Can We Price Carbon?, with Barry Rabe

Notable Quotes

• “I think [political scientists are] beginning to formulate, not a counter to the economics literature, but hopefully a complement. Is a great idea politically feasible or not?”(12:40)
• “Developing a constituency is hugely important because those supportive leaders, those policy entrepreneurs, will inevitably leave the scene. We have elections, we have election cycles. Do we see policies where carbon price becomes a target for an opposition party to gain power and reverse that policy upon being elected? We've seen that in the US, we've seen that in Australia, we may see it very soon in Canada.” (15:09)
• “There's no amount of benefit through expenditure that can likely offset the pain for many folks from higher energy prices. But I do think that question of how you use the revenue, whether that becomes a compelling story that people get behind is an important part of this, and is often historically, outside the energy area, part of the recipe of developing long-term support for a political strategy that involves some imposition of pain through tax.” (16:20)

Top of the Stack

References and recommendations made during the podcast:

• Can We Price Carbon? by Barry G. Rabe
• Senate Bill 181: Protect Public Welfare Oil And Gas Operations
• Elections in Canada
• Blood Oil: Tyrants, Violence, and the Rules That Run the World by Leif Wenar

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. This week, we talk with Professor Barry Rabe of the University of Michigan about his new book, Can We Price Carbon? Barry will share his insights on some of the real-world challenges for implementing policies that price carbon, and describe some of the key features that might help make them stick. We'll talk about how experience from previous efforts to price carbon can inform discussions on the Green New Deal and much, much more. Stay with us.

Barry Rabe, my friend and colleague at the University of Michigan, thank you so much for joining us today on Resources Radio.

Barry Rabe: Daniel, thanks so much for inviting me.

Daniel Raimi: So Barry, we're gonna talk today about your new book, Can We Price Carbon?, but before we get into the substance of that, can you tell our audience a little bit about how you got into the world of energy and environment?

Barry Rabe: Sure. I actually began my career coming out of graduate school principally interested in issues of healthcare and public health. Actually, my first appointment here at Michigan was in The School of Public Health, terrific place. As the years began to pass though, after a few years in residence, but even before that, I really became more and more interested, not so much in the question of healthcare delivery, but all the steps that we might take to deter harms coming to people through various kinds of risks.

That led me increasingly to an environmental agenda, and then often with the question of how the use of energy leads to possible environmental damage or environmental human health damage. There was also a bit of a role because of my interest in areas like tobacco, not only abatement strategies, but regulatory issues. And I am the son of a cigar salesman, I've watched that industry, I've watched the huge transformations of that industry that have actually achieved a great deal in terms of driving down smoking rates.

And I was brought here to the University of Michigan in part through collaboration with Ken Warner, a defining figure of economics and disease prevention. Those conversations with Ken really convinced me to think about public health issues and prevention kinds of considerations, but kept pushing me much more to more, again, environmental health kinds of questions.

Daniel Raimi: That's great. Thinking now about the world of the energy transition, which you think a lot about, and is very relevant to our conversation, I imagine there are some lessons that we can look to the transition away from tobacco farming in some communities and their reliance on tobacco as an economic driver, and the tobacco settlement monies, all of those issues that I knew a very little bit about. But I imagine they have some relevance for the energy and environmental world as well.

Barry Rabe: I do think there are important parallels and analogies in other areas, it's not always just an inside energy discussion and thinking about the direction of energy policy. One of the things that really does intrigue me about tobacco as a potential model in the energy space is that we've achieved this tremendous reduction in the U.S. from a point where not that long ago, just a few decades, more than 40% of Americans smoked on a regular basis. That's now been reduced into the low teens through a combination of policies.

But all of the serious work on the political economy of tobacco puts first and foremost the fact that we have been willing to use the T-word, taxation. Going back to cigarette excise taxes, which ironically have an evolution across the states and diffusion to the federal government with some very strong parallels with the gasoline excise tax.

