenching to think about people out of work, and the collapse of communities and social networks. It is just difficult to transition lives, and to fully restore the well-being of displaced workers. But paying people to worsen climate change is an unaffordable folly.

How did we get to this point of environmental crisis? People blame capitalism for the profit motive that seems to have driven the fossil fuel industries to their excesses. But that is mistaken thinking. Capitalism is a system of economic governance, not political governance. A working definition is in order: capitalism is a system of private property whereby ownership of the means of production can be separated from the means of production itself. Capitalism is so powerful because it provides a way of linking money and ideas, sometimes far-flung money and speculative ideas. Capitalism is an extremely efficient way of allocating resources. It is a system that places market economy prices at its conceptual center, rather than straining against them, as socialist economies do. Prices are so ubiquitous and so remorseless in their assessment of scarcity that they provide instantaneous signals of value. Markets fail, of course, sometimes spectacularly, tragically, and globally. But capitalism only leans into what appears to be a default for human nature: the weighing of alternative uses of resources, and their conversion into a metric: a price. How the social consequences of capitalism are managed is determined by policy choices. Capitalism is an exceptionally powerful engine, but it still needs to be steered by political choices.

What are the political decisions that have given rise to the current environmental crises? One choice that almost all countries still make, almost unconsciously and to varying degrees, is to favor short-term economic growth over long-term sustainability. No one would revel in saying it that way, but the preference is unmistakable. Climate change was first pronounced publicly as an environmental threat by President Lyndon Johnson, in a 1965 address to Congress. Some may blame the climate misinformation spread by oil companies and Republicans, but the blame for fossil fuel supremacy and the climate crisis should be widely shared. Democrats and their voters clearly hold the higher ground on environmental issues, but public opinion polls, and the everyday choices made by both red and blue voters, suggest that environmental concerns are superficial, still falling well below kitchen table economic concerns. President Biden, facing worrying political signs ahead of the 2022 midterm elections, released 180 million barrels of oil from the Strategic Petroleum Reserve, because of concern over high gas prices. It is no exaggeration to say that American democracy was on the ballot in last year’s midterm elections, and no exaggeration that keeping gasoline prices low and keeping up consumption (and concomitantly, emissions) seemed still to be a significant national priority.

Having said that capitalism is not the cause of the manifold environmental crises facing humankind, it is important to acknowledge that it has, due to its enormous power, amplified the political choices steering it. In fact, it is fairly important to explicitly identify a critical weakness: while capitalism is not the root of the world’s ills, the capital procured is, in fact, a substantial cause.

The reason for that is this: while capitalism is a system of economic governance that has as its goal the movement of resources to their most profitable use, the capital formed in capitalist ventures—the power plants, the pipelines, the refineries, the offshore oil rigs, and the vast fossil fuel-centered energy infrastructure—are potentially working against this goal. Expensive brick-and-mortar assets, once paid for, create an enormous incentive to maintain the current mode of operations. The status quo may direct resources not to their highest and best uses, but to existing ones. Pricey assets create their own political economy. The result of investment in expensive capital is rigidity in production, an antithesis of capitalism. Joseph Schumpeter identified “creative destruction” as the defining feature of capitalism. The whole point of capitalism is to always have a competition for precious resources, so as to ensure optimal deployment. Capitalism is not the entrenchment of legacy industries.

The global fossil fuel-centered economy originated in the development of the steam engine, but widespread production owes a good deal to the first U.S. tax subsidies for oil, passed in 1913. The subsidies were small. But they were able to create a price differential, enough to induce petroleum exploration. And despite their smallness, year after year, these subsidies cumulated, as did the capital purchased to pursue these industries. The capital improved; innovation made oil capital more productive and efficient. Crude wells gave way to pumpjacks, and they have given way to the small fracking wells that are now commonly used to extract oil and gas in the United States. The oil industry is now famously or infamously powerful, with trillions and trillions of dollars of assets worldwide.

Capital cumulates. Small capital makes a profit, which is used to improve capital, and is invested in bigger, more-efficient capital. This is eventually converted into larger capital, and eventually, it is so large, systemic, and ubiquitous that it is considered infrastructure. Environmentalists complain that legal systems protect corporations; they are actually protecting the capital.

