The real cost of carbon

Two years ago, if you'd asked me what I thought about something like cap and trade, or a carbon tax, I would have said that they were interesting ideas, but probably not worth the trouble of fighting for. I didn't think a price on carbon was necessary and, in fact, I was worried it could do more harm than good.

Doing the research for my book, Before the Lights Go Out, changed my perspective. There are risks to any mechanism you use to put a price on carbon (there are risks to everything we do), and it's still not something we could institute easily (thanks, politics!), but I've come to think that this one thing could be the easiest method to change the way we make and use energy. Energy—and more importantly, reducing fossil fuel use—isn't intuitive. It's often hard to see how we're using fossil fuels, and make decisions about how to use less of them. A price on carbon, however you do it, takes some of the guesswork out of that. Instead of having to become some kind of Super Green Living Expert, all you have to do is do what's cheapest. posted an excerpt from my book this week, and they also did a short interview with me. One of the things they asked about was carbon pricing:

We’ve become dependent on fossil fuels for a reason — not because of any evil plot, but because these fuels are just that much more powerful than anything that came before them. The power of coal, the portability of liquid gasoline: There is amazing value there. At the same time, we’re also talking about fuels we have limited supplies of. And those fuels, when we use them, also cost us money in the form of health-care costs and climate change adaptation costs.

Right now, the price we pay for those fuels doesn’t really account for either the amazing benefits or the awful limitations. It’s an artificial price, based on simple, direct supply and demand. It doesn’t take the long term into account. It doesn’t take economy-wide effects into account.

If we valued fossil fuels at what they are really worth to us, then a lot of the other stuff would fall into place. That mixture of technologies and policies would happen faster, and more naturally, because it would be based on a natural incentive.

It’s reasonable for people to not want to spend half their paycheck on a fuel that is absolutely necessary to their life. But paradoxically, if we had a price on carbon, and the cost of those fuels went up, then businesses and governments and individuals would find ways to get people the services they needed at a lower cost. Right now, there’s not enough of an incentive for that.

Read the rest of the interview at

Read more about why I think carbon pricing matters in Before the Lights Go Out.

Image: Black coal or charcoal for cooking, a Creative Commons Attribution (2.0) image from epsos's photostream


  1. Maggie, thank you for such a reasoned and thought-out post.  I keep thinking that we CAN do this, we can make energy greener, but not with politicians trying to manipulate everything they can think of in order to keep their jobs.  That’s what keeps prices higher or lower than they ought to be. 

  2. My problem with Cap and Trade is that it ONLY affects the poor people, who tend not to be the largest abusers of over consuption.

    Also, who gets this money and what are they going to do with it afterwards. Everything that I have read so far involves Goldman Sachs and market speculation. If 100% of the tax went towards investing in reusables and the consumers benifited in the long run with cheaper energy costs, then I am all in. I just can’t trust the government to do the right thing because they never do

    Social Engineering is wrong, in my opinion.
    Governments should not manipulate us, we should be manipulating them.

  3. re: ” A price on carbon, however you do it, takes some of the guesswork out of that. Instead of having to become some kind of Super Green Living Expert, all you have to do is do what’s cheapest.”

    That is all well and good – simple even. The problem I have is that will simply further tax poor people for a necessity. Even the true middle class will feel it, just like they do with gas prices. We all need heat and electricity. So right now ‘green’ isn’t viable because it is more expensive than fossil fuels in many cases, unless there are subsidies. So lets say i could have wind or coal power where I live. Let’s say wind would cost me $100/mo, and coal only $75/mo. So coal is taxed, bringing up the cost of coal to $125/mo. Obviously that means wind is the way to go, even though my bill just dramatically increased $25.

    But wait! Wind was only so cheap because it was already subsidized (in some areas). Where would that money go? I guess the carbon tax could go to keep those in place – until everyone switches. But if they do go away, the price of wind goes up (and the tax to offset the carbon as well). So now my bill is $125/mo.

    These are just made up numbers. I have no idea if they reflect accurate percentages, but I think I raise a valid point.

    I think the solution is to just keep plugging away. When the green tech gets simple and cheap enough to become the cheapest with “no cheating”, it will take over like wild fire.