And decisions by both the federal government, but all states over the last 25 years, to have used that tool aggressively to drive up the price of a product which is legal to produce, legal to refine, and for the most part legal to use although there's now restrictions on how that's used. I do think there are some lessons there.

And yet, when you compare the tobacco industry where Dad used to work to the energy industry and fossil fuels, when you move toward energy you're talking about far more people, far more congressional districts, far more states' political vested interest, and far greater use. It's not in the mid-40 [percent] range, we all are linked to fossil fuel use, and hence the politics becomes much more challenging.

Daniel Raimi: Yeah. This sounds like another episode that we'll have to revisit connections between policies on smoking and tobacco and in energy. So put a pin in that, and we'll come back to it another time.

So we're gonna talk, again, today about carbon pricing and your new book, which I strongly recommend to people, it's called Can We Price Carbon?. Carbon pricing, just to put a really quick gloss on it, carbon pricing is the basic idea that the government applies some kind of price signal to the carbon content of fossil fuels that are consumed in the economy, which discourages their use and encourages the uptake of alternatives, as well as encourages R&D to develop new technologies that can reduce carbon dioxide emissions, which of course are the primary drivers of climate change.

So, with that incredibly brief description of what carbon pricing is, let's do a quick review of the state of carbon pricing around the world. Can you give us a quick tour around the world of some of the jurisdictions that are pricing carbon, and give us a sense of what sectors they apply to in the economy, as well as what actual price levels we've seen in recent years? And there's a lot of ground we could cover here, so I'll just ask you to pick whichever examples you think are most interesting and just give us a sense of how they're playing out on the ground.

Barry Rabe: Sure. This is not a new idea, this has been kicking around in circles particularly in the discipline of economics, and I say that as a card-carrying political scientist, not an economist, for decades. It has been used in a number of contexts and settings, perhaps most notably applied to carbon in a series of Nordic cases, a series of countries including Norway, a large fossil fuel producer, but Sweden and others, that adopted still by global standards rather high carbon prices through tax mechanisms in the very early 1990s.

At that point, the expectation was, certainly amongst economists but in all scholars and policy analysts working in the climate space, that this idea would truly sweep the globe, that we would probably move toward a global interlocking system, whether that was through the Kyoto Protocol or anything else.

That has not happened. But what we do have is kind of a patchwork quilt of experiments, examples, in some cases experiments that have lasted for a while that we could begin to evaluate. But a great number of them are relatively new. In the European Union, perhaps most significantly a number or jurisdictions beyond those Nordic cases have adopted some combination of a carbon tax or perhaps building on large gasoline or energy taxes for transportation, but moving it into a continental trading system, cap and trade or the EU Emissions Trading scheme.

That's one that has had lots of bumps and management issues and problems, but recent evidence suggests over the last few years that it may be moving into a more mature middle age and achieving some of the things that it's supposed to be doing to meet those goals.

Beyond Europe, we have some experimentation with this in Canada and the United States. A number of states have experimented with cap and trade. If we were having this conversation 10 years ago, we would be talking about the 23 states, including the one where we're having this conversation in Michigan, has committed to cap and trade. At this moment we have seen a reversal, and we're down to essentially 11 states, possibly a 12th one coming in.

Canada is in the midst of a major experiment about a national strategy for a carbon price arrangement that gives a lot of authority towards individual provinces. And we've also seen uptake on this issue in places like Mexico, Columbia, Chile, and others. Asia, also a player in this, South Korea, Japan, and the like.

For the most part, these policies do not cover every possible sector as might be optimal or preferred by many economists. It tends to be sector-specific. Many of these prices are set at a relatively low level, so they might have some bite and impact, but are likely to be modest. There's also a sort of Swiss cheese-like quality to many of them because there are exemptions and loopholes, and part of the need to close the political deal to make a tax or pricing system acceptable, there are these adjustments.

