The Wrong Solutions to Fighting Climate Change

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The fight against climate change is back in renewed focus with the recent Democratic win in the midterm elections. The party’s tilt toward more and more progressive policies has led to last week’s introduction of Rep. Alexandria Ocasio-Cortez’s Green New Deal, a massive government spending program that aims to tackle the problem of climate change.

Yet it is not only the Democratic Party that has come out with a misguided solution to address the problem. Last month, a panel of distinguished, bipartisan economists penned an editorial in the Wall Street Journal that claimed to provide a “market-based solution” to climate change. Both policies are ill-advised, advocating for even larger levels of federal bureaucracy with no definitive goal in sight.

The Green New Deal is modeled on FDR’s New Deal to pull America out of the Great Depression. Both advocate for a significant increase in federal government spending and involvement in the economy to stem what they believe is a national emergency. Based on the assessment of the Intergovernmental Panel on Climate Change (IPCC) that the world would need to reach net-zero emissions by 2050 to avoid further negative effects from climate change, the Green New Deal targets a goal of net-zero greenhouse emissions over the next decade. Two of the pillars of the deal involve significant investment in electric vehicle (EV) development and funding for high-speed rail. Yet these are the wrong ways to address the issue, in large part because they have failed in their current forms.

The electric car experiment has yet to be a success, despite massive government subsidies being granted to buyers of EVs in an effort to bring them to the mass market. The average price of an EV before accounting for tax credits is $42,000, with Tesla’s Model 3 starting at a price of $35,000.

Even with the tax credit accounting for a majority of the $7,000 difference in price, EVs represented only 1.2 percent of all cars sold in the United States in 2017. What’s worse, the benefits of the tax credit are not being captured by low-to-middle income households, as they were originally intended to be. Nearly 80 percent of EV tax credits are taken by households with incomes above $100,000, with 99 percent of all credits accruing to households with incomes above $50,000. Large-scale adoption of EVs will require even more investment in government subsidies and charging infrastructure far beyond today’s levels, adding to the already bloated federal bureaucracy.

There is no better example of such bureaucracy in its current form than California’s high-speed rail to nowhere. Funding for high-speed rail projects is one of the cornerstones of the Green New Deal, yet the failure of California’s investment should provide a cautionary tale against pouring more funding into this. The urban-to-rural California rail, built with the intention of connecting land from San Francisco to San Diego, was all but scrapped by California Governor Gavin Newson last week.

The budget for the project skyrocketed from the original $45 billion to $77 billion, a 70 percent cost overrun for an initiative that has so far provided no tangible results. The Governor put an end to the rail, explaining that the project is costing far too much and is taking far too long to materialize. High-speed rail has failed in one of the few places in the country where it had the potential to succeed – a liberal state like California, where public support for the project was overwhelming and the state government was prepared to sink significant amounts of money to see the initiative work. If high-speed rail could not survive in California, it has little hope of succeeding on a national scale.

As misguided as the Green New Deal is, it is not only the Democrats who are proposing unworkable solutions to climate change. Last month, an accomplished and bipartisan group of economists authored a letter in the Wall Street Journal that claimed to create a market-based solution in the fight against climate change.

The proposal included a carbon tax that would act as a price signal in the emissions market, with the tax intended to be revenue neutral and distributable to U.S. citizens as a lump-sum rebate. The letter starts with the correct premise – that market failures can be fixed by having market actors internalize the cost of their activities – but ultimately suffers the same problem as the Green New Deal, which is the incorrect belief that a market failure necessarily has to be counteracted with a government response.

The problem with the proposal is threefold:

  • (1) The imposition of the carbon tax as a method for emissions deterrence;
  • (2) The creation of another level of government bureaucracy; and
  • (3) The idea that lump-sum rebates would counteract additional fiscal burdens placed on the population.

