President Obama calls for a price on carbon. Will it work?

In a recent speech at Carnegie Mellon University, President Obama called for a price to be put on CO2 emissions, in order to move us on the path towards renewable energy. He figures the market will help do the rest.
” …the only way the transition to clean energy will succeed is if the private sector is fully invested in this future, if capital comes off the sidelines and the ingenuity of our entrepreneurs is unleashed. And the only way to do that is by finally putting a price on carbon pollution.”

A price on carbon has dual purposes:

  • It raises the cost of energy, which should encourage conservation.
  • It closes the cost gap between fossil fuels and alternative energy.

But will it work?

According to the most recent EPA greenhouse gas inventory, US greenhouse gas output is 7 billion tons a year. At a price of $25 per ton — as envisioned in the Kerry-Lieberman American Power Act — the total added cost if we priced all US emissions would be $175 Billion dollars per year, or about $1750 per household per year. Of course we won’t be charging for all emissions….more likely just those above our 17% reduction cap, so the short term number (in grossly oversimplified terms) is really more like $350 per household….and that’s only if we were not simply giving away all the permits. And in the long term? The senate bill targets an 80% reduction by 2050…but I’ll believe that commitment when I see it. 

I suppose this could show up as an additional $.25/gallon at the gas pump, or perhaps another $.01- $.02 per KwH for electricity. More likely, a lot of it would be buried in the cost of all the things we buy…carbon pricing by a thousand paper cuts!

When I talk about offsets (which I do a lot), I often have people tell me that a carbon tax is a much better answer, because it sends clear signals about the cost of consuming energy. So let’s look at some major sources of emissions to see what pricing carbon might do:

Driving (roughly 20% of US emissions)
I really doubt that adding another $10 per barrel to the cost of oil is going to change driving habits or vehicle choices much. Demand only seems to change with massive ($30 or more per barrel) type price shocks, and even then only temporarily. If you don’t like a Prius at $60 per barrel, you probably still don’t like it at $70. Rather than carbon pricing, we either need to tax the real price of oil (including military expenditures, health costs, and deficit-related currency weakness) or simply rely on higher mandates on gas mileage, like the ones the EPA just enacted.

Flying (roughly 3-5% of US emissions)
Much of the cost of flying is fuel related, and this is an area where carbon pricing could have the greatest impact. While 10% at the gas pump does not scare drivers much, a 5% or 10% increase in the price of flying has a big impact on demand….there are plenty of pricing studies that confirm this. But even in this case, the drop in passenger miles would probably not hit the 17% reduction target. Of course airlines are already looking for exemptions to cap and trade in both the US and Europe. Perhaps we need some sort of mandatory fuel targets (per passenger) for airplane flights?

Electricity Generation  (roughly 30% of US emissions)
For a home using 9,000 KWH per year, the carbon penalty would be around $15 per month. Most homes could easily save this much by using cold water for washing clothes and  changing out a few lightbulbs, or shutting off vampire appliances and computers. And yet most of us don’t. We don’t seem to be that rational when it comes to electricity.

The utilities would look at both cost per kWH and capital expense, if it is a purely market based decision. Many uilities don’t really compete, so any cost increases would simply be passed on anyway. This makes it rational to avoid new capital expenses, and stick with the old power plants. Emissions and renewable energy targets and other mandates (like additional scrubbers) could be much more impactful.

Industrial Energy Use (roughly 10% of US emissions)
Businesses have gotten smart about energy use in a big way. The more energy intensive the business operation, the more they are conserving in order to cut cost. But if they are taking action anyway, how much more impact will carbon pricing have? For those on the margin (less energy intensive businesses) some may start to care. But the big polluters are already paying attention to conservation. The senate bill also has some trade protections (carbon tariffs) so simply raising prices on goods and services ever-so-slightly is an option…no need to worry about foreign competition. 

Agriculture (roughly 7% of US emissions)
This sector seems to be given a waiver: If so, the CO2 equivalent of agriculture related Methane (21 times that of CO2) and Nitrous Oxide (310 times that of CO2) will not be priced. Need I say more?

Another big issue is that the price on carbon – as envisioned in current climate legislation – will go right back into the pockets of US consumers, either in the form of rebates or in defict reduction that will keep both taxes and inflation down. So the more we reduce our consumption or switch to renewables, the less we get back in rebates….sort of a reverse incentive.

While I think capturing the true cost of energy is an important step, I am not all that optimistic that carbon pricing alone will change behavior. What are some other options? Here are a few I can think of:

Conservation Capital
There’s a high ROI on energy reduction (which would be even higher if energy costs go up due to carbon pricing.) But many changes require upfront capital. How about a low interest or no interest capital fund or Fannie-Mae type system for businesses and households to fund conservation and energy retrofits? This scheme is already being considered for residential solar. 

Hard Targets
We could simply set renewables and emissions targets, as has been done with automobiles.  If the market knows that a utility needs to get to 20% renewables in ten years, the “ingenuity of entrepreneurs” that The President referred to will kick into high gear an compete vigorously for a piece of the pie, lowering costs and increasing innovation.