This point might be more compelling if one considers another form of capital. Human capital is the education and the job training obtained by people throughout their working lives. It includes formal education, but it also includes the training provided by employers to operate the expensive capital assets acquired to produce fossil fuels. Human capital is much more valuable than physical capital, an order of magnitude greater in terms of its value toward production of goods and services.

Consider also, that human capital is much more precious to individuals than even physical capital is to their corporate owners. In a lifetime, an individual only has a few chances to acquire human capital. To render that capital anachronistic is to impoverish. Offshore oil rigs can employ people with just a high school diploma, and can pay them $50,000 to $100,000 per year to work for six months as a roughneck. With a college degree, one can earn over $125,000 to be a subsea engineer, again for six months’ work. What are the options for these workers if they lose these lucrative jobs? For corporations, writing off physical capital is bad for business; for people, it is existentially threatening. Politicians compete over their commitment to protecting jobs for this reason.

The upshot of this bit of irony—that capitalism is not the problem but that capital investments are—is that capitalism can be a highly path-dependent phenomenon. I contend that fairly modest subsidies dating back to 1913, small but ongoing, have spawned a behemoth industry with enormous political and economic power. Just its sheer size and its collection of physical and human capital is enough to send Republican politicians scampering to curry favor. Make no mistake: it is nothing short of a miracle that the modern oil industry can float a $500 million oil rig out on the ocean, drop a tube 10,000 feet to the seabed below, puncture it and extract oil in an extremely high-pressure and unpredictable environment. But those productivity miracles are also a curse: this productivity is also a source of inertia, crowding out investment in other forms of energy production and all efforts at conservation. The efficient and productive global oil industry is a product of capitalism, but has now become an anathema to it.

What are we to do, then? How can capitalism be steered in a sustainable direction but also prevented from entrenching a new set of industries?

A new direction must be set by changing prices. Existing prices fail to account for environmental harm, and as a result, have directed entrepreneurial energy toward harmful, entrenched capital. A new set of prices must reflect the harm to the environment, but they should also minimize the potential for entrenchment. The straight subsidization of say, wind energy, may appear a century from now to be as foolish as the original oil subsidies of 1913. As much as is possible, a new set of prices should be narrowly tailored to address the environmental harm, so that the price is neutral as between technologies and methods of reducing that damage.

A new set of prices reflecting environmental impacts will no doubt produce new winners, but as long as prices closely hew to the environmental harms, they will minimize (and perhaps avoid) the picking of winners. A system of subsidies, such as those in the new Inflation Reduction Act, will indeed reduce emissions, and is certainly preferable to inaction. But a better role for government is to evaluate the harm from pollution and establish environmental tax rates representing that amount. Such action is more within the skill set of government agencies than choosing, via subsidy policy, the technologies to address environmental harms. While there remain areas in need of prescriptive government regulation (and perhaps even subsidies), the focus of governmental action should be on the harm side, leaving the technological choices for reductions to the private sector.

Environmental taxes are needed to introduce a new set of prices to steer the engine of capitalism in a more sustainable direction. The world must very soon adopt something like a global carbon tax. But there are other taxes that can and should be levied. A cattle tax is one. If we were to weigh all of the cows on Earth, the total would be greater than the combined weight of every other mammal—every human, dog, cat, whale, dolphin, horse, pig, bear, etc.—by a factor of fourteen to one. Given the greenhouse gas emissions from bovines, which regurgitate methane as part of their digestive process, a head tax on cows would also be an important step forward.

As noted earlier, environmental taxation is not at all a new idea. But previous work has centered on a tax that internalizes previously externalized social costs. Since then, economists have been arguing that environmental taxes are the most efficient way of accounting for the environmental harms of polluting industrial activities. But I make a different argument. I am saying that there is another, little-appreciated justification for environmental taxes: the need to provide a new direction for economies. Capitalism is steered by prices. If we wish the entrepreneurial energies of an economy to change direction and begin to find new ways to protect the environment, we must supply the prices to incentivize new activities and innovations in new areas.

The traditional way of reducing pollution is to regulate the sources. That means, as compared with environmental taxation, issuing rules governing their operation. Some of those rules can seem tantalizingly like a price, since they involve compliance costs. Those rules typically even provide some flexibility as to compliance methods or technologies. Polluting firms may have options for reducing their emissions to mandated levels.

