Note: this post is part of a series highlighting PEC’s upcoming conference, Achieving Deep Carbon Reductions: Paths for Pennsylvania’s Energy Future, March 15-16 at the David L. Lawrence Convention center in downtown Pittsburgh. This piece was contributed by guest blogger Katrina M. Kelly of the University of Pittsburgh’s Center for Energy.
Climate change is widely viewed as an environmental problem, but at its crux it is an economic one. A changing climate exposes many major security risks such as increasing volatility in food production, decreased reliability in energy supplies, and greater frequency of extreme weather events which require extensive funding to repair damage. The only way to mitigate these risks is to ensure that further damage to the atmosphere does not occur, and the simplest way to do so is to limit the immediate cause of the deterioration, mainly through the reduction of carbon emissions. Rather than focusing on the environmental side of climate change, we should instead recognize it for what it is: a problem of economic uncertainty. Enacting a market-based mechanism like an emissions-trading scheme or a carbon tax would help to create regulatory certainty in an era of instability in energy markets.
Limiting the usage of pollutants through market means is not a new concept; in fact, it is an originally American notion that began with SOx reductions. The main reason the Europeans developed the EU ETS was in hopes of creating environmental policy in a way that was compatible with the U.S. government. Cap-and-trade schemes and carbon taxes are not strict environmental regulations — in fact, they are the opposite. Policy instruments like these are different from traditional command and control regulations in that they drive competition within industry to effect behavioral change. A cap and trade works similarly to a traditional commodity market, where price reflects availability. Consider the price of diamonds: because they are scarce, they’ve got to be expensive. Carbon emissions can be viewed in the same way: make them expensive, and consumers will be motivated to limit their consumption. We know that using more carbon will cause environmental damage, so in this sense we can say that the ability to use carbon-emitting energy sources without consequence is an extremely scarce resource. We should therefore treat carbon as a clear input cost to our production processes.
Consider the price of diamonds: because they are scarce, they’ve got to be expensive. Carbon emissions can be viewed in the same way: make them expensive, and consumers will be motivated to limit their consumption.
Enacting a carbon price would be exceptionally practical when taking into consideration the fact that Pennsylvania is a net exporter of electricity. We are the largest generation source within the PJM regional energy market, and the second-largest electricity producer in the country behind Texas. Currently, we use large amounts of coal to produce our electricity, which is incredibly carbon dense. Therefore, Pennsylvanians are currently paying for the damage of a production process for goods we don’t even use. We have an abundance of energy resources in our state and increasing potential for low carbon sources like wind, solar, shale gas, and nuclear. If there was a clear price on carbon, it would actually make producing electricity from low-carbon sources cheaper than generating electricity from coal. Although this would be foolhardy if indeed we were currently in the process of building coal-fired plants, most of PA’s coal plants are old or close to retirement. Although some may argue that doing so would potentially penalize the coal industry in Pennsylvania, it has recently been estimated that the wind industry alone would be able to provide more jobs that the entire coal industry in Pennsylvania as it stands. Putting a price on carbon would help further incentivize companies to build new plants and more clean energy resources, and to increase their operational efficiency. This would require investing in smarter and more efficient technologies, as well as researching and developing new ones.
Taking advantage of our resource generation capabilities and the opportunities for grid innovation could help to position Pennsylvania as a hub for innovation.
Using a price for carbon would be a productive “win-win” solution for both Pennsylvania and the U.S. Becoming the first state to tackle climate change in a way that benefits the economy would help to put us on par with the world’s most competitive markets. What’s more, taking advantage of our resource generation capabilities and the opportunities for grid innovation could help to position Pennsylvania as a hub for innovation. After all, it was here in Pittsburgh that Tesla lost the current wars to Westinghouse. But as direct current electricity becomes increasingly popular, the market for DC-based power electronics grows. With the strength of power technologies developed in our region by Eaton, Westinghouse, GE, and more, it becomes increasingly difficult to understand why we are resisting the move towards a low-carbon economy. Putting a price on carbon is likely to be the catalyst we need to move toward an integrated economy where we grow in a manner that’s best for our generation and the next.
Katrina M. Kelly is a Research Associate in Low-Carbon Policies and Economics at the University of Pittsburgh, Swanson School of Engineering, Center for Energy. Her work builds on her previous research on Resilient Energy at the World Energy Council, and works between the policy and engineering departments to develop, finance, regulate, and deploy climate mitigation and adaptation policies. She focuses on the impact of economic ideas on stakeholder actions, and in the market construction needed to support the broader energy transition.