This is a once-in-a-lifetime opportunity to set a price on carbon so the true costs to society and long-term national security of unbridled burning of fossil fuels are captured. Fossil fuels already represent more than 80 percent of U.S. direct energy consumption. Wise policy is needed to manage this unanticipated energy bonanza to reap its full rewards.
Six reasons demonstrate the overwhelming case that a price on carbon is necessary.
First, energy booms have historically been followed by their evil twin—energy busts. Energy prices skyrocket and plummet in times of market supply and demand imbalances. Oversupply leads to underinvestment that in turn leads to undersupply—it’s a vicious circle.
A scheme that increases the carbon price as energy markets fall, while decreasing the carbon price as these markets rise, would help shield the overall economy from energy price shocks. Businesses want transparency in the future cost structure of their product lines. Carbon pricing helps.
Second, a carbon price allows the United States to safeguard its investment in expanding supply of new energy sources, especially renewable fuels. Public as well as private investments in research and development have enabled the ramp-up of solar, wind, geothermal, biofuels, hydrokinetic, and other forms of non-fossil energy. And America is now the unchallenged global leader in developing these new energy technologies.
These new energy markets are growing rapidly, but are still fragile. They can easily be crushed by wild price swings that fossil fuel companies can more effortlessly weather. Carbon pricing puts renewable fuels on a better footing to compete with fossil fuels due to their lower carbon footprint. Absent carbon pricing a large part of U.S. investment in renewable technologies could be wasted, ceding leadership to China, Europe, or elsewhere.
Third, carbon pricing promotes efficiency and thus global competitiveness. By keeping energy costs artificially low, American industries delay adopting best practices. As overall energy prices rise (as they are projected to do over time) U.S. competitors will gain the upper hand as efficiency trumps slightly lower energy costs.
The domestic car market in the United States is a case in point. In 2008, when new American cars were mainly low-mileage SUVs, domestic car sales plunged when gas prices hit $4.10 a gallon. In 2011, when gas prices again approached $4.10 a gallon, car sales soared as Detroit’s new product line was more fuel efficient. Efficiency builds economic resilience. Carbon pricing helps.
Fourth, a carbon price will defend U.S. national security. Protecting fossil fuel supply lines in the Persian Gulf costs the American taxpayer over $7 billion a year. These are costs totally independent of war and are paid through taxes on income or through borrowing—debt. Carbon pricing would yield sufficient revenues to pay at least a portion of these costs, while encouraging less consumption.
Fifth, some of the new unconventional oils leading to the U.S. energy bonanza are extremely dirty. Oil sands, bitumen, and oil shale are carbon-heavy and produce petroleum coke as a waste product, which has lower energy content and higher carbon content than coal. When burned, the buildup of carbon dioxide in the atmosphere traps solar radiation, thus slowly heating the planet. Global warming has many documented adverse impacts—such as more extreme weather events—that harm ecosystems and public health.
Carbon pricing reduces the pace of global warming and accelerates the transition to a more balanced, durable, and resilient energy economy where fossil fuels represent less than 50 percent—not 80 percent—of U.S. energy consumption.
Finally, the United States needs the money. Carbon pricing, even at modest levels, can generate the revenues needed to invest in a new energy economy. Whether cleaning up from extreme weather events such as Hurricane Sandy or bringing new energy to scale, the United States needs improved energy transmission systems, rebuilt roads and bridges, and smarter grids.
America is already over $2 trillion behind in public infrastructure investment—not counting the investments needed to harden U.S. coastlines from storm surge and to bury power transmission lines. The argument that carbon pricing puts the United States at a competitive disadvantage simply doesn’t hold water — U.S. energy costs are already lower than most of its major competitors and its infrastructure is in worse shape.
Let’s be clear: pricing carbon takes nothing away from the real benefits the United States will gain from its newfound oil and gas wealth. It simply ensures that these benefits are fully realized. Carbon pricing is a policy tool that must be delicately calibrated to achieve precise public goals. Strategically crafted and carefully implemented, carbon pricing can be an answer to many of Washington’s troubles.
Burwell is the director of the energy and climate program at the Carnegie Endowment for International Peace.