And yet, there are these policy laboratories in national governments, continentally we could begin to look at this, by many estimates about 50 nations have some skin in the game and have some form of a carbon price. But one has to be careful not to state the overall impact or scope of those as presently designed.

Daniel Raimi: Right. And the prices that you mentioned, just so people have a general sense of where they are, if we're looking at somewhere like California, I believe prices are in the 15 dollars a ton range. If we're looking in the European Union, prices have moved up significantly from their lows of a few years ago, they're now in the range of I want to say about 25 to 30 dollars in US terms. Just to give a sense of where those prices are lately.

As you mentioned, policymakers, economists in particular, many of my colleagues at Resources for the Future have been thinking about carbon taxes or carbon pricing for a long time, and working on it. Why did you want to put this book, Can We Price Carbon? ... Why do you see it as a valuable contribution at this point in time?

Barry Rabe: I began to think about the idea of this book over a decade ago when I was watching patterns and trends in climate policy development. What would actual governments do, not just a theoretical discussion of how we might design the best possible system, where the contributions economists have made in carbon pricing is so powerful and so impactful? But what happens when you go into the real world of politics, the real world of governments having to make decisions, at a national scale, a sub-national scale, or a continental scale?

I began to see even a decade ago that if you looked empirically at what governments were doing, just beginning with the model of American states, carbon pricing was part of the conversation, in some cases you saw early adoption, but you also saw a lot of other policies. Regulatory mandates, requirements to purchase more renewable energy, subsidies and incentives, that were not what economists were saying is the best way to go. But politically, they were much more likely to be adopted and actually sustained over some period of time.

So I actually, kind of as a hobby, developed a tracking system about 10 years ago, and began to monitor what all the American states, all the Canadian provinces, but then also looking globally at what was and was not happening, and then ultimately concluded that this is an arena, as a political scientist and someone who thinks not just about how do we get something done in a legislature now, but does that policy stick and last over time?

That long standing interest in what I call the policy lifecycle. If you, through democratic channels, adopt a policy, can you then stand it up through administrative channels, does it survive subsequent elections and changes of leaderships, does it perform empirically over time?

I felt what was missing in the discussion was an honest discussion of the political realities and why this compelling idea in some cases could be adopted and be sustained, but in many others was either rejected outright or reversed, as in the case of some of those states that we talked about a moment ago, reversed after a few years, where the policy doesn't actually accomplish anything because it doesn't have the longer-term bite that you need for that elevated price.

So the goal was to actually bring what early on was a relatively unique experience, a political science lens, to an issue that has largely been engaged by economics. But I'm delighted to say the number of political science scholars, including a number of junior colleagues working in this terrain, is increasing, and I think we're beginning to formulate, not a counter to the economics literature, but hopefully a complement. Is a great idea politically feasible or not?

Daniel Raimi: I couldn't agree more that the contribution of political scientists is incredibly valuable for thinking about a policy that, again, my colleagues have focused on for a long time, actually how do we get it done in the real world?

So, can you tell us a little bit about some of the design features that you think are particularly important when it comes to durability of carbon pricing policies? You spent a lot of time in the book talking about some of those key elements, and I know we probably won't be able to cover all of them, but can you highlight maybe one or two for us?

Barry Rabe: Sure. First of all, there's a challenge here because the set or the NF cases that are what I would call robust, that work through all of those stages, the lifecycle, perform over time, is relatively small. So from a standpoint of generalizability, or theoretical development, it's hard to go far because we're working with an odd set of cases, in the end it's overall small. But if there are common design features and elements, I would put them into a particular basket and perhaps we can illustrate it through one or two cases.

I do think that this often begins in a jurisdiction in response to real, more localized concerns about climate change. Something is seen in the local political context that triggers or elevates climate change as a concern, and creates a classic window of opportunity to really engage and develop a policy that has that kind of pricing mechanism.

Usually there is leadership that can begin with a fairly solid base in a particular political party, but almost immediately looks for ways to, if you are gonna try to develop a policy and outflank opposition, how you ultimately build a constituency over time. In successful, robust cases, serious attention is paid to the public management or the administration of policy.

