There’s an implicit assumption in much of the climate policy debate that to meaningfully lower greenhouse-gas emissions, we need a high price on carbon. The assumption is wrong.
Economics 101
In a market setting, price is a function of supply and demand. For a given commodity, prices will be high when demand outpaces supply and low when supply outpaces demand. Thus oil, for instance, is expensive. And autographed copies of my pen and ink cartoons are cheap (in spite of their rarity, I might add).
A cap-and-trade system is an attempt to create a market around a particular commodity, namely GHG emissions. The same dynamic will apply: if demand for GHG reduction outpaces supply, the price of GHG reduction will be high; if supply of GHG reduction outpaces demand, the price will be low.
If we pass a cap-and-trade policy that yields sustained high prices for GHG emissions, it will not be a sign of a successful policy. Quite the opposite: it will mean that the supply of GHG reduction is insufficient to meet the demand.
This economic reality doesn’t always sit well with the environmental community. They often speak of high GHG prices as a way of teaching polluters a lesson and driving consumers to change their wasteful ways. And they want high revenue for pollution reduction to provide incentive for those who do the right thing.
But those desires confuse the ends and the means. The ends, the ultimate goal of policy, is pollution reduction. If supply fails to meet demand, we aren’t getting what we want.
One of the reasons renewable energy credits (RECs) are trading at such high prices nowadays is that those markets built in steadily rising demand for renewable energy (by gradually increasing the percentage utilities had to procure), but artificially constrained supply by picking winners. From a narrow perspective, this is a good thing, in that there is a lot of money (in some cases nearly $50/MWh) available to support renewable deployment. But the price is so high only because the market is supply-constrained. We are implicitly limiting the deployment of clean energy. From that perspective, the high price isn’t much to cheer about.
On the other side, the price of tradeable SOx permits has collapsed since that market was established, since the supply of SOx reductions has vastly exceeded initial expectations. To be fair, grandfather rights given to existing coal plants did artificially depress demand in that market. But even within the (lowered) expectations that grandfathering created, the falling price still provides an implicit signal that we are reducing SOx emissions faster and more cheaply than we thought possible. And since the ultimate goal is to reduce SOx emissions, that’s a good thing.
Why this matters
First off, realize that I am making an argument exactly contrary to my own personal economic interests. My company is building projects that reduce CO2 emissions, and to the extent those reductions have financial value, higher prices = more money for me. I’m also arguing against the specific economic interests of everyone else in the clean energy community, for the same reason.
But at the end of the day, our specific economic interests aren’t the issue, no matter how deserving we may be. What matters is that we reduce CO2 as quickly and as cheaply as possible. Quickly because we can’t afford to wait. Cheaply because of the economic disruption caused by expensive energy, but also because all wallets are finite, and maximum CO2 reduction is logically incompatible with expensive CO2.
More urgently, what matters is that we get a GHG policy passed, and so long as we continue to frame our GHG conversation as a fight between morality and economics, we will fight rather than act.
A good cap-and-trade bill, one that leverages the innate ability of a competitive market to surprise us with excess supply, need not be economically painful. Such a bill would facilitate the capture of all the low-hanging fruit first. It would support technologies and concepts that no one has yet thought of, increasing the supply of GHG reductions beyond what we can today conceive. All of which will drive GHG prices down, to our collective environmental benefit.
When all is said and done, the purpose of a GHG policy is not to penalize GHG emitters, nor to reward GHG reducers. It is to reduce GHG emissions. And real success on that metric is incompatible with high GHG prices.
