President Joe Biden last month held a virtual world leaders’ summit on climate, casting it as an effort to galvanize efforts by the world’s major economies to tackle the issue on a global basis. The summit reconvened the US-led Major Economies Forum on Energy and Climate, bringing together 17 countries responsible for roughly 80% of both global emissions and gross domestic product, as well as other delegates.
At the summit, the US announced a 2030 greenhouse gas (GHG) emissions reduction target of 50-52% from 2005 levels. The target is the country’s new Nationally Determined Contribution (NDC) under the 2015 Paris Agreement, which the US rejoined when Biden became president.
Many European countries submitted more ambitious new NDCs of their own before the summit and China and the US issued a joint statement, committing to cooperate “with each other and with other countries to tackle the climate crisis.” But China continues to build coal-fired power plants, and both it and the US have been criticized for long failing to address climate change seriously.
An Apr. 28, 2021, vote in the US Senate restored federal regulation of oil and gas methane emissions, reversing 2020 rules enacted by the Trump Administration. These rules undid 2016 Environmental Protection Agency (EPA) regulations curbing methane emissions from both new and modified oil and gas sites and reducing federal oversight of the industry. A matching House resolution is expected to be acted on this month.
Efforts to rollback rules promulgated by the Trump EPA are largely being led by Democrats. But Congressional Republicans have also engaged climate policy, putting forward more than 30 bills as part of the “Energy Innovation Agenda: Conservative Solutions for a Better Climate.”
Harness the market
Given interest in climate matters on the part of our two viable political parties and support for action from both a majority of the American public and a substantial part of the oil and gas industry, it seems time to do something.
For lasting change to take hold, however, those responsible for changing their behavior will need more than a new set of laws and regulations to follow. They’ll need a system of costs and benefits to incentivize participation. The market can provide this incentive.
A carbon fee is the market-based incentive backed by the Climate Leadership Council (CLC), founding members of which range from oil majors and utilities to manufacturers (Ford, Microsoft, etc.), financial service companies (e.g., Allianz, JPMorgan Chase & Co.), and environmental nonprofits like Conservation International and the World Wide Fund for Nature. Its plan centers on a fee starting at $40/ton (2017 dollars) and increasing annually at a rate 5% greater than inflation.
CLC says this price on carbon—paid economy-wide by emitters and paired with border carbon adjustments to ensure overseas polluters pay their share—would cut CO2 emissions in half by 2035 on its own. Fees generated would be returned to individual citizens as a dividend.
Those to whom this sounds too much like a tax might prefer a cap-and-trade system. Emissions allowances would be sold at auction and companies could then buy and sell them to each other. Those less interested in cutting emissions can buy credits to cover their overages from those who have built up excess allowance.
Either will produce tangible economic incentives that companies can then choose whether and how to embrace, and in so doing provide the foundations of a lasting emissions solution. By at the same time allowing individual actors to then develop their own mechanisms through which to maximize income, either is also superior to even the most carefully crafted prescriptive regulation.