Cost Transparency
Better feedback on energy use and costs would lead to better decisonmaking. Let’s hook those smart meters into our thermostats and iphones, so we can see at anytime how much we are spending on power. And instead of an MPG gauge on cars, how about a taxi-meter style read out that shows how much we are spending on gas as we drive? These sort of in-your-face mechanisms are more likely to change behavior.

Spend Intelligently and Holistically
While we are pricing carbon at $25 or higher, I can think of an amazing innovation that ‘eats’ carbon for $10 per ton, and has years of successful field trials. It’s called a tree, and we are losing as much as 80,000 acres of them each day. Trees also can preserve biodiversity and provide income in poverty zones. Using less and cleaner energy is a worthwhile goal, but a planet covered with solar panels and turbines instead of trees is not the kind of future we should aspire to. It’s all about balance.

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Original photo CC license modified by ClimatePath. All rights reserved.


Chinmayee Jog
Chinmayee Jog7 years ago

Thanks for sharing :) Of course trees are the most important part of this equation, but it really is up to all of us to reduce, reuse, recycle, and to cut down on all our fuel usage.

Katherine Maar
Katherine Maar7 years ago

Great article. Wonderful news. Ever since watching Carbon Nation I've been waiting to hear this. Thank you for posting Dave!

Linda Mills
Linda Mills7 years ago

thanks for the article

Jonathan B.
Jonathan B7 years ago

Never let it be said that President Obama cannot take a world class disaster of biblical proportion and not be able to tax it and make it worse.

Obama understands that any carbon tax will hit poor and middle class people only, and that the establishment rich will just benefit from it, so this tax will be the greatest money transfer from poor to rich since the Phaeroh of Joseph's day took ALL the welath of the people of Egypt in exchange for his food stores during a famine.

AL Gore and his billionaire establishment banksters DO NOT NEED any more of our money.

Taxing carbon requires a full on dictatorship to control all aspects of our lives, since WE ARE CARBON.

This tax will remove the ability of most people to afford to heat or coll their house, eat, pay for water or utilities, or even pay that insane health insurance tax we are facing.

Bascially, adding this carbon tax on top of current Obama taxes will take more money than we can make working 16 hours a day in slave labour.

Obama probably has to fight to keep the grin off his face as he watches the Gulf be destroyed, since his carbon tax was toast before the disaster.

Paige B.
Paige Boily7 years ago


Nancy Forler
Past Member 7 years ago

Marvin - you forgot the biggest contributor og methane gas. All the garbage dumps all over the world. I am 60 and learned about the effects of methane gas from a garbage dump that was surrounded by a low income development. These people had to be moved and the dump was closed down because of the methane gas. That was 45 years ago and that was also when my home town began changing the way things were. We began recycling and that meant, taking the paper off all cans and washing them out, separating newspapers, plastic, glass, paint cans and other toxic items. When fall came and all the leaves fell off the trees, we could bag up all the leaves in clear plastic bags and these were picked up and taken to the recycling area where they were left out all winter and then in the spring, people could go and get this for fertilizer. They started a program for composters and we all began that. All the food clipplings, egg shells, coffee grounds could be put into the composter. No meat leftovers or bones. The results were fantastic, natural fertilizer for your gardens. When I left Canada over 15 years ago for my health, you were only allowed a certain amount of garbage depending on how many people were living in your house. So now we also have to change the dependance on oil and look to solar, wind and water.

Ian M.
Ian M.7 years ago

Putting a price on Carbon is the right thing to do. If people have to pay for their pollution they will pollute less. Pricing carbon will be the true beginning of the alternative energy boom. Companies that can be 100% sustainable and by this i mean no CO2 emissions at all, will shine. We do not need oil to survive, the sooner we go oil an coal free the quicker mother earth can begin to heal from human impact. We must put a price on carbon and a high one, then big business's like Walmart who tout green will soon be out of business b/c, they don't know what green is. Once they pay (carbon tax) for every piece of merchandise shipped from indonesia they will soon have to buy local giving smaller greener companies a chance to compete again and helping out the the local farmer, tool maker ect ect.

Cezar Lemos
Cezar Lemos7 years ago

Using more oil will make us decrease even more the quality of the evironment around us. We should change the use of oil for our human power in action. We should stop burning our feet and start breath the fresh air, even on rainy days, when we may use public means of transportation.
We just need oil for lasy.
Stop using oil now!

Alim M.
Alim M7 years ago

Umm Agriculture 7%?? From "Energy and chemical-intensive industrial food and farming are responsible for 35-55% of the world's greenhouse gas emissions."

And there's a much simpler solution than starting to charge for emissions. END OIL SUBSIDIES.

Luciana D.
Luciana D7 years ago

A lot of rubbish ! Everybody is screaming "poor animals" or "BP should pay !" This is not the solution ! WE ARE responsible for too much consuming cars, too much wasted energy, too much food (think of the cattle releasing methan gas ...) etc. etc. And the CO2 tax is not going to be used to help foreign countries ... It's an "educational" measure. But I sadly notice that nobody wants to change his way of life, nore wants (or can) understand the meaning of this measure. Folks, you are not alone in this world, look around you and you will see intersting things going on everywhere ...