But regulations lack the one thing effected by environmental taxes: a marginal price on pollution. This characteristic of making compliance cost proportional to pollution amounts is what gives environmental taxation its secret power. By scaling compliance cost to pollution levels, environmental taxation activates a different part of the corporation, and a different part of the brain. Compliance can be a creative endeavor, but is not inherently so. By contrast, minimizing a tax bill, which is the task induced by environmental levies, presents many more possibilities for reducing pollution, and thus fosters the creative process. It pains me, as a lawyer, to say this, but in terms of creative solutions, I would rather have the business and engineering parts of a firm working on it than the legal team.

This potential of environmental taxation for fostering creativity and generating innovation are cause for optimism. Innovation is a difficult thing to study empirically, as there is never a counterfactual baseline against which to measure induced innovation. But the evidence is highly suggestive. High prices induce the search for avoidance, and for alternatives. Two resource-poor countries serve as examples.

Sweden has no fossil fuel reserves. Its electricity is derived from nuclear power, hydropower, biomass burning, and some imported natural gas. Yet rather than rely on importing fossil fuels, Sweden has doubled down on its ability to innovate: it has a carbon tax of about $150 per ton. That high price has spawned a new generation of energy innovation. Sweden has created a robust energy loop that uses agricultural waste and woody biomass to generate energy. It has pioneered energy efficiency measures, including the deployment of district heating, the sharing of heat among buildings. It has gasoline cars, but cities are planned differently, and transportation is considered differently. In a country that is two-thirds as dense as the United States, people drive about half as much.

The other country that has responded to extreme resource scarcity with innovation is Israel. Israel receives enough natural rainfall to provide every person with 55 cubic meters of water per year. That doesn’t even account for the needs of agriculture or industry. Needless to say, water is extremely costly in Israel. Households pay typically orders of magnitude more than residents of the United States. And yet, Israel prospers. Compared to arid California, Israel is not quite as prosperous in terms of GDP per capita, but it is far superior in creating wealth from water: it generates 3.5 times as much GDP per unit of water. Israel, a technologically sophisticated country, uses artificial intelligence to spot leaks in sewer pipes—sewer pipes! Upon discovery of a potential leak, small robots are deployed (because people don’t generally like to crawl in sewage pipes) to go and plug the leak with the injection of an industrial putty. Drip irrigation was invented in Israel, and despite its water paucity, it is a net exporter of many of the crops grown in the country.

In both Israel and Sweden, scarcity led to high prices, which led to innovation.

Taxes are, of course, politically toxic. And these environmental taxes will shift jobs from some industries to others, to the great consternation of those coming out on the losing end. But this is always the way things have been in healthy capitalist societies. Creative destruction has always been a feature, not a bug.

Humankind stands not so much at a crossroads but a precipice. At some point, painful measures will have to be undertaken. The sooner those measures are made, the less painful they will be, because entrenched industries continue to further entrench themselves. Meanwhile, the pain of not taking those measures grows in the form of increased climate damages and climate risks, and other kinds of environmental catastrophes. Presidential economic advisor Herb Stein once said, “If something can’t go on forever, it will stop.” And the libertarian icon Milton Friedman once said, “Only a crisis produces real change when that crisis occurs, the actions that are taken depend on the ideas that are lying around. . . .
I believe our basic function is to develop alternatives to existing policy and keep them alive and available until the politically impossible becomes the politically inevitable.”

It is odd to think that Milton Friedman once thought of himself as an underdog. Fifty years hence, it seems clear that his ideas have actually been carried too far. But it is surely cause for hope that Friedman preached a form of economic thinking that had no natural allies, and was able to launch a decades-long movement. Environmental taxation may yet go from being impossible to inevitable. TEF

OPENING ARGUMENT Environmental taxes are necessary to reorient market economies. Those levies will introduce a new set of prices to steer the engine of investment in more sustainable directions.

Holy Grail
Are Green Taxes the Answer to Pollution
G. Tracy Mehan III - American Water Works
American Water Works
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Over thirty years ago, as a callow youth running the Missouri Department of Natural Resources, I wrote an op-ed for the St. Louis Post-Dispatch calling for the substitution of revenue-neutral pollution fees for existing taxes on income and productivity — which I believed made sense environmentally, economically, and politically.

Quoting from the likes of TEF contributor Robert Stavins, Peter Drucker, Jack Kemp, and Lester Brown in State of the World 1991, I reasoned that revenue-neutral fees would “internalize the externalities,” imposing costs on the party that generated the pollution, and could be offset by reductions in corporate or marginal tax rates and Social Security taxes. I did not use the term at the time, but they would generate a supply-side economic boost.