I think one problem that we have seen is that, especially in areas like cap and trade, which is a very complicated policy in many respects, it does not automatically self-implement. There are problems and bumps, you have to develop an adaptive capacity.

Developing a constituency is hugely important because those supportive leaders, those policy entrepreneurs, will inevitably leave the scene. We have elections, we have election cycles. Do we see policies where carbon price becomes a target for an opposition party to gain power and reverse that policy upon being elected? We've seen that in the U.S., we've seen that in Australia, we may see it very soon in Canada. All of those factors come into play.

And I do think one other ingredient, I would not say this is the secret sauce by any means, but in a carbon price you are asking people to consider a commodity that they know, that they are familiar with the pricing, especially gasoline, and ask them to make an immediate sacrifice, an elevated price. And you can argue that in climate terms with the hope that that provides a benefit in future decades. A laudable goal, but a hard political sell.

But, when you impose a price, you do produce revenue. And I do think there is much to be learned from examples where there has been strategic consideration toward how you build a political constituency and a base of support.

There's no amount of benefit through expenditure that can likely offset the pain for many folks from higher energy prices. But I do think that question of how you use the revenue, whether that becomes a compelling story that people get behind is an important part of this, and is often historically, outside the energy area, part of the recipe of developing longterm support for a political strategy that involves some imposition of pain through tax. Whether it's payroll tax for Social Security, or president Eisenhower going back to the excise tax to launch the highway legislation of the 1950s.

Daniel Raimi: Wow. So there's so much to unpack there, again, I wish we had so much more time. But this is just an advertisement for why people should go out and get the book and dive more deeply into these issues.

I certainly know that thinking of the distributional impacts of carbon pricing has been an increasing focus of economists, and there's been a lot more work on modeling those impacts and estimating how particularly lower-income households can be made whole, or perhaps more than whole, depending on the use of revenues.

Folks at Tufts, and at RFF, have shown I think pretty compellingly that lower-income households in particular can be made whole, and in many cases can actually be made better off, if certain policies are put in place that use the revenue to compensate those lower-income households.

Is that particularly politically salient element from carbon pricing? In other words, do you think that this distributional question is at the top of the list when it comes to political challenges of implementing carbon pricing? Or is it lower in the rank?

Barry Rabe: It is significant, but not the only one. And I very much appreciate the contribution of those economists and others to begin to think about the economic consequences, the distributional equity, of different kinds of revenue allocation strategies. Here, I would only note that all of this has to play out in real time political terms. It is one thing, and a valuable contribution, to talk about what those distributional consequences would be, assuming you can get a bill through a legislature that has no exemptions, is stable, and is implemented exactly as it is promised.

We live, not just in the US but around the world, in times where governments are not necessarily trusted. The durability of policy is being reversed. We have gone through a number of presidencies now where multiple Congresses have struggled to even reauthorize clean air and clean water legislation, much less take on climate change, for decades. That often then means that you have presidencies, and we see this at the state level, that jerk back and forth, pulling levers back and forth.

In a case like carbon pricing, part of the deal has to be a longterm plan, and that question of durability really does enlarge. So how do ordinary people, ordinary citizens who are not policy [inaudible 00:20:29], hear what these benefits are, or potential benefits are? Do they really believe that governments will deliver on them? Do they believe that there will be shifts and changes and all of that?

That's part of the message, it's not just figuring out conceptually how you would like to allocate those resources, but doing it in a way that's persuasive and ultimately convincing, and builds support over time rather than loses it.

Daniel Raimi: Yeah, fascinating to consider all of these issues. One example of a policy that has been getting a lot of traction, in the media certainly, and perhaps in the public as well, is the idea of the Green New Deal, which of course is not fully formed, hasn't been spelled out, the I's haven't been dotted and the T's haven't been crossed.

