State cap-and-trade systems offer evidence that carbon pricing can work

The latest UN Intergovernmental Panel on Climate Change report argues that carbon pollution must be cut to zero by 2050 to avoid devastating levels of climate change.

Achieving that goal will require swiftly transforming the energy, transportation, housing and food industries, and more. Although these tasks are daunting and the Trump administration is dismantling federal regulations aimed at reducing climate-changing emissions, cost-effective policy tools that could help do exist. And individual U.S. states and regions are using them to make significant progress to reduce emissions.

I led a Fletcher School Climate Policy Lab team that reviewed carbon pricing policies in 15 jurisdictions to see how they work in the real world, not just in theory. We found that in all cases carbon pricing seems to be a cost-effective method to cut carbon pollution.

Emissions trading

States including New York, Delaware and California are keeping up the experiments with carbon pricing they began as many as nine years ago.

Along with the results from similar efforts in Europe, Asia and Latin America in more than 40 countries, these policies have amassed ample evidence about what works in practice, what doesn’t and why.

As my team explained in Climate Policy, an academic journal, there are two basic flavors of carbon pricing: cap-and-trade – otherwise known as emissions trading systems – and carbon fees or taxes. Some jurisdictions also use hybrid blends of the two approaches.

U.S. carbon emissions trading until now has been limited to the Northeast, some mid-Atlantic states and California. But many countries, including Canada, Mexico, China and the entire European Union, are levying carbon taxes, running emissions trading systems or using a mix of the two. Washington State’s citizens will soon vote on a ballot initiative that would impose a carbon pollution fee on major emitters and collect revenue to be mostly spent on clean air and clean energy investments.

Emissions trading systems cap the total emissions allowed at a certain level. The government then allocates emissions permits to factories, utilities and other polluters either for free or through auctions.

Each permit usually covers 1 metric ton of carbon dioxide. Permit holders, typically, may buy and sell their permits as needed.

Companies capable of cutting their own emissions may choose to do so, and then sell their permits to other polluters to make money. Conversely, businesses can buy permits at the prevailing market price to avoid having to directly cut their own emissions in their business operations.

As you might expect in carbon markets that depend on willing buyers and sellers, the cheapest emissions reductions usually happen first.

The American track record

The results look promising so far.

In the Regional Greenhouse Gas Initiative, which includes nine Northeastern and Mid-Atlantic states like Delaware, Massachusetts and Maine, carbon emissions from electricity generation fell by 36 percent between 2005 and 2015, the most recent comprehensive data available.

More recent data shows that carbon emissions allowed under the cap imposed by regulators will have fallen from 188 million metric tons in 2009 to 60.3 million metric tons by the end of 2018, representing a 68 percent reduction in carbon dioxide emissions in the power sector in this region.

One reason for this progress may be that utilities operating in this region have found that pricing carbon has shifted what the industry calls the “power plant dispatch order.” That is, sources of power like wind and natural gas that emit less carbon than coal are tapped first.