Capturing the Cost of Carbon

Phew! The world did not end on 12/21/12 as many deduced it would based on the rollover of the Mayan calendar. That is great news. Now we only have to wait for global warming to become as alarming and “interesting” as the possible end of the world.*

As more people are concerned by global warming, more people will want to act to prevent global warming and be willing to contribute to the effort. Those contributions will have to be both action-oriented and financial, but many Americans are weary of making that financial commitment in a recession when they aren’t sure climate change is even linked to human activity.**

The United States was long the world’s largest producer of greenhouse gas emissions, but China has recently surpassed the U.S. In spite of the recession, the U.S. remains the second-largest emitter in the world (producing nearly 20% of worldwide emissions) because of the availability of energy. When I say availability, I mean that energy is both easy to use (accessible) and cheap to buy in the U.S.

Cheap?… Cheap! Cheep!

When many Americans hear politicians advocate for cheap energy, they often respond like baby chicks with an enthusiastic, supportive, and approving “Cheap? Cheep!” without much concern for where that energy comes from or the actual cost of supplying that energy. And realistically speaking, who doesn’t want energy to be as low-cost as possible? The problem is that when you only talk about energy being cheap in terms of the dollar cost to the consumer, you miss a lot of the hidden costs associated with fossil fuel energy.

But why is fossil fuel energy so cheap in the U.S. (Cheap? Cheep!)? I’m not an economic guru, but can share a couple of fundamental factors of which I am aware. One reason energy is cheap in the U.S. is that the extraction and production of fossil fuels is heavily subsidized by the federal government. In fact, the federal government subsidizes fossil fuels with about 5 times as much money as renewable energy in the form of tax breaks and direct spending. For example, from 2002 to 2008, the government provided $70 billion to fossil fuels and only $12 billion to renewable energy.

Secondarily, the presence of these subsidies on fossil fuels incentivize the effort to search for and extract fossil fuels. This increases the supply of these sources beyond what a free, unsubsidized market would support. According to the economic “laws” of supply and demand, a greater supply leads to lower relative demand and lower prices. We know the impact of large subsidies on fossil fuel extraction is real because even the relatively small production and investment tax credits from the U.S. government for wind energy have created a tremendous wind energy boom in the past five years. The policy problem with putting our chips behind fossil fuels now is 1) that fossil fuels eventually run out, and 2) while we burn fossil fuels at a rate far greater than our ecosystem can safely absorb the associated emissions (and pollution) we are changing the atmosphere and environment. These changes are starting to warm the planet and create foreseen and unforeseen consequences. There is no way to accurately predict the financial cost of these changes, but they are estimated to be very large.

Taxes, Fees, and Caps

In order to level this playing field, and provide price signals to consumers about the actual known and unknown/unquantifiable cost of burning fossil fuels and releasing greenhouse gases into the environment, experts, citizens, and Congress have explored various methods to create pricing signals.

Taxes on emissions are often generically referred to as “carbon taxes” because the element carbon is one of two elements present in carbon dioxide, the most prolific and infamous greenhouse gas. These taxes could work similarly to traditional taxes on specific items like gasoline, cigarettes, or alcohol, and would apply to fuels that produce carbon dioxide through combustion. The government would collect these taxes and in theory use them to support programs and projects that mitigate and adapt to climate change.

Other experts have advocated for carbon fees. Generally, carbon fees would be collected similarly to taxes but distributed directly back to citizens rather than being doled out by the government. The benefit of fees is that they would directly help citizens purchase energy or efficiency measures and thereby help them with the increased cost of goods and services.

Finally, cap-and-trade is a notorious proposed solution to reduce emissions in the U.S. Cap-and-trade basically involves setting a limit on an entity’s emissions (a cap) and then allowing that entity to either use less energy (by reductions or efficiencies) or obtain emissions offsets from other entities that produce fewer emissions than their limit who sell credits for those reductions. This scheme affects the price of carbon by creating an economic market for the capacity to produce greenhouse gas emissions.

What Have We Now?

I think many Americans are opposed to all of the above options because they would inevitably increase the cost of energy, which would increase the costs of goods and services that use energy for production and transportation. However, as demonstrated by the lesson of Omaha’s $1.6 billion combined sewer project, if we aren’t willing to pay a little bit today and over time, we are going to have a very large invoice from mother nature before the end of the century, and it will probably make the cost of hurricanes Katrina and Sandy look like my allowance in first grade.

But here is the thing, your cost of energy already tracks the related emissions. The only difference between what we have now and the above options is that, in many cases, no percentage of the current cost is specifically designated as being tied to emissions. As an example, take a look at the graph below showing the average annual total greenhouse gas emissions and average annual total energy cost for 83 OPS schools over the past 24+ months. The two lines are nearly identical in shape! What does that mean? Simply put, it means that you can figure out emissions simply based on energy spending, and therefore that the cost of energy somewhat incorporates the related emissions. But we are not yet calling a component of that cost a carbon tax or fee.

Graph comparing the average total annual emissions (previous 12-month period) with the average total annual energy expenses (previous 12-month period) for 83 OPS schools.

Download a .pdf of the above graph by clicking this link: OPS Emissions v Expenses.

The pricing schemes mentioned above would simply shift the cost line up slightly while retaining the same overall shape. Yes, it would probably increase the monthly energy bill by a certain amount, but if we apply the additional marginal revenue toward energy efficiency, clean energy, and renewable energy, we will over time be investing in measures that prevent a future lump-sum bill that is likely to exceed anything we can imagine. For example, one expert has calculated that for every $1 New York City spends today to prepare for and prevent climate change it will save $4 in future repairs.


My personal conclusion is that there is no reason to fear a slight increase on your energy bill today (assuming the increase leads directly to climate change mitigation and adaptation) when there are clear indications that the cost of not making that investment will be, for lack of a better word, huge. Cheap energy might seem desirable, but if we aren’t careful to think about what it really means to have cheap energy we might all be shouting “Cheep? Cheap!” while civilization as we now know it risks the same fate as the infamous dodo bird.


* Climate experts are predicting that future warming due to past emissions already has the potential to change many aspects of civilization as we now know it.

** Climate experts are certain that the current changes to earth’s climate are the result of human activity.

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