Making it cheaper to be green

As green energy costs drop, we should shift the emphasis from economy-wide carbon pricing to sectoral policies

World leaders have accepted the warnings of scientists that global temperatures must increase by no more than 1.5 or 2 degrees Celsius to avoid severe damage to the Earth’s ecosystems and to human health and welfare. According to recent surveys, the general public increasingly agrees on the need for climate action.

As a result, many countries and some subnational entities have set ambitious targets for reducing greenhouse gas emissions. This past spring, the United Kingdom adopted a target of 78 percent emissions reductions by 2035, relative to 1990 levels. In the United States, the Biden administration announced a (nonbinding) goal of reducing net greenhouse gas emissions by 50–52 percent by 2030, relative to 2005. At the subnational level, several US states, including California, Colorado, Massachusetts, and New York, have legislated targets to approach or reach net zero emissions by 2050.

The climate crisis is too important to let these goals turn into failed promises. What policies are needed to turn these ambitious targets into action?

Economists’ standard prescription is to implement a robust economy-wide price on carbon. A carbon price that starts at a moderate rate and grows predictably will incentivize individuals to use lower-carbon sources of energy than fossil fuels and will induce firms and power generators to switch away from fossil fuels to low-carbon primary sources of energy. An economy-wide carbon price efficiently obtains emissions reductions from sectors or uses where they are least costly while keeping costs manageable in applications difficult to decarbonize. Moreover, depending on how it is implemented, revenues from a carbon price can be used to reduce distortionary taxes elsewhere or to provide needed public investment.

A frequent response to this prescription is that it ignores the political reality that carbon pricing, especially through a carbon tax, is unpopular. Despite considerable efforts over decades, only a small fraction of worldwide carbon emissions is covered by a carbon pricing program, and among those programs that do exist, the carbon price is typically low.

Now there is an additional reason to question this focus on economy-wide carbon pricing: it was developed when green energy was expected to remain far more expensive than fossil fuels. In many parts of the world, however, green energy, especially wind- and solar-generated power, is either less expensive than fossil fuel generation or is likely to become so soon. Costs of technologies to use green electricity—electric vehicles, for example—have also fallen dramatically. How does climate policy advice change for a world where it could be cheaper to be green?

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