There are many ideas floating around on how to use financial markets to stave off the worst effects of climate change. It’s worth remembering that in order to hold CO2 concentrations in the atmosphere below 450 parts per million (what scientists generally agree to be a safe target to stay below 2 degrees C), we need to decarbonize the global carbon intensity by almost 10% each year.
A levy on carbon pollution is a great idea that won’t solve this problem. Capping pollution precursors has done better.
Sir Richard Branson recently proposed a Clean Energy Dividend as a policy tool to help address climate change. Companies would pay a fee for any energy they use that causes carbon pollution, and the proceeds would be invested as a dividend into cleaner solutions.
Conceptually, it is better than many carbon tax designs for addressing the root cause of the problem. But it still won’t work for a number of reasons
First: a clean energy dividend doesn’t focus the role of government in the right place.
This is important because governments absolutely have a big and important role. The goal is to get fossil carbon out of energy, building products, and food supply chains at the scale and speed the science shows to be necessary. The most efficient way to get this done, unsurprisingly, would be to order reductions in fossil carbon content in those supply chains at the scale and speed the science shows to be necessary!
For energy, this works when governments order reductions in fossil carbon content per heat unit (“mmBTU” or “Gj”) or energy delivered in and into their market. For something like a large office building, a consumer product, and even the food we buy, equivalent embedded fossil carbon reductions can be estimated. This is the product standard strategy all developed economies used to ultimate get the lead out of gasoline and paint, sulfur content down in diesel fuels and ozone depleting substances out of out refrigerant chemical supply chains.
Second, a clean energy dividend won’t work without tariffs on imported goods and/or services.
A well-designed government policy to cut fossil carbon lets suppliers comply in a “sales portfolio average basis”. In other words, they must be disciplined in cutting emissions from across their supply chain as a whole by the required amount. But they have the freedom to decide where and how those reductions take place across their operations. As in all of the precedents (lead out of gasoline, sulfur out of diesel, etc.), a product standard that limits pollution precursor content can apply equally to all energy products, whether they are domestically produced or imported. This product standard does not need a complementary tariff on imports to make it work. Carbon tax schemes can only be effective if they include tariffs on imports. And when we add tariffs to the mix, we always add opportunities for gaming and unnecessary international conflicts.
Suppliers of regulated energy products can also “comply jointly”. This means any combination of regulated suppliers can trade over-compliance credits to minimize compliance costs. But in this supply-side regulatory strategy, government plays no role in the pollution credit market design or administration. That is all up to the private sector. Government’s role is simply to collect compliance reports, ascertain that reporting suppliers are jointly or severally in compliance with their portfolio average pollution precursor content limits.
Third, a clean energy dividend attempts to prescribe solutions from a centralized place. This tends not to work.
Instead, having set limits on fossil carbon content, a good pollution reduction policy gives obligated parties only three ways to earn ‘credits’ for anything beyond straight up reductions in the fossil carbon content of their global supply chains: reduce the precursors in one’s supply chain, trade for allowances with those with easier ability to reduce, or find other ways to actively remove the pollutant from the atmosphere.
Of these, we believe one is the most important, and most necessary: For any carbon emissions that cannot be cut out, polluters must pay the price to clean them back up without any harmful effects — if such an ability to do so exists.
That is why I am proud to be a co-founder of Nori, and excited by the carbon removal marketplace we are working hard at cultivating.
Why is it important for governments to simply order the fossil carbon — out of the supply chain? I.e. to focus on the “pollution precursor”? Why is this better than placing a penalty on the emissions from the fossil carbon sources themselves? Primarily, pollution precursors are better because of the conditions they create to solve the problem.
Pollution precursor policies bring some tough discipline in needing to cut carbon pollution, and to cut it deep, and cut it fast. This is what the climate science needs, and what a growing number of people around the planet are marching every Friday for.
However — and this is crucial — pollution precursor policies give those whom they regulate enough freedom to compete and innovate in how they ultimately comply. Groups can also compete on price (opposed to governments directly or indirectly setting prices).
Some policy must indeed be centralized. But to be successful, they must inspire decentralized action. Policy must of course compel collective ownership of the problem; yet is must also correctly catalyze competition and cooperation in the correct amounts. This is how humans got lead out of gasoline and paint, got sulphur out of diesel, and got ozone depleting substances out of refrigerant chemicals. This is how we get fossil carbon out of our supply chains, and then start getting the excess back out of the atmosphere and the oceans.
Climate is, of course, a more wicked problem in some big aspects than these historic analogues. But in others, are all of the above issues and policy solutions really that different?
I have worked on carbon and climate policy for over forty years. I don’t say that to make an argument from authority; instead I wish to express my hard-earned experience. In all that time — and despite being a strong advocate myself for many years for alternative — there is not one precedent in which taxing emissions, allocating tradable emission quota, or letting government prescribe solutions with a fee and dividend that has had the desired effect.
The taxes go into treasuries and get spent on other things, whilst the polluters pass the cost on to the consumer — and often disproportionally to the most vulnerable. Cap and trade policies over-allocate quota at the start and underachieve in getting the amounts down as politics and disincentives distract and detract.
Fees and dividends are at the mercy of some form of government setting the right rules, and spending the money in the right way. Yes, they are better than some other policies out there, and can get money going where it should. But they are still inefficient, and ineffective when it comes to the simple goal of getting levels of pollution down to where they need to be.
Every time people have been serious about cutting pollution, we the people, through our elected governments, ordered suppliers to reduce the pollution precursor content in their global supply chains. We the people also and left it entirely to the suppliers to innovate and compete to re-establish market shares in that context.
In addition, every time we the people did it that way, we got the pollution reduction faster and at lower cost than we anticipated. Every time policies went after the pollution precursor the regulated groups came up with sensible solutions that neither we the people nor they, the ‘professionals’ they could have imagined before the order to reduce pollution precursor content was made into law.
To reiterate, this is because, every time it worked, the law both brought discipline to suppliers by making them address the pollution issue — yet the law also left them free to do what they do best: compete on price and through innovation.
We discuss the pollution precursor further in episode 31 of the Reversing Climate Change podcast. We also discuss issues where a Carbon Tax falls short on episode 18 of the Carbon Removal Newsroom Podcast. I also plan to write more about some of the historic successes of this type of policy, along with the failures of the others.