“Using these levies on pollution as a substitute for existing, counterproductive taxes on productivity, environmental costs can be incorporated into how America does business to forge a new environmental policy for the next century.” It seemed a surefire way to find common ground between the left and right sides of the political spectrum. It constituted a “no regrets” approach to dealing with a low probability but potentially catastrophic challenge, regarding which I was unqualified to assess.

The “next century” is here, but the idea has not caught on, although the New York Times reports that Senate Democrats are now looking at a carbon tax in a desperate quest for revenues for their massive $3.5 to $5 trillion budget. This is not exactly what I had in mind. Their plan includes rebates to mitigate regressive impacts for lower-income citizens, but there is no supply-side kick from reducing marginal tax rates, capital gains, etc. Quite the opposite in fact. Revenue-neutrality was the key to my proposed political compromise, but that seems out of the question. More on this subject below.

Given my youthful flirtation with pollution fees, I was pleased to take up Nobel Prize-winning economist William D. Nordhaus’s new book, The Spirit of Green: The Economics of Collisions and Contagions in a Crowded World, a very useful introduction to and argument for market-based approaches, with an emphasis on “Green Taxes,” which he deems “the holy grail of public policy.” Moreover, “They are the holy trinity of environmental policy: they pay for valuable public services, they meet our environmental objectives efficiently, and they are nondistortionary” — assuming they are grounded in solid cost-benefit analysis. That first part of the trinity would indicate his lack of enthusiasm for the revenue-neutrality element I held near and dear decades ago.

Nordhaus, a Yale professor, surveys the basic concepts pertaining to externalities (positive and negative), market efficiency and failure, public and private goods, cost-benefit analysis, and the English economist Arthur Pigou, from whom the “analytical thinking behind the Green movement originated.” The chapters are solid and useful for anyone unfamiliar with environmental economics — and often stimulating and informative even if you are not a stranger to the subject matter.

Nordhaus also pursues newer ideas, such as green national accounting, sustainability, ESG (environmental, social, and corporate governance), socially responsible investments, and the social cost of carbon. On this latter point, he seems to see a price of $40 or $50+ per ton as just the start of the bidding. This is the range established by the Obama and Biden administrations. He thinks there is justification, nay, necessity for as much as $200 per ton to effectively address the challenge of climate change, which he believes is “a major threat to humans and the natural world” and “the ultimate challenge for Green policies.”

“Global warming is one of the defining issues of our time,” writes Nordhaus. Indeed, mitigating climate change or reducing carbon emissions will cost in the range of 2 to 6 percent of world income or “roughly, $2 trillion to $6 trillion annually at today’s level of income.”

Regarding the Green New Deal, Nordhaus wants to be supportive of Representative Alexandria Ocasio-Cortez (D-NY) and Senator Edward Markey (D-MA), the prime movers, but he notes its failure to “include any discussion of using market approaches such as prices, taxes, or tradeable permits as instruments of environmental policy.” He argues that “the inconvenient truth” of climate policies “require[s] aggressive price-raising measures, probably through carbon taxes.”

Professor Nordhaus concedes that green taxes are not common, although congestion pricing in Europe has been successful. But even putting carbon taxes in place will not solve the problem without an international enforcement mechanism, given the global nature of the problem. Of course, the undoing of the Kyoto and Paris agreements on climate has been the free-rider problem which, get ready for it, game theory calls “a noncooperative free-riding equilibrium,” and that’s not good. He recommends something nearly as ambitious as a steep carbon tax: an international club or compact of nations which imposes tariffs on free-riding or non-complying nations which do not put on equivalent green or carbon taxes. This, too, is being discussed by Senate Democrats.

Nordhaus is a towering intellect, but he has strong views and is not shy about expressing them. He hates Trump, despises the Republican Party, abhors Koch Industries, and detests Facebook. That said, he provides a respectful discussion of his agreements and disagreements with his fellow Nobelist, libertarian economist Milton Friedman, and points to several conservative economists who support carbon taxes as the most efficient approach to coping with a changing climate. This is true, to a point; but he fails to mention that several of them would look for cuts in other taxes to compensate for the carbon taxes. For instance, Arthur Laffer of the eponymous “Laffer Curve” wrote a famous letter to the editor of the New York Times clarifying his support for a carbon tax.