    1. “to just keep plugging away. When the green tech gets simple and cheap enough to become the cheapest”

      Which is why the proper role for government in all this is to support basic research into things like more efficient energy storage and distribution, rather than throwing money at poorly-managed manufacturing startups.

      1.  Which is why the proper role for government in all this is to support basic research into things like more efficient energy storage and distribution
        They should be doing this _as well_.

  4. If the idea is to incentivize reduced carbon usage, then I do think that a straightforward, no bullshit carbon tax is the way to go.

    This simple idea has taken back stage to the cap-and-trade, carbon-credit schemes for several reasons:

    – As istvan said above, cap-and-trade allows the banksters to skim off plenty in transaction costs.
     – Carbon credits allow the Al Gores and Tom Friedmans to pose as “green” by buying indulgences while their homes pump out as much carbon as my whole neighborhood.
     – The more byzantine the plan, the greater the opportunity for Congress to gin up campaign contributions by selective exemptions and punishments.
     – Last but surely not least, the various complex schemes enable this to be sold to Joe and Jane Six Pack as a win-win for the economy and for their paychecks, instead of having to confront the simple truth that a major reduction of CO2 in the atmosphere will not be free, or even cheap.

  5. Its BS and it creates distorted regulations.
    For example in Poland you can have an “Ecological Coal burning plant”, all you have to do is burn a set amount of FRESHLY CHOPPED HEALTHY TREES per month and you are set.

  6. If the tax on petrofuels  makes the price go up, that should make nuclear even cheaper by comparison and be an incentive to bring on the next generation of nukes even sooner. 

  7. I’m not entirely sure what the solution is, but the problems are clear:

    1. ‘short-term profit/greed at absolutely any cost’ is apparrently an acceptable business model in the west.
    2. large companies following the example from #1 have ludicrous amounts of cash spare
    3. companies from #2 use their vast amounts of money(=power) to buy-out/bribe politicians to ensue #1 is maintained for as long as possible.

    So basically a horrible self-feedback loop that prevents any changes until the problem becomes too immense to hide.
    They don’t care because by then they’d have made their money and the fallout will be ‘someone else’s problem’… Complete sociopaths the lot of them…

  8. In Australia our politicians are currently in a poo-flinging contest over this very issue. Our current federal government has implemented a carbon price which will go into effect at the end of this financial year. Originally both sides of politics agreed that we need a price on carbon – including our “beloved” ex-PM and sucker of George Bush’s little wang, John Howard – but now the opposition is being led by a conservative sexist redneck moron who is choosing to play politics with this issue instead of doing what is the most cost effective way to reduce our carbon use.

    In answer to concerns like those of Mister44 above, simultaneous to the implementation of the carbon price there is going to be a restructure to the tax system so those on lower incomes are supposed to be better off under the carbon tax than before (through increases to the tax-free threshold for income and subsidies to help those with lower incomes). It is absolutely the best way to address the problem and all I hope is that our present federal government doesn’t lose power in the next election or there is a fair chance the whole thing could be scrapped.

    This helps explain Australia’s carbon pricing scheme:

    This is a report called The Garnaut Review 2011: Australia in the Global Response to Climate Change which gives context to the plan and how it connects with what we know about recent climate change:

    1. Thank you for typing that all up, I wouldn’t have been able to say it so well, nor have those links on hand. 

  9. There’s a powerful lesson from how the US managed to get the car industry to clean up its act with respect to tail-pipe emissions of particulates. The government didn’t invest in R&D. It didn’t pick winners and losers. It didn’t try subsidizing new cleaner technologies. It didn’t offer prizes and incentives. It didn’t try to educate drivers to change their driving habits. 

    It simply legislated a steadily increasing tailpipe emissions standard, with serious penalties for non-compliance, and it left it to the auto industry to figure out how to get there. It’s one of the most successful environmental improvements ever.

    That’s why we need a carbon tax.

    The tax should steadily increase over time, with a very clear timeline to allow industry to adjust. The revenues should be used to reduce income tax / increase benefits for the poorest people who will be least able to afford to invest in more energy efficient stuff. It should also fund a massive country-wide retrofit program to help people improve the energy efficiency of their homes, which, by the way, would also create a huge number of jobs and float the economy out of recession, without adding a dime to the national debt. 

