Ecofrugal climate policy

In the past couple of years, I've written several posts here about the benefits of putting a price on carbon. A carbon tax or carbon fee is a very simple, direct way to bring down fossil fuel emissions by making fossil fuels more expensive. This gives everyone who uses fossil fuels now — individuals, businesses, governments — a clear incentive to use them less. And it doesn't have to hurt low-income families, because you can simply take the money from the carbon fees and distribute it directly and equally to citizens. With a bill designed like this, called a carbon fee and dividend or carbon cashback bill, the majority of Americans — especially those lower on the income scale — would come out ahead.

I've always assumed a carbon fee was the most ecofrugal of all possible climate policies. It has a major impact on climate (as you can see with this simulator tool I tested at the 2021 CCL conference) and it doesn't cost the government one red cent. But according to the latest Weekly Planet (a free climate newsletter from The Atlantic), there's actually something even better: clean energy tax credits.

We already have some clean energy tax credits, of course. But they're kind of a hodgepodge. Each one covers a different, specific type of clean energy project. Some pay developers when they make investments in clean electricity; some pay them when they actually produce it. And a lot of the money ends up going into the pockets of the big banks that finance the loans for these projects.

These new credits are more elegant, kind of like the carbon tax itself. They apply equally to any kind of clean energy project. Developers can take the credit either when they invest or when they produce electricity. And if they're new companies that owe no taxes yet, they can apply the credits to their future taxes.

According to a recent University of Chicago study, these new credits are amazingly cost-effective. Existing clean energy policies can cost as much as $3,064 for every ton of carbon they remove from the atmosphere. These tax credits cost between $33 and $50 per ton. When you factor in the amount of money the government saves by reducing the cost of carbon pollution (costs like health care expenses and dealing with natural disasters), these policies actually pay for themselves. And if you could factor in the cost savings from eliminating all the other pollutants produced by fossil fuels, they could possibly pay for themselves twice over.

And we're not talking about a small cost for a small benefit here. According to the study, these incentives would affect the "entire electricity sector," unlike current credits that affect only "relatively small parts of the economy." They could reduce emissions from the grid by 33% to 45% by 2031, a mere nine years from now.

OK, you may be thinking, but how is all that better than carbon pricing? Wouldn't making fossil fuels more costly, rather than making clean energy less costly, have the same effect? And wouldn't it be even cheaper, since the polluters, rather than taxpayers, would bear the cost?

The paper doesn't address this point. It compares the clean energy credits only to "existing carbon policies," which don't include a price on carbon (at least not in the U.S.). Robinson Meyer, author of the Weekly Planet, says "because their per-ton cost is below the social cost of carbon, the tax credits may in some cases be more efficient than a carbon tax," but he doesn't explain beyond that. To me, it seems that the only real benefit of the clean energy incentives is that they indirectly reduce the use of fossil fuels, and carbon pricing does that directly.

But Meyer does bring up another way in which the subsidies are clearly superior to carbon fees: "they seem unlikely to generate the political blowback that tends to greet a carbon tax." Because, as he pointed out in a previous issue of the newsletter, carbon pricing is a very hard sell. The benefits from reduced global warming are hard to measure or point to directly, but the costs are immediate and affect everyone. And even when you tie the carbon fee to a dividend, as in a carbon cashback program — even when you can tell Americans honestly that this policy not only mitigates global warming in the future but also puts money directly in their pocket, right now — it doesn't increase popular support for the program. (To be fair, the study he cites found that if you make the rewards of the program more transparent — for example, sending people a check in the mail every month instead of giving them a tax credit once a year — people support it more.)

The point is that, whether reasonably or unreasonably (I'd say there's a strong case for "unreasonably"), carbon taxes are unpopular and politicians don't want to touch them. But clean energy tax credits are easier to sell. So the biggest benefit of this policy over a carbon cashback is that it could actually get passed. And a real benefit always beats a larger, purely hypothetical one.