When President Joe Biden visits the decommissioned coal-fired Brayton Point power plant in Somerset, Massachusetts, on Wednesday afternoon to lay out his planned executive actions on climate, his allies will be looking for bold initiatives. As Oregon’s Senator Jeff Merkley put it to the Washington Post, the impasse in the Senate created by Senator Joe Manchin’s blocking of his environmental agenda “unchains the president from waiting for Congress to act.”
But here’s one bold move that Biden is unlikely to make, despite the real dent it would put in the emission of heat-trapping carbon dioxide that is causing such havoc with the weather: Stop the fall in gasoline prices.
As any economist will tell him, the most efficient way to reduce fossil fuel consumption is to raise its price relative to alternatives, encouraging people and businesses to switch to cleaner sources and use less energy altogether.
President Obama’s cap-and-trade proposal for CO2 emissions, which failed to pass the Senate in 2010 (and which then-Senate candidate Manchin also disliked) aimed at a similar target: It put a ceiling on overall carbon pollution and created a market for businesses to trade permits to emit CO2, setting a price which would rise as the number of permits was reduced to zero over time.
Increasing the price of gas is not the same as increasing the price of the CO2 it releases into the atmosphere when burnt, but it’s close enough. The beauty of this moment for the president is that he wouldn’t have to deploy any political capital for this to happen. Russia’s invasion of Ukraine already did the trick — sending the average retail price of gasoline above $5 a gallon in early June. All Biden must do is keep it from falling back.
The climate would thank him.
Cars and trucks account for 22% of US carbon emissions. Gas prices in the $5 range would inevitably trim their contribution. For instance, driving a Ford F-150 at $5 a gallon would set the average driver back by about $281 a month, assuming a fuel economy of 20 miles per gallon over 13,474 miles driven per year. That is about $85 a month more than if gas had stayed at $3.50, where it was in early February, before Vladimir Putin sent troops into Ukraine.
Cutting back on driving is not easy. People must get to work and school. Not everybody can switch to public transit or buy a Tesla. Still, economists at the Dallas Fed have estimated that the price elasticity of gasoline demand in the short run is around negative 0.37. So a 43% price hike, from $3.5 to $5 a gallon, would cut gas consumption by about 16%.
The savings over an entire year would amount to 21.6 billion gallons of gas. Since burning one gallon emits about 8.1 kilograms of CO2, such a reduction would prevent about 175 million tons of the stuff getting into the air, alongside a bunch of other noxious fumes.
These numbers are rough approximations. Other things happening in the economy can confound the measurement of price elasticities. They change over time. Short-term price increases may have a smaller effect than increases sustained over time, which would encourage the driver of the F-150 to swap into the “Lightning” model that runs on electricity. On the other hand, rising wages would make consumers less and less sensitive to a one-time gas price hike.While consistently high gas prices would encourage more drilling over the long term — not quite the desired outcome from a climate change perspective — imposing a tax to boost the retail price at the pump would eat into consumer demand without incentivizing further supply. Economists Gilbert Metcalf from Tufts and Jason Bordoff from Columbia proposed a tax along these lines in 2007 to stabilize the price of oil. Today, Metcalf argues, “rather than a price-cap on Russian oil, let’s put a $50 tax on it.” Russia would suffer lower revenues, and oil prices would not fall.
Higher energy prices will eat into consumers’ pocketbooks and slow the economy. What’s important for the president to understand is we have no choice. Fossil fuels must become more expensive. Lacking perfect zero-carbon alternatives that we could switch to cheaply at scale, we must recognize that higher energy prices are an inescapable component of any strategy to mitigate climate change.
There is a still open question: How much should we be willing to pay, to save the climate? It may be that $5 a gallon is too high a price to pay to save California from additional forest fires a decade down the road. But the answer cannot be zero.
To get at this, economists came up with the “Social Cost of Carbon:” the cost that an additional ton of carbon lingering in the atmosphere will impose on the world from here on into forever. They would argue that firms and households should pay exactly this amount — as a fee, a tax or whatever — to cover the damages caused by the additional carbon that, through their day to day activities, they emit into the air.
This social cost is hard to calculate. One must figure out how much the world is warmed by an extra ton of CO2, work out how warming will change the environment and what those changes will cost in terms of flooded homes, declining agricultural yields, pandemics, shrinking life expectancies, dead species and so forth. Then a dollar value must be put on those changes. Critically, one must agree on a discount rate to determine how much is justified to be spent today to prevent damages 50 or 100 years in the future.
It turns out that pushing the price of gas to $5 a gallon may land on the higher end of this debate, but it is very much within bounds. If you think of it as $3.50 plus a $1.50 “Russian invasion penalty,” the penalty works out to just under $200 per ton of CO2 (since burning a gallon of gas releases some 8.1 kilograms of CO2 into the atmosphere, raising its price by $1.50 per gallon amounts to adding a $200 penalty on each ton of CO2 emitted from burning it).
That is substantially higher than the Obama administration’s central estimate of the social cost of carbon of about $60 per ton of CO2 emitted in 2022, (in 2022 dollars). But subsequent research has suggested that estimate represents a lower bound.
For instance, the Obama administration’s high-risk scenario raised the cost to $180 per ton of CO2. And even that may be low. Notably, it assumes a discount rate of 3%, drawn from the average rate on 10-year Treasury bonds from the 1960s through the early 2000s.
But rates were much lower in the subsequent two decades. And a lower rate would imply a higher present cost. ($1,000 in 100 years is the equivalent of $52 today at a 3% rate but $138 at 2%.)
What can President Biden, deploying his executive powers — especially if he subsequently declares a national emergency on climate — do with all this?
Keeping gas at $5 by presidential fiat is probably more difficult than I imagine. It is not unheard of, however, for governments to impose minimum prices. Consider, for instance, the minimum wage. The European Union for years imposed minimum support prices for farm products, in order to protect farmers incomes. Figuring out the mechanics is beyond my skills. But perhaps there is a method whereby any drop in price automatically triggers an increase in the gas tax, such that the average price to the consumer remains at $5. Maybe he can calibrate it to $4.50, instead.
To counter the inevitable pushback, the president could take an idea put forth by Senators Maria Cantwell from Washington and Susan Collins from Maine during the debate over Obama’s cap-and-trade proposal more than a decade ago: Use the tax revenue to fund rebates for taxpayers. The rebate could be tilted to benefit lower-income Americans, those most hurt by expensive energy, without encouraging them to drive more.
Will the president do anything like this? Given his immediate political prospects, most probably not. Indeed, he has been spending his political and strategic capital (a trip to Saudi Arabia comes to mind) on trying to bring down the price of gasoline. All of which makes one wonder what to make of a president who invokes a climate emergency yet fails to understand climate change.
More From Bloomberg Opinion:
Ending the Energy Crisis Doesn’t Mean Giving Up on Climate: Editorial
If We’re Lucky, OPEC Is Wrong About Oil Demand Going Up: Julian Lee
• Europe’s Heat Wave Is Bad for Energy Prices, But the Drought Is Worse: Javier Blas
(Updates with comment from economist Gilbert Metcalf on higher prices’ potential impact on supply in 11th paragraph.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, US economic policy and immigration. He is the author of “American Poison: How Racial Hostility Destroyed Our Promise” and “The Price of Everything: Finding Method in the Madness of What Things Cost.”
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