But one thing that does seem to be coming through is that carbon pricing certainly doesn't look like it's at the center of the Green New Deal. And some of its backers, including representative Ocasio-Cortez, have even referred to carbon taxes using words like “wimpy” in a recent interview.

So are there lessons from your analysis on carbon pricing that you think can help inform discussions about the Green New Deal, either for its supporters, the Green New Deal supporters, or others who are trying to figure out how to mold this idea of a Green New Deal into the more historically accepted, preferred approach that economists might like, of something like carbon pricing?

Barry Rabe: I think for many reasons we owe a debt to the advocates of the Green New Deal for elevating saliency and awareness of this issue at a point where more and more people in the United States and around the world are seeing clear, demonstrable evidence of weather and other issues that can be linked to climate change, and recognition that the science on this issue gets more and more robust, and we need to take steps now.

I also give them very high marks for reminding everyone that this is not something that can be just concentrated into one little narrow bucket or sector of policy, it cuts across the board and will involve far-reaching mechanisms. All to the good, and has really triggered a lot of passion in new energy in this area, which I welcome.

A challenge will be, whether the carbon price is wimpy or not, what is ultimately the desired policy going to look like? There's always this question when you're leading a social movement and trying to engage people and build a broad movement behind something: when do you begin to come to terms with what the actual policies, whether they are regulatory attacks or subsidies, would look like?

This is one where I don't think we are seeing the transition yet amongst Green New Deal advocates for laying out what those terms would be, including whether or not in their estimation a price would play a role. I think they underscore the likelihood quite substantially in other cases as well that the idea that we're simply gonna eliminate all other energy policies related to climate, all regulations, all initiatives, fuel economy, and have some grand bargain where there's one massive carbon price that drives everything, is not a political reality for the United States or anywhere else in the world.

Carbon price has to work alongside these other policies that are generally a lot more popular, are likely to have constituencies that are gonna be fighting to maintain those over time. So the fit really does become important. But at some point, you have to make a point of transition between rhetoric, aspiration, lofty goal, and the realities of policy.

If, in fact, we are talking about a possible scenario in which in a 2020 election there might be new receptivity on climate change from institutions in Washington, D.C., we are less than two years from a new government forming. A new president perhaps, a new Congress certainly. What will they be talking about?

If one looks at the history of every major environmental statute, certainly in the last 50 years including air and water, at this point, before an electoral transition, there were beginning to be very serious discussions of what the key elements will be. If that involved some kind of a market-based mechanism or other kings of regulations, we should simply not expect much opportunity to have a major electoral transition if one is to occur any time soon, and then, within a matter of weeks, begin to cobble together incredibly complicated policies.

So I think that is a missed opportunity. And if carbon pricing has a role to play in that discussion in the U.S., this is the time to really work that through. Whether the goal is to set a high price and do all the things that we were talking about earlier, or perhaps in some instances to find a revenue source to pay for some of the dislocation costs, new energy starts, or even dealing with the dislocation considerations.

I know, as someone who's spent a lot of time in oil and gas producing states, like you, these are communities that could have a lot at stake through a major fossil fuel transition. How do we think about those communities, provide support, and all the rest? All of those are to be discussed, and I see no better time than the present to begin to engage that conversation.

Daniel Raimi: I couldn't agree more, and happily I think those conversations are happening, quietly in many cases, and maybe in the proverbial smoky room. Probably not so smoky anymore with the less tobacco in the air. I'm not based in Washington, D.C., but spent a lot of time with people who are, and I think it's been encouraging to see engagement happening across a variety of spectrums on these topics.

So we are running short of time, and of course as usual there's a million additional questions that I'd love to ask you. One final question before we move to our Top of the Stack segment, where we talk about some fun stuff that we've been thinking about and reading ... I'm gonna put you on the spot and ask you to put on your Nostradamus hat, and see if you can answer the question that the title of your book poses. Can we price carbon? So, Barry Rabe, can we price carbon?

