Mark Muro (@markmuro1) is a senior fellow at the Brookings Institution and the policy director of the Metropolitan Policy Program there.  Carbon pricing is trending. Well, OK, it’s always trending. Still, the year has seen a notable uptick of buzz about the virtues of a carbon tax to ease our climate change woes. Economists, policy wonks, bloggers, editorial writers, news outlets and activists (though not the presidential candidates!) have all been weighing in, and almost all are “singing from the same hymnal,” as blogger David Roberts puts it. The constant refrain: By putting a price on pollution to reflect its costs government can ensure markets will efficiently adjust and naturally limit emissions. All of which is mostly fine: Pricing carbon by imposing a carbon tax makes a lot of sense.  And yet, there is a problem here. To the extent that pricing carbon has emerged as the ideal of climate policy, it has also been idealized in ways that may be diverting attention from other needed actions.  The crux of the problem is that while proponents ascribe a kind of market magic to the carbon price itself to reduce emissions, a ton of evidence suggests that no enacted carbon price will be high enough to make a big enough dent by itself in U.S. global warming emissions resolve the emissions problem. To begin with, MIT scholars Jesse Jenkins and Valerie Karplus have shown that the “binding constraints” of politics keep jurisdictions’ legislated carbon prices low. They document that only a few of the world’s 22 jurisdictions with carbon taxes have pegged them at prices anywhere near the true “social cost of carbon” at which point climate damages are fully “priced in.” Whereas Sweden’s tax on transportation and heating fuels weighs in at the $130 estimated social cost of carbon, all other nations’ levies come in at less than half that, and more than half come in at less than $15 a ton. Turning to actual observed impacts, meanwhile, a number of analyses have found that the kinds of prices Jenkins and Karplus document yield modest but not revolutionary amounts of emission reduction and technology change. In short, carbon pricing enthusiasts may be overexcited about the power of prices to magically ameliorate the nation’s carbon problem.  So does that mean the carbon pricing dream is mistaken? Not at all: It just means that carbon prices should be treated as just one useful tool among many and assessed realistically. And here no one should forget the other side of the carbon-price equation: the revenue.  Happily, more commentators (including my Brookings colleague Adele Morris) have begun to focus on the enormous flows of revenue that will result from even a modest carbon tax. And here is my main point: Those yields are not incidental to carbon pricing. They are central to it—and critical. Not only can the revenue help ameliorate the ugly politics of imposing a new tax by offsetting some of the burdens a tax would place on consumers, producers and communities. Also, the money would be available to support further efforts to reduce greenhouse gas emissions and ameliorate climate change. This especially appeals since MIT economist Daron Acemoglu earlier this year demonstrated that the optimal carbon policy is not one-sided but involves both carbon taxes and direct investments in R&D aimed at making clean energy cheap.  Which brings me to my favorite use of, oh, say, $30 billion a year of any future U.S. carbon tax revenue: Set it aside for clean energy R&D and technology development. Now, we lack the cheap power, batteries and other advances necessary to launch a true clean energy revolution. However, maybe we can get there faster by using some carbon tax revenue in the old fashioned way—on aggressive, direct technology investments. That’s why it’s the revenue that matters.  Read the latest Energy Report.
WSJ Energy Expert Mark Muro says the attention centered around carbon pricing is distracting from other needed energy actions.