By Peter Shannon, Queen’s University

Questions from California’s battle over carbon emissions

Battles over climate change policy between state, provincial, and federal governments have been a common occurrence in 2018. In April, the Environmental Protection Agency started a row with California over emissions standards. Then EPA administrator Scott Pruitt announced that it would repeal automobile emissions standards set by the Obama administration and threatened to waive individual states’ power to set their own emissions standards if California was unwilling to negotiate over its own higher pollution and mileage standards. California’s Attorney General replied that California was prepared to sue the EPA if necessary to maintain its current regulations. [1] California followed through on this promise, filing a lawsuit with 16 other states in May. [2] The disagreement over emissions policy extends far beyond automobile standards: California is the only US state with a complete carbon market, although nine northeastern states have tradable emissions caps that apply only to power producers. Meanwhile, the President Trump withdrew America from the Paris climate accord, scoffed at the notion of federal climate change policy and claimed scientists predicted the polar ice caps “were going to be gone by now, but now they’re setting records.” [3] With the battle over carbon policy becoming one of the most significant issues in Californian politics, it is worth asking whether carbon pricing is a worthwhile policy and if so, which level of government should handle carbon emissions policy.

The first of these questions is straightforward: carbon pricing is one of the few policies to receive nearly unanimous support from economists. A survey by New York University’s Institute for Policy Integrity found that out of 365 economists with climate expertise, 95% answered the United States should reduce its carbon emissions as promised under the Paris Agreement. Furthermore, 81% believed that market-based policies such as carbon taxes or emissions trading would be the most efficient reduction policy. [4]

Support for carbon pricing is rooted strongly in economic theory. Although classical theories predict that all taxes other than lump-sum “poll taxes” are distortionary, such theories rely on assumptions such as perfectly competitive markets, perfect and complete information, and the absence of externalities. In fact, carbon emissions are a textbook example of the externality problem. When a consumer purchases a fuel-hungry SUV or a power company burns coal to meet electricity demand, they only consider the private costs of these actions. These could include the sticker price of the large SUV and higher costs at the pump for the consumer, or the relative cost of firing up a coal plant compared to other sources owned by the electricity producer. Neither the producer nor the consumer considers the social cost of carbon emissions (the costs born by all of society) resulting from their actions. As a result, greenhouse gases are emitted at well above the efficient level, inflicting damages in the form of extreme weather, wildfires, lost crops and more. [5] The US Government Accountability Office found that extreme weather and fires cost the federal government more than $350 billion between 2007 and 2016 while coastal property damages from rising sea levels are estimated at $4-6 billion per year from 2020 to 2039. [6]

To reduce these damage costs and achieve a socially optimal level of emissions, governments must force individuals to internalize the full social costs of carbon emissions in their decision making. This can be achieved by setting a unit tax equal to the marginal cost of one extra ton of carbon emissions. Consumers and producers will then make decisions such that their marginal benefit from producing one last ton of carbon emissions is equal to the tax. This also means that the benefit from producing one more ton of greenhouse gases is equal to the marginal cost: an efficient level of emissions is achieved. If this efficient level is known then the same outcome can be achieved by a cap-and-trade policy – providing a fixed number of tradable emissions permits and allowing the market to determine the permit price. [5]

The benefits of carbon pricing are clear. But who should administer it? Canada has chosen to delegate carbon emissions policy to provincial governments. The Trudeau government signed an agreement with most provinces requiring them to implement a carbon price of $10 per tonne in 2018 and to increase the price to $50 per ton by 2022. Provinces are free to choose and implement their preferred method of carbon pricing. The government stated that non-compliant provinces will be subject to a federal carbon tax of $20 per ton as of January 1, 2019. [7] British Columbia and Alberta already have carbon taxes while Ontario and Quebec joined California’s cap-and-trade market in recent years. However, following the recent election, Ontario has cancelled its cap-and-trade program. [8] Meanwhile, Alberta has withdrawn from the federal climate change plan and refuses to re-enter unless the expansion of the Trans Mountain Pipeline is approved. [9] In the United States there is no federal carbon pricing policy at all. Outside of California and the 9 states belonging to the less ambitious Regional Greenhouse Gas Initiative, the remaining 40 states do not have any form of carbon pricing. Currently the largest and most centralized carbon market is in Europe, where the EU Emissions Trading System covers 45% of emissions in 31 countries. [10]