    Come on, politicians, it isn’t that hard to understand.

    1. Auto emissions are actually a good example of how this sort of policy fails: the auto makers make inefficient cars, they pass the costs on the to consumer, there’s no real incentive to improve in this area because the market generally cares about other things (features, not bug fixes). When pressed, the industry goes on and on about the difficulty of change, and how the market won’t support it.

      That is, until regulations actually do change, the bar is raised, they’re all forced to change at the same time, and consumers just have to learn to live with a few feature-light, “bug fix” releases while the industry catches up to level it could have been at years ago. Once that becomes a solved problem, the cycle starts over again, making progress in fits and jerks, and always too little, too late.

      The manufacturer will find ways to pass costs on to the customer, and customers have shown that they are more or less fine with this. Consumers who will pay for 15 mpg trucks will pay for carbon taxes. And manufacturers will accept that their customers seem to be fine with that added cost, and focus on things that actually differentiate them from the competition in their customer’s eyes, like leather trim and in-dash GPS. And nothing will actually be done to improve the situation. It’s a good way to generate revenue, but a horrible way to effect real change.

      1.  While much of what you say is true, the results don’t line up with your conclusion. New vehicles ARE much more efficient and clean than they were prior to CAFE. Fleet-wise, the rate of improvement in efficiency and emissions has been faster over the last decade than the previous 20, and over the past 20 years, more improvement has been made than the last century.

        Even manufacturers that have pretty legitimate gripes with the fleet basis of CAFE (e.g. Porsche, Ferrari) have made huge innovations in the last 5 years. They are poised to not just raise their efficiency and emissions standards, but found they could improve performance at the same time.

        It turns out you can have your V12 AND your 30 mpg, too.

  10. “the price we pay for those fuels doesn’t really account for either the amazing benefits or the awful limitations.”
    A special case of the single largest generalised flaw in disaster capitalism – namely that usually, the fastest way to appear more successful and attract investment is to be the most ruthless and the quickest at externalising all possible costs.

  11. It’s called an externality.  It’s a fairly simple economics concept that will typically be covered briefly in any introductory economics course.  The trouble is that people sympathetic to extreme right wing ideologies tend to outright deny that externalities exist.  The obvious and inescapable conclusion that follows from the observation of the existence of externalities is that markets aren’t magical and government intervention is occasionally necessary to promote efficiency or even avert disastrous misallocation, as in the issue at hand.  You’ll never get people on the right to accept this because doing so would be tantamount to convincing them that the entire right wing intellectual enterprise is fundamentally flawed and unsalvageable.

  12. The trouble with the emissions system as it exists right now is that essentially gives away public property. So long as a polluter falls below certain limits, he is allowed to consume a public resource — clean, breathable air — without paying. It’s fundamentally not much different from a grocer that lets you walk out with “just one” free steak per visit. What’s worse, these unspoken subsidies give a small advantage to the polluter at incalculable expense to the public now and forever.

    The notion of a fixed tax for emissions is a fine idea for simplicity’s sake, but it’s also not very good at solving the problem. Yes, it puts a fee on emissions where there currently is none, but the fee is entirely dependent on the government’s ability to predict the value of clean air and the cost of improvement. To go back to the grocer example, it would be as if all steaks were now priced and priced evenly… anywhere from 5 cents each to $100 each. If the tax is set too high, it can strangle the economy needlessly. If the price is too low, it’s not worth the effort of trying to improve processes. In some cases, it could even skew decision-making towards just paying the appropriate taxes and not worrying so much about efficiency, encouraging more pollution.

    What Maggie said above about the difficulty of seeing where we are using fossil fuels and deciding on  how to use less of them is not just true on an individual scale. Put a single bureaucracy in charge of putting a price on air — making a single pair of eyes responsible for the health of the planet and the market — and odds are they won’t do particularly well on it. Not surprisingly, none of them want to try.

    Instead, cap and trade actually solves the problem by letting the government figure out a considerably easier question: how much total of agent X can we afford to let into the air this year.  Market competition then lets all players contribute in setting a price on this finite public resource. The same way we do for water. And for power. And for radio spectrum. Hell, the same way my mother-in-law’s town does with restaurant liquor licenses. The market has been in policy for years, and it’s been there because it works.

