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US Climate Policy: Carbon Pricing vs. Clean Energy Standard - Selin Kumbaracı

Currently, about 20% of worldwide emissions are subject to a form of carbon pricing, such as a carbon tax or a cap-and-trade scheme, whereby a price is attached to carbon pollution with the aim of lowering emissions and fostering investment in cleaner alternatives. Notable examples include the EU’s Emissions Trading Scheme (ETS), the position of which as the world’s largest trading scheme will be overtaken by China’s own scheme, which is to be launched within this year.

One notable absence in this field is the United States. Though the setting of a carbon price is not an entirely alien concept within the US policy arena, it can be said that discussion surrounding it has subsided to a large extent following the failure of the Waxman-Markey bill in 2009, which would have (among other things) established a cap-and-trade program in the US.

It should, however, also be noted that even though the political appetite for carbon pricing is quite low at the federal level, there are still initiatives at the state level, such as California’s cap-and-trade system, established in 2013.

While some were expecting a change in this aversion to carbon pricing under the Biden administration—which has made ambitious pledges when it comes to fighting climate change—the US has favored a different policy route, specifically for decarbonization of the power sector: namely, a clean electricity standard (CES).

The CES, as currently envisioned in the broader infrastructure bill that has been proposed, mandates that retail power suppliers provide an increasing proportion of clean electricity, starting in 2023. This proportion would be 80% in 2030 and rise to 100% by 2035. This is a key element of the US reaching the climate target that has recently been set by President Biden, wherein emissions are to be halved (relative to 2005 levels) by 2030.

Several business groups, notably the American Petroleum Institute—which had lobbied to reject the Waxman-Markey bill mentioned earlier—are now expressing their support for carbon prices as market-based policy instruments, as opposed to “more command-and-control” methods.

It should be noted though, that much criticism is directed at carbon pricing for being market-based—due to how “imperfect realities” of markets mean that things can go wrong. A frequently cited example is that of the EU ETS when carbon prices were said to be virtually worthless after the price of permits hit their record low of €2.81 per ton in 2013.

In contrast, this price is currently over €50 per ton, and some, such as the Bank of England, suggest that it needs to go up to €100/ton by 2030 to keep the rise in global average temperature to less than 2°C, as pledged in the Paris Agreement. In fact, according to the Bank of England, the figure of €100/ton is the case if there is an “orderly transition” and could be even higher if the transition is more abrupt or ambitious.

A different kind of argument presented in favor of carbon pricing has been regarding the staying power of fiscal policy. As Joseph Majkut of the Niskanen Center explains, “Fiscal policy is something that can be more durable, long term and less subject to legal and administrative challenges and risks (…) it can help, under certain conditions, [to] resolve the political challenges of securing ambitious climate action.”

As such, it is posited that the establishment of a carbon price would provide some level of permanency to US climate policy, which can change drastically depending on the prevailing political group in power—perhaps the stark differences in policies pursued by the Trump and Biden administrations is the best example of this. In the words of the Financial Times’ Myles McCormick, “the merry-go-round of Democratic and Republican legislatures means that regulation can be torn up and patched back together every few years”.

However, regardless of the potential effectiveness of carbon pricing, there seems to be a lack of political will in pushing for its establishment. Indeed, it seems that a clean electricity standard is much more palatable than carbon pricing, especially such pricing in the form of a carbon tax.

“There’s something to be said about the political perception of rewarding ‘clean’ versus taxing ‘dirty’ resources. Both policies will ultimately lead to similar results but politically speaking, that could be an advantage for a CES,” argues Kathryne Cleary, of the think-tank Resources for the Future.

One way in which this preference of a CES over a carbon pricing mechanism could prove challenging is in future trade relations with countries and blocs that have ambitious carbon prices. Divergences in carbon pricing policies create worries that higher carbon prices in one jurisdiction could simply lead to a carbon leakage to another one that does not impose as a high a price, if any, on carbon. There are also concerns that high carbon prices could act as a sort of de facto export subsidy if the way in which the price of carbon not being factored into the cost of such imports works to advantage foreign producers.

One such example of this is the current discussion taking place in the EU regarding the creation of a “green level playing field” through the establishment of a carbon border adjustment mechanism. This can be seen as a tax of sorts for imports from countries that do not have a carbon pricing scheme equivalent to that of the EU—it is not difficult to see how the US might fall under this categorization.

Overall, while there are arguments in favor of and against carbon pricing’s effectiveness, it faces significant political challenges. Nonetheless, it is not easy to definitively say that the US will not establish a carbon price anytime soon.

As US climate envoy John Kerry stated a few months ago, “President Biden believes that at some point in time we need to find a way to have a price on carbon that’s effective. (…) He hasn’t decided or made an announcement about it, but we all know that one of the most effective ways to reduce emissions is putting a price on carbon.”

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