Barry Rabe: At times I've lived to regret the title. I'm not someone who usually puts a title on anything that includes a question mark. But I actually decided to shift it from the original, The Politics of Carbon Pricing, as I went deeper and deeper into the subject and just became uncertain. I'm not really trying to joke around with the title, I think it's unclear.

I would not want to make a bet that any future Congress or any particular state or any government in the world will do carbon pricing. But I don't think it's remote. I think you can begin to see political patterns, coalitions, possibilities, even here in the US, even in states like Michigan, where this is feasible and possible going forward. I don't think I would bet everything that I own on that proposition, but I think it's a possibility, a fairly strong possibility in coming years.

And I really am heartened by this notion of other models and examples, either from within our own arena of the world here in North America, but also more broadly. I think that's where some of the really interesting work in this field is going.

Daniel Raimi: Yeah, great. We'll have to circle back sometime soon, either on a podcast or not, to get an update and see where things stand, certainly after the next election, if not before.

So now let's close it out with our Top of the Stack segment. What's at the top of your literal or metaphorical reading stack, and I'll just briefly mention a new piece of legislation that has been passed by the legislature but not yet signed by the governor in Colorado.

Daniel Raimi: This is Senate bill 181, which is a bill that focuses on the oil and gas industry, and it actually substantially expands local control of siting and regulating oil and gas development for cities and municipalities in Colorado. It expands rules on methane emissions and other air emissions from oil and gas facilities. And it redirects the state regulatory body to focus more on protecting public health and the environment. So really fascinating piece of legislation. Today is April 9th, not sure if the governor's gonna sign it or not, but I'll be watching, and I imagine many of our listeners will too.

So that's what I'm thinking about today, and reading about. But Barry, what's on the top of your stack?

Barry Rabe: The immediate event involves elections coming in Canada, most notably Alberta. Is it possible for a jurisdiction for whom oil and gas production has been lifeblood for a long time, and yet unilaterally adopted a carbon price with some real bite to it, and even a plan to expand that to methane over the next five years.

If a political figure takes that on as premier Rachel Notley did over the last few years, can she win reelection in a province where her election might have been a bit of a fluke, it's not a party that wins very often. Can you survive politically, especially in a place that lives and breathes oil and gas production, and argue that they can be a part of this, or does the Alberta case follow the pattern we've seen elsewhere in some cases in the U.S., to see rejection?

The big item on my reading list, it's a book that I began a year or so ago, I hadn't finished and I've gone back to, is Blood Oil by Leif Wenar, a philosopher. And it's a very deep and rich treatment from a philosopher's lens of all of the issues of energy, oil, production, and the like, and the circumstances, the ways we might think about constructive governance, engaging citizenries, and leaving that to be a much more robust sector.

If I might bring one other piece in, my colleague Matto Mildenberger at University of California Santa Barbara has been digging into a number of areas as he often does, and has shared with me a fascinating book, Defending the Land of the Jaguar, a History of Conservation in Mexico. A relatively new book on the political history of energy and conservation in Mexico. At the very moment we're looking at the AMLO experiment, and looking where Mexico is gonna go on all of these issues.

I continue to find, as a political scientist, turning to philosophy, the first of the book, or something that's really more energy history, is very rich and important, something that I need to ground myself as a scholar, but also someone concerned about these policy areas. So I've got one eye on Alberta, but the other eye on these books.

Daniel Raimi: Fantastic. We'll make sure to have links to all those readings on our show page, and look forward to digging into them.

Barry Rabe, thank you so much for joining us on Resources Radio, I've really enjoyed it.

Barry Rabe: Thanks Daniel, it was a pleasure.

Daniel Raimi: Thank you so much for joining us on Resources Radio. We'd love to hear what you think, so please rate us on iTunes or leave us a review. It helps us spread the word. Also feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent, nonprofit research institution in Washington, D.C. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org.

The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Kate Peterson, with music by Daniel Raimi. Join us next week for another episode.