Carbon pricing could be the Biden administration’s climate tool

Protecting Americans from threats is the task of any U.S. government. Climate risks are such a threat. Devastating hurricanes and the largest wildfires on record in California almost doubled in 2020 the costs of natural disasters in the U.S.. 

Clearly not all of this is due to heating up our planet with greenhouse gases (GHG) from fossil fuels — yet clearly human-made climate destabilization drives up extreme events that endanger the property and the safety of U.S. citizens.

What can the new administration do to keep Americans safe from climate risks? There’s in fact a whole toolbox to open after 4 years of neglecting the climate issue — but some tools are more effective than others.

Of course, the U.S. will get back into the Paris Climate Agreement, which was signed by almost all governments worldwide. That’s good since climate stabilization efforts need to be international, just like climate impacts do not stop at a country’s borders. The world needs the U.S., and the U.S. needs the world. Yet the Paris Agreement means to bring down each nation’s GHG emissions to net zero by mid-century. How can this actually be achieved?

Building a national carbon dioxide pricing scheme is what economists like myself find to be the most effective tool. Putting a price on what destabilizes our climate, on carbon dioxide, really means taxing the bad instead of goods. Clean renewable energy becomes cheaper when emitting GHGs — most notably carbon dioxide — becomes more expensive. While the government sets a direction to head for, it is completely up to businesses which way they choose to get there. It is a market-based solution.

This is why it is a nonpartisan policy. The Biden-Harris administration now has the historic chance to make it a reality. Yet, for instance, in January 2020 already veteran Republicans such as George P. Shultz, who served as secretary of State under President Ronald Reagan and as secretary of Treasury under President Richard M. Nixon, proposed a carbon tax. They called it the conservative fiscal solution. It is to some extent, but it mainly is one thing: it’s reasonable.

Part of the good news is that pricing carbon dioxide is not new. California, which alone is the fifth biggest economy of the world, and Massachusetts have already quite some experience with carbon pricing. The same goes for Europe and China, also Canada and Japan — basically the greatest partners and competitors of the U.S. My country, Germany, just established a national pricing scheme to complement the European Emissions Trading System (ETS). The new administration can look at what they did, check what works well and what could be improved. It can ground its action on robust experience of others — and do better.

A U.S. carbon pricing system should work across sectors, from energy production, to industry, transport and to housing and agriculture. It should include a minimum price to provide a reliable framework so businesses have certainty for planning. Importantly, such a pricing scheme can generate substantial income — money that to some extent can be used to compensate low-income families, by sending Christmas checks or by lowering energy taxes or, if a government chooses so, by investing some part of it into improving U.S. infrastructure.

In any case, carbon pricing can be designed revenue neutral, giving back the money to the people. This is not just a matter of making it more acceptable, but a matter of social justice. Poor people pay a relatively greater part of their income for their energy bills than rich ones. Hence we need to compensate the poor. Yes, some things will become more costly under carbon pricing, but the cost of living does not need to increase. If, however, climate destabilization would go on unmitigated, costs will increase — not just for the U.S. as a whole, but also for individual citizens, since for instance supply chains for businesses get interrupted more frequently driving up their costs, and so on.

The science is clear that pushing the clean transformation makes sense economically. The transition will be difficult, no doubt about that. But new, green technology also means new, sustainable jobs. It means a new industrial revolution — the next big thing, complementing the digital revolution. More and more companies around the world — such as tech giant Google and financial powerhouse Blackrock and even truck makers — are aware of that and say they want to be part of the pioneers, not the laggards.

In a second step, after introducing it nationally, a U.S. carbon pricing system could be linked with those in place in Europe and China. This would assure a level playing field for everyone, including U.S. businesses. Interacting prices would assure achieving climate stabilization at the lowest cost because they would happen wherever you get the biggest GHG reduction bang for the buck. If this linking of pricing schemes would succeed, this could be a real breakthrough in countering climate destabilization. It would mark history.

The U.S. now has the chance to once again become a world leader on this journey to a safe and prosperous future for all. The Biden-Harris administration will be remembered as one that either failed to assure a safe future for our children. Or as one that acted on one of the greatest challenges of our times.

Ottmar Edenhofer is the director and chief economist of the Potsdam Institute for Climate Impact Research. He is also the director of the Mercator Research Institute on Global Commons and Climate Change and professor of the Economics of Climate Change at the Technische Universität Berlin and he provided scientific advice on carbon pricing to the German Chancellor Angela Merkel.