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Carbon pricing and the journey towards an ‘energy constrained world’

It’s not often that you see an oil executive and a climate change analyst nodding in agreement. But at last week’s Shell Energy Summit, climate researcher and author Mike Berners-Lee reached an agreement with Shell’s integrated gas and new energies director, Maarten Wetselaar, when they were each asked what the most significant step forward in the global fight against climate change would be.

Both, without missing a beat, replied “a price on carbon.”

But if a universal price on polluting externalities remains sensible in the eyes of a classical economist, politically, the practical question of how to engineer a price on carbon is trickier than ever. Only last month in Oregon, Republican senators sparked a democratic crisis when they fled the state to avoid having to vote on a carbon emissions bill they feared the Democrats would win. It looked as if advocates for carbon pricing were heading for victory, but then the GOP simply packed in the debate and headed for the state line.

Without a quorate assembly the bill — or any bill for that matter — could not be considered. Worse still for supporters of carbon pricing mechanisms, the gambit appears to have worked. The Republicans only resumed their seats in the State Senate after the bill was killed from the voting schedule.

The Oregon standoff is an extreme example, but it is part of a wider trend whereby carbon pricing routinely faces a fierce pushback from certain quarters. And yet, many businesses, including plenty of carbon-intensive firms, are reluctant to give up on a policy tool that could provide one of the most effective means of driving down emissions and mobilizing investment in clean infrastructure, especially when global emissions keep inching upwards. 

Speaking alongside Berners-Lee and Wetselaar last week, Kevin Anderson, professor of energy and climate change at the University of Manchester, offered a stark assessment on the scale of the decarbonization challenge. “Since 1990 and the first IPCC report, emissions are now 67 percent higher,” he said. “They went up last year by 1.6 percent; they are probably going to go up by the same amount this year.” As such, the world has just 18 years left at the current rate of emissions growth before it blows the remaining carbon budget deemed to be compatible with limiting temperature increases to 1.5C, he warned.

The only way to successfully tackle this emissions growth is at the global systemic level, Berners-Lee argued. “There are some realities we need to face keenly in the eye here, and one of them is that going forwards if we want to live well and have quality of life, and we want our kids to have quality of life, and people around the world to have quality lives, we need to stop that energy growth which has been going on since year dot,” he said. “For the first time humans need to learn to live within an energy constrained world.”

As if this historic challenge were not daunting enough, he quickly added that constraining energy use cannot come from saving energy alone.

Designing ever more efficient cars, white goods and homes will not be sufficient, he stressed. “Efficiency is part of the dynamics of growth — of our economy, of our energy system and by default on its own what it leads to …  is a growth in resource use, not a reduction in it,” he explained. “And it leads to an even greater increase in our productivity. So it’s not that efficiency is bad, it’s just that we absolutely have to bank the savings. And if we don’t do that, efficiency gets us nowhere.”

It will take some form of global system to ensure any savings in emissions reduction are banked, Berners-Lee added. “When we look at the global carbon curve, there is not that faintest jot of evidence that humans have noticed climate change yet,” he reflected. “It is going up exactly, and I choose my words carefully, exactly as if humans had not noticed climate change was an issue. And I’m not saying that to be depressing, but that tells us that we need to interrupt the dynamics of emissions growth at the global systems level. So we need a global constraint to leave the fuel in the ground.”

This global constraint could take a number of forms, but Shell, along with a band of oil majors and most classical economists, would argue a global price on carbon represents the most effective means of getting a grip on growing energy demand. In a capitalist society, price signals can have a huge impact and pricing carbon, so the argument goes, should force companies and individuals to cut their emissions in the most economically efficient manner possible.

But there have been problems with this argument, not least the political feasibility of bringing economic theory into policy life. Wetselaar offered a candid assessment of why the introduction of any kind of “forcing mechanism” to drive emissions reduction is so difficult. “A politician in an honest speech would say, ‘I know what to do, but I don’t know how to do it and get re-elected,'” he argued. “That is the point which is holding back regulatory action.”

The result is that carbon pricing regimes remain far from universal, and in countries or regions where a carbon price has been implemented, prices generally have been far too low to force the rapid and radical shifts in energy consumption or emissions that are required to deliver on the goals of the Paris Agreement. One notable exception is provided by the United Kingdom, where the carbon price floor has proved instrumental in largely forcing coal power off the electricity grid far faster than anyone expected.

The debate is further complicated by the fact some green campaign groups are ambivalent or even critical towards carbon pricing policies, arguing they can be used as a fig-leaf for otherwise inadequate decarbonization efforts. They point out that in order to reach net zero emissions by mid-century, the world will have to redesign vast swathes of infrastructure, from transport to electricity grids and buildings. As such, it is questionable whether a carbon price alone can reshape the policy and regulatory landscape aggressively enough to force through changes in how economies power themselves.