Taxes may be the classic economic solution for market failures, but corporations can and have historically shifted the burden of higher taxes onto consumers, contradicting the letter’s idea that taxes will only serve to force corporations to invest in clean technologies. A collection of yet another tax will create room for yet another agency of the government to distribute that tax, adding more levels to the federal hierarchy. The letter does not advocate for the creation of a new government agency specifically, but in the current political landscape of “every crisis is an opportunity”, it is hard to believe politicians would let it go uncreated. Finally, the idea that the tax will ultimately benefit American families because the money will be returned is unfounded in reality. There is significant research and evidence on the regressive nature of gas taxes, harming the very people who can least afford to shoulder the burden. And even if we were to believe that the solution really is to return money to the people, it would still be up to politicians to execute the plan. The letter places a faith in government officials that the federal government has never lived up to.

Any solution to fighting climate change must involve incentivizing the markets to do so. A heavy-handed approach from unaccountable government agencies will fail. Public-private partnerships on this front may succeed if each party is correctly incentivized to participate and measurable results can be held up to scrutiny. One possible solution to this problem is a cap-and-trade scheme, which will create a market for companies to buy and sell government-granted allotments of greenhouse emissions.

There is a legitimate debate to be had about the starting point of government allotments, and ultimately they may prove too bureaucratic as a viable starting point. But the market-based nature of cap-and-trade will solve the problem of incentives and upholds the idea of responsibility for individual actions.

Companies that want or need to pollute more will still be allowed to do so, but they will be made to pay for these harmful decisions through the necessary purchasing of carbon credits from other firms in the market. Companies that find innovative ways to pollute less will be rewarded for doing so by the free market, through income collected from the sale of their credits to other firms.

Today, nearly 13 percent of global greenhouse emissions are covered by either carbon taxes or carbon emissions trading, suggesting that there is precedent for this type of solution. In addition, the European Union has had such a program in place since 2005, and a similar program worked successfully during the Bush administration when it was used the reduce the harmful effects of acid rain.

Cap-and-trade systems can be a good compromise between those that call for more government involvement to fight climate change and those that want to leave the problem to the free market to deal with. Small phase-ins of the program through the country can be done to test for viability, and successful results can translate into national movements.

Today, the two central ideas to fight climate change involve massive increases in government spending and more bureaucratic unaccountability, in a goal that is not clearly defined or outlined. The Green New Deal focuses only on American emissions, which have been falling and will not be as large a problem in the future as those of China or India. The statement on carbon dividends by a group of economists at least recognizes the global nature of the problem, but then turns around and suggests the same heavy-handed government involvement as a solution.

Any realistic, workable solution has to be market-based, and market participants have to be correctly incentivized to participate if there is to be any hope of meaningful success. A serious discussion of cap-and-trade can be a good starting point, and the plan can be tailored to be more market-based if need be. Such a program may not ultimately work, but it at least goes further in getting to the root of the problem than any current solution does: the problem is global in nature, and it will require a market solution to be long-term, viable, and meaningful enough to make serious strides in the effort to reduce the negative impact of climate change.

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Jenny Grimberg

Jenny Grimberg is an economist at a financial firm in NYC. She holds a Masters degree in Applied Economics from Georgetown University, and a degree in finance from NYU. Prior to her current role, Jenny was an economist for the White House, working on infrastructure reform and cryptocurrency regulation. During her time in college, Jenny developed a passion for policy and politics, with libertarian leanings on most political issues. She decided to moved to Washington, D.C. to pursue a graduate degree that would allow her to begin a career in public policy, focusing specifically on monetary policy and financial regulation. She believes that the less government gets involved in the economy and the lives of its citizens, the better for society in the long run. She is also very passionate about the issues of drug liberalization, school choice, and gun control, believing that government has no business dictating how its citizens should live so long as they are not harming anyone else in the process. For fun, Jenny loves to travel whenever she can. One of her dreams is to take a road trip through every state in the United States. So far, she is up to 18 states. Her favorite road trip so far has been along Highway 1 in California. In her free time, Jenny can be found planning her next trip, reading, and visiting the zoo.