It is important to consider the nature of a pollutant when determining how to regulate its emissions. Greenhouse gases are uniformly mixed global pollutants. This means that greenhouse gas emissions spread rapidly through the atmosphere and damages are not concentrated around pollution sources. The effects of carbon emissions spill over well beyond state or national borders. [5] Because of this, state or even federal policies may only eliminate a small portion of the externality problem. Assuming governments only act to serve their constituents, the costs inflicted upon other states or countries by climate change remain external to each government’s policy decision. Furthermore, since environmental assets such as stable weather, low sea levels and polar ice caps are public goods, there is an incentive for countries to free-ride off one another’s climate policies. Indeed, critics in smaller countries often argue that it would be foolish for them to implement costly climate policies when large economies such as the United States and China will be responsible for the majority of emissions reductions.

Carbon emissions are also classified as a stock pollutant rather than a flow pollutant. This means that climate change is determined by the total quantity of greenhouse gases in the atmosphere rather than the current emissions level. [5] It is therefore impossible for any emissions reduction policy to have an immediate effect on climate; slowing global warming would take years of action. The benefits of carbon pricing are unlikely to be realized until long after the political careers of those who implement it. As a result, there is little incentive for politicians to take sufficient action on climate change. Combining this with the global nature of carbon emissions it is apparent that international agreements that pressure each country to do their part in reducing emissions are essential.

Carbon leakage is another concern associated with localized carbon pricing. When otherwise similar jurisdictions have different climate policies, firms may choose to move production to the jurisdiction with looser emissions constraints or lower carbon prices. [11] This is a particularly unfavourable outcome for legislators since their country could lose jobs while total carbon emissions stay the same. The more decentralized carbon policy is, the more opportunities there are for jurisdictions to compete through lower carbon prices while those with higher prices fall victim to carbon leakage. The issue of carbon leakage is of some concern to economists: over the 95% who supported a reduction in carbon emissions, 18% of respondents to NYU’s survey believed the United States should wait for other countries to reduce their emissions first, possibly through multilateral or global agreements. [4]

Therefore, due to the widespread effects of climate change, the nature of greenhouses gases as uniformly mixed stock pollutants and the risk of carbon leakage, climate policy must reach beyond state and even national borders. Although negotiations are often difficult and painstakingly slow, global efforts such as Paris Agreement and the Kyoto Protocol are essential. Coordinated efforts across states and countries allow for more efficient and equitable policies that account for the full cost of climate change. Although California is fighting for a worthy cause, its state-level policies are nothing but imperfect stopgaps as we await a global solution.

 

References

[1] Lundy, M. and Cardoso, T. “EPA announces easing of car and truck emissions standards”. The Guardian, April 2 2018.

[2] Mooney, C. “California, 17 other states sue Trump administration to defend Obama-era climate rules for vehicles”. The Washington Post, May 1 2018.

[3] Merica, D. and Miller, B. “Trump’s false claims about the polar ice caps”. CNN Politics, January 29 2018.

[4] Howard, P. and Sylvan, D. “Expert Consensus on the Economics of Climate Change”. Institute for Policy Integrity, New York University School of Law, December 2015.

[5] Field, B. and Olewiler, N. Environmental Economics and Assessment Fourth Canadian Edi-tion. McGraw-Hill Education, 2015.

[6] “Information on Potential Economic Effects Could Help Guide Federal Efforts to Reduce Fiscal Exposure”. Report to Congressional Requesters, Government Accountability Office, September 2017.

[7] Tasker, J. P. “Trudeau announces ‘pan-Canadian framework’ on climate – but Sask., Manitoba hold off”. CBC News, December 9 2016.

[8] “Ontario Introduces Legislation to End Cap and Trade Carbon Tax Era in Ontario”. Government of Ontario. Web, retrieved October 14, 2018 from https://news.ontario.ca/ene/en/2018/07/ontario-introduces-legislation-to-end-cap-and-trade-carbon-tax-era-in-ontario.html

[9] “Canada’s climate change plan — Alberta is out, so is it dead on the table?” Global News. Web, retrieved October 14, 2018 from https://globalnews.ca/news/4420844/alberta-climate-change-plan-federal-justin-trudeau/

[10] “The EU Emissions Trading System (EU ETS) Factsheet”. European Commission Publications Office, September 2016.

[11] “Carbon leakage”. European Commission. Web, retrieved April 18 2018 from https://ec.europa.eu/clima/policies/ets/allowances/leakage_en.