Nevertheless, without a carbon price the other actions needed to drive emissions reductions will be slow to emerge, Wetselaar argued. “As long as we don’t price carbon in some way, it will be very difficult to get the rest [of decarbonization] to work within society as we have wired it,” he warned.

It is a compelling argument, especially when you consider the way carbon pricing has worked in the United Kingdom and arguably has helped to drive the surge in clean energy investment across much of the EU. Putting a price on carbon tilts the economics in favor of cleaner technologies. Getting a sufficient price on carbon in the energy sector should start to enable not just increasing levels of renewables, but also the widespread adoption of likely essential carbon capture and storage (CCS) technologies. As Shell CEO Ben van Beurden warned earlier in the day, currently, without a sufficient carbon price or other regulatory signals CCS remains a critical and proven technology without a viable business model. 

But many academics remain wary of any attempt to position carbon pricing as a silver bullet for the climate crisis, arguing that even if it makes economic sense, high carbon prices could result in significant unintendend, and largely negative, consequences.

“I’m concerned about the price mechanisms,” said Anderson. “I’m not saying they don’t have a role to play — in the power sector they certainly have a role — but in the economy this vision that you apply a carbon tax and let the system run misunderstands what we are trying to do here. If we are serious about the Paris Agreement, we will need very, very high carbon prices to force people who have high disposable incomes to change their behaviors.” Prices at the requisite level could price the poorest people out of key services such as energy and transport, he warned, a doubly unfair outcome given poorer individuals tend to have lower carbon footprints.

Instead, Anderson favors a fee-and-dividend model, where the richest — and highest emitting — 10 percent of society pay very high rates of tax on their activities, helping to subsidize those at the poorer end of the spectrum. “So the fee and dividend model is that you put a very high carbon tax on and then you re-distribute that money equally to the whole population,” Anderson said.

A frequent flier levy could follow a similar model, with the vast majority of passengers facing negligible carbon taxes for the one flight they take each year, while the small minority who account for the bulk of the flights by taking multiple flights a year see carbon tax rates increase sharply.

But whether the optimum approach is a global cap-and-trade scheme, national carbon taxes with border adjustment tariffs to ensure a level playing field, fee-and-dividend, or a combination of various mechanisms, one thing remains clear: an energy-constrained world would require a fundamental shift in how energy is generated and consumed. And that shift could mean that for those in the West, lifestyles would have to change to embrace lower levels of consumption.

Is the public really ready for what could be characterized as “energy rationing”? Despite recent polls suggesting that in the United Kingdom, at least, support for climate action is at record levels, the panel was skeptical about whether the public is ready to accept any major lifestyle changes in the name of decarbonization.

“Even in a 2050 world with carbon capture and storage to help us out, we do need to really reshape society,” said Rebecca Heaton, head of sustainability and policy at Drax Group and a member of the U.K. Committee on Climate Change. “I don’t know if people realize the changes they are going to have to make to their daily lives. So far it’s been mainly the electricity sector which has decarbonized — that doesn’t affect you on a daily basis.”

The big unknown for the net zero transition is how will the public respond as more visible changes start to occur. “We’re going to have to decarbonize heat — that’s going to involve heat pumps, that’s going to involve things outside of our homes that might make a bit of a noise,” continued Heaton. “We probably shouldn’t be flying as much, and if we fly we are going to have to pay more tax, and we’re going to have to learn to cope with electric cars. And we’re probably going to have to do some behavioral change around eating as well.”

According to Anderson, delivering social change on the scale needed to cut the carbon impact of developed societies will require a fundamental shift in collective thinking. Western society currently teaches people to aspire to more carbon-intensive lifestyles — a bigger house, a more powerful car, a larger wardrobe, he noted. “The higher the income means broadly the higher the carbon footprint,” he said. “And so there is a real issue here that we have to rethink our values as a society. Why is it that the people who are generally lower emitters and lower consumers, why are they valued so much less and why are they not held up as good examples? Whereas the people that have a high carbon footprint, they are the ones that reap the rewards of our society.”

Expecting people to voluntarily run against the grain of such cultural and societal norms in order to cut carbon emissions seems a big ask. And even if the United Kingdom can engineer a net zero transition, it will count for little unless emerging economies all aorund the world quickly emulate it. All of which helps to explain why so many companies, academics and politicians repeatedly come back to the idea of constraining energy use by harnessing the pricing and market-based mechanisms that have driven the climate crisis in the first place. If climate change is a market failure, then why not focus on trying to correct that failure?

Constraining energy use and global emissions at a global systemic level may be hugely challenging — it may not even be appropriate — but it is radical. And at this stage in the world’s faltering decarbonization journey, radical solutions must be part of the debate.

The BusinessGreen Powering Progress Together Hub is supported by Shell. All the hub’s content is editorially independent, unless stated otherwise. 

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