A Billion Here, A Billion There

by | October 14, 2020

If the opinion polls are correct, not only will Joe Biden become President in January 2021, but he could enjoy the benefit of a Democrat-controlled Congress. His policy platform is therefore undergoing considerable scrutiny, notably in relation to the major global challenge of climate change. This is not a moment too late, for the United States comprises 4% of the world’s population but consumes one-sixth of its energy.

The nine key elements of Biden’s plan for a ‘Clean Energy Revolution and Environmental Justice’ centre on economy-wide net-zero emissions no later than 2050. The approach is comprehensive, including a range of spending commitments such as investing $400 billion over ten years in clean energy and innovation, recommitting the USA to the Paris Agreement, and regulatory change requiring publicly traded companies to disclose climate-related financial risks to shareholders.

There is much to commend in Biden’s approach, including eliminating tax breaks and subsidies for fossil fuel use. The IMF has estimated that the implicit global subsidy from undercharging for energy and its environmental costs in 2017 was $5 trillion, equal to 6 percent of world GDP.

Nevertheless, there is also room for constructive criticism, especially on economic grounds. The plan relies more on government directives and spending than on incentives and disincentives, which can have a powerful impact on private sector behaviour. Notably, the words ‘carbon tax’ do not appear in the Biden platform. Perhaps it is no surprise that ahead of the election Joe Biden has steered clear of fuel taxes, choosing to emphasise job creation in his energy programme. But if he wins election, the economist community should swing behind encouraging a carbon tax as well as carbon emissions trading.

Of course, the devil may be in the detail and semantics. One person’s tax is another person’s charge or levy. There are tantalizing hints in Biden’s plan, such as the idea that Congress should pass legislation ensuring that “polluters must bear the full cost of the carbon pollution they are emitting” or, alternatively, “the Biden Administration will impose carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations”.

A variety of global bodies have already put forward incentive-based proposals. As one example, the IMF has estimated that a tax of $75 per ton of carbon dioxide applied around the world would make it possible to meet the Paris Agreement target of limiting global warming to 2˚C over pre-industrial levels. What does that mean in practice? A tax of $35 a ton on CO2 emissions in 2030 would typically increase prices for coal, electricity, and gasoline by about 100%, 25%, and 10% respectively. That is rather large compared to policies adopted worldwide thus far. Across 60 or so carbon tax and trading systems in various countries, the average price of emissions worldwide is only about $2 a ton. Politicians, every wary of crucial constituencies, remain hesitant to act decisively.

The plan’s reference to ‘carbon-intensive goods from countries that are failing to meet their climate and environmental obligations’ is also significant. It can be argued that the mainstream oil, gas, and raw materials companies are moving too slowly down the path towards a carbon neutral world, but recent announcements by the likes of BP or Shell show that they are trying to turn proverbial super tankers around.

Yet as a Bloomberg analysis shows, such publicly quoted companies are only a small part of the overall problem. Some 63 global businesses account for about two-thirds of all fossil fuel pollution globally. Listed oil and gas, coal, and steel companies are a quarter of the total. A fifth of the global sources of carbon-emitting energy come from unlisted national oil companies, such as Pemex, that dominate production across the Persian Gulf, Asia, Africa and Latin America. A similar amount comes from a group of listed but state-controlled giants such as Gazprom. Economists, climate change analysts and governments risk measuring what can be measured as opposed to what ought to be measured. One implication is that investor-targeted divestment campaigns, however beneficial, are necessary but not sufficient in making progress toward emission and climate change targets.

Fees or quotas on carbon-intensive goods could be a tailored route to bring about major change among fossil fuel producers outside the USA. In this context, it will be important to map total carbon footprints. For instance, the carbon footprint of a clothing retailer must take account of energy usage in its own shops and its sources of production, as well as the entire way along its logistical and supply chain. Otherwise well-intended efforts will be prone to miscalculation and lose credibility amongst the broader population. Society would be miscounting at best, exporting its problems to poorer countries at worst.

Although the deliberations in Washington in 2021 will have major global implications for carbon emissions and climate change, the federal government on its own cannot determine how the whole country responds to climate change. Business, local governments and individuals must all do their part. For example, Walmart has joined a growing list of firms announcing that it will cut carbon emissions to zero by 2040. The state of California aims to be carbon neutral by 2045. Some of the largest US power suppliers and traders recently discussed carbon pricing at a conference arranged by the US Federal Energy Regulatory Commission. And economists can also meaningfully contribute by calculating costs and benefits, constructing sensible incentive mechanisms, and designing policies that ameliorate impacts on hard-hit businesses, communities and individuals.

More important than any policy, however, is the gating step of accepting that change is required, and that the lead should be taken by those most able to afford it. The top 10% of income earners account for nearly half of annual global carbon dioxide emissions. Of all the inequities today, surely that is one that should be addressed.

Filed Under: Featured . Economics

About the Author

Andrew Milligan is an independent economist and investment consultant. He is a Board member of the Asia Scotland Institute, an adviser to the Health Foundation, to Balmoral Asset Management and to the Educational Institute of Scotland, and a Fellow of the Society of Professional Economists. From 2000-20, Andrew was the chief market strategist for the global fund manager Aberdeen Standard Investments.

After graduating from Bristol University, Andrew started in H.M. Treasury where he specialised in the IMF and World Bank’s handling of the Latin American debt crisis. He then worked in turn for Lloyds Bank, the broker Smith New Court, and New Japan Securities as an international economist. In 1995 he entered the asset management industry, becoming Head of Economic Research and Business Risk for Aviva Investors. In 2000 he moved to Edinburgh to work as the Head of Global Strategy for Standard Life Investments, in charge of a team covering economic and market research, tactical and strategic asset allocation decisions, client advice and communications for retail and institutional clients globally.

After its merger with Aberdeen Asset Management to form Aberdeen Standard Investments, the company became the second largest active fund manager in Europe with over 30 offices across the major financial centres. Andrew is well known as a public speaker while his writing, commentary and interviews have appeared in all the mainstream media.

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