Friend or Foe: Carbon Pricing Under the EPA’s New Rules

By Liz Hardee, The Climate Trust
June 2, 2014

0.7◦C. That’s how much the temperature of earth has risen since before the industrial revolution. It’s been enough to get us talking: Did climate change cause Hurricane Sandy? Typhoon Haiyan? Are we going to have more fires?

Floods? Droughts? What’s going to happen to farms? To our coastal communities?

Now imagine the world at 2◦C. This is the temperature governments say we can’t surpass, the temperature at which we will no longer live on the same type of planet we grew up on. To prevent such drastic changes, states and nations around the world are discussing the merits of carbon pricing: putting a price on the damage that CO2 causes to our world. There are two common objections to these types of programs. One is that they will ruin the economy (more on that later). The other is that we have no responsibility to act as long as other countries don’t either.

The latter argument was largely negated this week. Not only has the Environmental Protection Agency (EPA) released its new rules for emissions from existing power plants—mandating a reduction of 30% by 2030 and signaling our first major nationwide action on climate change—but China also announced its intention to introduce a national cap-and-trade program by 2018.

What about the first argument; that carbon pricing will destroy our economy? The EPA’s new rule is flexible—states have many compliance options, including state or regional carbon taxes or cap-and-trade systems. To inform the conversation around these flexibility mechanisms, The Climate Trust (a nationally recognized innovator and quality leader in the carbon market) examined five existing carbon pricing strategies using a set of four key indicators we felt would be important considerations to state legislators: carbon reduction, economy, jobs and social equity. We learned a great deal from this analysis, but the key takeaways are these:

Both cap and trade and carbon taxes have the potential for positive gains in terms of carbon reduction, economy, jobs and social equity. In fact, carefully designed mechanisms can realize positive gains in all four indicators simultaneously, disproving the notion that environmental stewardship is in opposition to economic prosperity. The best way for Oregon to realize these gains is through targeted reinvestment of revenues, as the Regional Greenhouse Gas Initiative (RGGI) in the Northeastern US has done. According to an Analysis Group study, RGGI lead to a $1.6 billion net economic gain and the creation of 16,000 new jobs in the Northeast during its first three years. A few potential areas for reinvestment are carbon-reduction projects, energy efficiency, habitat restoration and social equity programs.

Any carbon pricing policy should be thought of as one piece of an overall policy strategy to address carbon emissions. California’s AB32 is a notable example of this point. California has a cap and trade system which will cover about 85 percent of its emissions starting in 2015, but this is only one piece of a bundle of legislation designed to help the state meet its emission reduction goals. California learned early on that complementary policies such as those that address low-carbon fuels, energy efficiency, renewables and transit improvements are necessary and should link with, rather than contradict, the carbon pricing mechanism. Some countries have even found ways to use both carbon taxes and cap-and-trade at the same time to enhance their benefits.

Design of a carbon pricing mechanism is crucial, and states new to carbon pricing can learn much from the experiences of existing programs. First, social equity must be the lens through which any carbon pricing system is designed. Australia’s carbon tax, passed in haste during a time of political upheaval and now being repealed, was based on a flawed understanding of the impacts to Australia’s economy and particularly to low-income households. Every other system we studied, however, was able to overcome this obstacle by carefully designing, testing and revising legislation using collaborative networks of academics, policy makers, business representatives and other organizations. Second, so immediate is the need to reduce carbon pollution that the solution proposed must withstand short-term political pressure. One way to accomplish this is to work within regional collaboratives that promote benefits for entire regions rather than single states going it alone.

Finally, it is important to note that none of the systems we studied passed their carbon pricing policies on the will of government alone. It takes support from business and nonprofit leaders, academics and private citizens of all ages. The EPA’s rule must be finalized by next summer; in the meantime it is up to all of us to engage with our respective states and find the solutions that work, for both the environment and the economy.

Download The Climate Trust’s full report.