    1. Exactly.  Markets are great at efficiently setting prices, but they have a few bugs here and there.  All it usually takes is a clever patch to fix it.

    2. If we can save the same weight of CO2 by stopping some process that makes us $1 better off (when not accounting for the externality) it is just as good as changing some other thing that makes us $100. We want to prioritise the easy steps to reducing CO2 production because those changes make the world that much better without much downside. Steak costs enough that you can eat it as a treat, but you wouldn’t waste it on your dog.

      Cap-and trade has the same effect as a carbon price (putting a cost on CO2 emission), but with far greater cost in accounting, and much more chance to game the system.  A fixed tax is vulnerable to being set too high or too low (we never have enough information about the future, even before politics comes into it), but it is at least transparent.

      Look at the European cap-and-trade system – each country set limits as high as
      possible (to protect their own industry), and the carbon price has
      crashed to zero because there are too many permits about. The opacity of the feedthrough from ‘number of permits’ through the market to ‘carbon price’ meant that the initial designers of the system set it up (intentionally or not) so that it abjectly fails in its purpose of making individuals account for the CO2 externality.

      That’s even before we worry about how to detect fraudulent returns. Compare a carbon tax: tax every lump of C imported or mined to account for its eventual combustion. You can set it at a rational level, based on the current understanding of the externality ($80 according to Stern, there are newer figures, and it’s absolutely the purpose of politics to channel a debate as to whether a final tax should be higher or lower than that).

      We don’t know how much CO2 it is correct to burn. We could make scientific estimates of the externality of each gram of CO2 and enact a tax to account for that, letting individuals decide whether some activity is worth it with the tax included; or we could rely upon some gropuscule of politicians and lobbyists to set some permitted amount that cannot take account of the economy, new technologies, or changes in human wants, years in advance.

      1.  What?  Your objection to cap and trade is the inability of government minders to set limits optimally, so your solution is to have government minders set the price?  The whole idea behind cap and trade is that it partially avoids the pricing problem, wherein no non-omniscient agent can approximate the optimal price.

        One of the rare good bits to be found in Austrian economics.

  13. Several of the posts up-thread share the same theme, the idea that evil, corrupt corporations are conspiring to force upon The People….


    ….cheap energy, and the cheaper products it makes possible.

    Alas, a demand for an end to cheap energy is, so far, somewhat of a non-starter as a political crusade.

    If I could envision ecstatic crowds roaring their approval of speeches calling for more expensive gasoline and electricity, I’d be more sanguine about dealing with all the “externalities”.

    Because the first externality any politician will consider is “How does this help my next re-election campaign?”, perhaps we need term limits before we can address the CO2 issue.

    1. The whole idea of an externality is a failure of normal market based pricing to adequately reflect costs and benefits external to a transaction.  There is no need for a conspiracy.  It’s just people behaving as normal economic agents.  And anyway, we use government intervention to deal with externalities all the time.  Ever heard of workplace safety laws, fire codes, or a host of other successful, popular regulation schemes?  These things exist specifically because the market fails to include the cost of something in the market determined price.

      1. “Ever heard of workplace safety laws, fire codes….?”

        Yep, those are popular because the electorate sees the benefit and believes it’s worth the cost.

        Now, convince them that $6/gal gasoline is worth the cost, and you’re home free.

        1.  It’s already been done in a number of other countries, so it’s demonstrably not impossible.  We are in a situation where people don’t see the value because a huge amount of disinformation is preventing the public from understanding the scientific consensus on the underlying problem.  That is the primary, and possibly solitary, obstruction here.

  14. “if […] the cost of those fuels went up, then businesses and governments and individuals would find ways to get people the services they needed at a lower cost.”[citation needed]

    Average UK unleaded price £1.42/l ($8.51/gal), of which £0.82/l ($4.91/gal), or 58% is duties/tax.

    Average TX unleaded price £0.64/l ($3.84/gal), of which £0.06/l ($0.38/gal), or 10% is duties/tax.

    The UK is charging nearly 14 times more tax, and yet I don’t see much more green innovation coming from the UK than Texas. And I didn’t see any more back when the difference was even more stark.

    Taxing the poor just punishes the poor for being poor, and ensures they remain poor: nothing more.

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