“I am an economist, not a climate scientist, and in my professional capacity I don’t have the slightest idea whether global warming exists or not, or whether mankind has caused it or not. What I do think is true is that a carbon tax offset dollar for dollar with an income tax rate cut would be a positive component of tax reform,” wrote Laffer. “I oppose any carbon tax at any time if it’s not fully offset by a cut in marginal tax rates.”

Considering the magnitude of the carbon taxes required to achieve anything substantive by way of mitigating greenhouse gases, and the failure of the Clinton administration in the early 1990s to pass a BTU tax, a rough, imperfect surrogate for a carbon tax not discussed by Nordhaus, it would seem that political reality, if not sound economics, would justify another look at revenue-neutrality by Green economists.

Given the global nature of the climate issue, readers may want to consult Pulitzer Prize winner Daniel Yergin’s latest tome, The New Map: Energy, Climate, and the Clash of Nations, a sequel to his magisterial volume The Quest, which I reviewed for the Forum nine years ago. Climate is just one part of the geopolitics of energy but is even more pressing since Yergin wrote his previous book.

“‘Climate’ will be a profound determinant of the new map of energy,” maintains Yergin. And “the momentum of climate policies — powered by research and observation, by climate models, and by political mobilization and regulatory power, social activism, financial institutions, and deepening anxiety — will transform the energy system.”

“Net-zero carbon” will be the great challenge of the decades ahead, “not just politically but also in how people live their lives and the costs of achieving it.” Today, the world depends on oil, natural gas, and coal for over 80 percent of its energy, “just as it did thirty years ago.” But the shift to a more pluralistic mix of energy sources is underway and will continue over the decades ahead while “disagreement rages, both within countries and among them, on the nature of the transition: how it unfolds, how long it takes and who pays.”

The myth of “peak oil” has now been replaced by the question of “peak demand” for oil and gas. When might we witness such a thing? “The actual answer,” writes Yergin, “will be determined by a concatenation of many forces — from what national governments and cities do in terms of regulation and incentives, to economic growth, to the availability of minerals, to the legal liability around autonomous vehicles and the security of the cyber systems controlling them, to the values and lifestyles of millenials, to social media, to the increase in air travel and petrochemicals, to geopolitical conflicts and social instability, to start-ups that have not yet started and new scientific and engineering breakthroughs, and so on.”

There is also the issue of “intermittency” as a challenge to continued expansion of solar and wind and the stability of the grid. “They can flood the grid with electricity when the sun shines and the wind blows, but then almost disappear when the day is cloudy or there is only a murmuring breeze,” notes Yergin. New technologies will be key (another reason Nordhaus argues for internalizing the externalities with a carbon tax), especially storage and battery technology, a stumbling block for wind and solar, as well as advanced reactors and a new generation of small reactors that might jumpstart carbon-free nuclear power.

And what of consumers? “In the absence of a carbon tax or significant incentives or higher gasoline taxes, how many consumers will willingly pay more for greener energy . . . Some will, some won't,” says Yergin.

Economics must, inevitably, for good or ill, give way to politics, and the politics of climate will preoccupy us for a long time to come. Contingency, not certainty, will be the norm.

G. Tracy Mehan III is executive director for government affairs with the American Water Works Association and an adjunct professor at Scalia Law School, George Mason University. He may be contacted at

On Green Taxes as Answer to Pollution

Sun Ready to Set on Breaks for Coal-Based Liquid Fuels
September 2013

(Washington, DC) — A new study from the Environmental Law Institute (ELI) finds that the federal government provided approximately $25.425 billion in financial support for coal production, transport, use, or waste disposal during the period 2002-2010. The majority of these dollars — $16.214 billion — are attributable to tax benefits. Of these tax benefits, the single largest category was the nonconventional fuels tax credit, providing $12.22 billion to coal.

To Receive Subsidies, Largest Farms Should Accept Greater Environmental Responsibilities: New Stewardship, Disclosure Conditions Would Reduce Water Pollution Cost to Public
June 2012

(Washington, DC) — A report issued today by the Environmental Law Institute (ELI) re commends that large-scale commodity crop operations that opt to receive any form of federal farm subsidy, including subsidized crop insurance, be assigned responsibility for: