Pricing carbon may be the single most important thing the government can do to drive clean technology and is a necessary but not sufficient condition for mitigating climate change, according to experts.
Many of the emerging systems that curb greenhouse gas emissions and displace fossil fuels show promise in the laboratory and at small scales but are too expensive for prime time. Attaching a price tag to carbon dioxide emanating from fossil fuels would go a long way toward closing the gap.
"Carbon is really cheap as long as you don't consider the full cost structure," said Michael Carr, principal deputy assistant secretary for the Office of Energy Efficiency and Renewable Energy at the Department of Energy. Speaking yesterday at the National Academies in Washington, D.C., he explained that expenses ranging from environmental remediation from mining fossil fuels to disaster costs from a warming planet tip the balance away from coal, oil and natural gas and toward renewable energy sources.
However, at the moment, the federal government is only using the carrot of politically precarious tax incentives for renewable energy instead of the stick of a carbon price.
Tax incentives largely come in the form of the investment tax credit (ITC), which allows investors to reduce their tax liability for buying a stake in a clean-tech project, and the production tax credit (PTC), which grants an income tax credit per kilowatt-hour of electricity for renewable energy producers.
"ITC values maximum capacity at lowest cost upfront," Carr said. "Most of the returns of the PTC are over time."
These approaches have helped double renewable energy production in the United States over the past four years, but sources like solar and wind energy still provide 13 percent of the energy in the United States, according to the International Energy Agency.
A big policy signal
This is where a carbon price comes in, helping to level the playing field between fossil fuels and renewables. "A price on carbon would be the single biggest thing that would promote the adoption of clean energy technologies," said Roberton Williams III, an economics professor at the University of Maryland and a senior fellow at Resources for the Future, an environmental think tank.
He cited the example of the sulfur dioxide cap-and-trade program under the Clean Air Act as a potential model for carbon emissions trading. Many analysts predicted factories and power plants would install expensive scrubbers, but instead they have found cheaper ways to comply with regulations, like increasing energy efficiency and using different coal blends, cutting projected implementation costs by two-thirds.
However, emissions credits are vulnerable to price shifts, like how credits under the European Union's Emissions Trading System lost value due to a glut of credits.
"If there's one thing that investors like, it's a predictable return," Williams said. This is one area where a simple carbon tax has a distinct advantage, delivering a steady price signal to utilities and industry. A tax also grants regulators precise control over the mechanism, so they can tweak a tax to hit a specific emissions target.
But does any of this stand a chance of passing a divided government?
'Ain't going to happen'
"We are not going to put a price on carbon. Ain't going to happen. There is no way. That's regardless of who is in the White House," said Rep. Joe Barton (R-Texas). "In fact, we're going to go the other way," noting that Republicans are pushing back against the social cost of carbon rules inside EPA and DOE.
The federal government has a dismal record with respect to funding clean energy companies, according to Barton, so its role should be limited to supporting basic research in clean tech. "I am not anti-alternative or anti-clean energy," he said. "'All of the above' means sometimes energy comes from below," like oil and natural gas, he added.
Rep. Paul Tonko (D-N.Y.) disagreed with Barton and said the government can play an important role in driving clean energy technology through incentives to ramp up deployment. "The best ideas in the world are of little value unless they are put to widespread use," Tonko said.
"I'm really concerned about the very laid-back attitude we've had about global warming," he said. "If you want to talk wastefulness and getting rid of the costs of government, let's talk about the cost of disaster aid."
With anemic incentives and bleak prospects for a carbon price, regulations may be the best remaining tool for the government to control emissions.
President Obama's Climate Action Plan, unveiled last month, directs EPA to regulate carbon emissions from new and existing power plants under the Clean Air Act. "He took that action only after literally years of trying to prod the Congress to meet him part of the way," said Elgie Holstein, senior director for strategic planning at the Environmental Defense Fund.
Federal environmental regulations have a much longer history than market-based emissions programs and have a track record of making businesses come up with new ways to handle requirements to use less energy and cut pollution.
"I like to describe the Clean Air Act as a freight train; it's slow, but hard to stop," said Dallas Burtaw, a senior fellow at Resources for the Future. "You cannot deny that regulations drive a lot of innovation."