by Al Gore
Economists have long understood that taxes do more than raise revenue for the governments that impose them; to some extent, at least, they also discourage and reduce the economic activities that are taxed. By using taxes to adjust the overall level of cost attributed to the production of CO2 and other greenhouse gases, governments can send a powerful signal to the market that, in the best case, unleashes the creativity of entrepreneurs and CEOs in searching for the most cost-effective ways of reducing global warming pollution. That is the reason I have advocated the use of CO2 taxes for thirty-five years as the policy most likely to be successful. And implementing the tax in a way that escalates over time would provide the long-term signal to industry and the public that is needed to plan effective changes over coming decades.
Taxes, of course, are always and everywhere unpopular with those who pay them. Therefore, the enactment of this policy requires strong and determined leadership and, to the extent possible, bipartisanship. In recognition of those simple but significant political facts of life, I have always recommended that CO2 taxes be coupled with reductions in other taxes by an equal amount.
Unfortunately, most people are far more willing to believe that government will indeed impose a new tax, but far less willing to believe that it will give that revenue back in another form. The forty-year campaign in the U.S. by the conservative counterreform alliance led by corporate interests and business elites has been effective in demonizing government at all levels and pursuing a “starve the beast” strategy that focuses on shrill opposition to any tax of any kind—unless the tax in question falls on low-income wage earners.
Other versions of this proposal have coupled the CO2 tax with a rebate plan, to send a check to each taxpayer. Under this approach, sometimes labeled the “fee and dividend” approach or “feebate,” those who were more successful in reducing their CO2 emissions would actually make money, or use it to pay for more efficient or renewable energy technologies. Yet another version, which was introduced in the U.S. Congress in 2012 but never voted upon, would return two thirds of the revenue raised by a carbon tax to the taxpayers but would have applied one third to a reduction in the budget deficit. Unfortunately, the ingrained opposition to any new taxes—even if they are revenue neutral—has thus far made it difficult to build support for the single most effective strategy for solving the climate crisis, a CO2 tax.
A second set of policy options involves the use of subsidies. To begin with, we should immediately remove existing subsidies that encourage fossil fuel consumption. In the United States, for example, approximately $4 billion each year—mainly in the form of special tax subsidies—go to carbon fuel companies. In India, to pick another example, the dirtiest liquid fuel, kerosene, is heavily subsidized.
Instead, governments should provide robust subsidies for the development of renewable energy technologies, at least until they reach the scale of production that will bring sufficient cost reductions to enable them to be competitive with unsubsidized fossil fuels. This policy would be even more effective in combination with a CO2 tax, which would appropriately include in the price of fossil fuels some of the enormous costs they impose on society.
Limited government subsidies have already been successful in promoting more rapid adoption of renewable energy technologies. In fact, the cost reductions associated with the increasing scale of production have now put some renewable technologies much closer to a price that makes them competitive with coal and oil. Both solar and wind technologies are only a few years away from reaching that threshold. Yet the large carbon polluters and their allies have been working hard to eliminate subsidies for renewable energy before these clean technologies can become competitive with dirty energy—which is ironic, given that the global subsidies for the burning of fossil fuels, described above, greatly exceed the subsidies for renewable sources of energy, even though the latter are often miscalculated and misstated by opponents, who lump them in with subsidies for nuclear energy, so-called clean coal technologies, and other nonrenewable options.
The third policy option is an indirect subsidy for renewable energy in the form of a mandate requiring utilities to achieve a certain percentage of electricity production from renewable sources. This mechanism has already worked in numerous nations and regions, though many in the utility sector oppose such measures. Several U.S. states—including, most prominently, California—have successfully implemented this approach, and it is a major factor in the increased renewable energy installations in the United States. Germany has been perhaps the most successful nation in the world in using this policy option to stimulate the rapid adoption of both solar and wind technologies.
On a global basis, the combination of government subsidies for the speedier development of renewable energy technologies and the requirements that some utilities use them to produce a higher percentage of the electricity they generate has contributed to dramatic advances far beyond what most predicted. In 2002, a leading energy consulting firm projected that one gigawatt of solar electricity would be produced worldwide by 2010; that goal has been exceeded by seventeen times. The World Bank projected in 1996 that China would install 500 megawatts of solar energy by 2020. China installed double that amount by 2010.
The past projections of increased wind energy have also turned out to be overly pessimistic. The U.S. Department of Energy projected in 1999 that the U.S. wind capacity would reach ten gigawatts by 2010. Instead, that goal was met in 2006 and has now been exceeded four times over. In 2000, the U.S. Energy Information Agency projected that worldwide wind capacity would reach thirty gigawatts by 2010. Instead, that goal was exceeded by a factor of seven. The same agency projected that China would install two gigawatts of wind by 2010; that goal was exceeded 22-fold and is expected to be exceeded 75-fold by 2020.
As Dave Roberts of the environmental magazine Grist has pointed out, the world has previously witnessed predictions for the adoption of new technology that “weren’t just off, they were way off.” Industry and investor predictions at the beginning of the mobile telephone revolution, for example, wildly underestimated how quickly that new technology would spread. After the Arab-OPEC oil embargos in the 1970s, projections for the adoption of energy efficiency measures were also way off. What both of these prior examples have in common with renewable energy technologies is that all three are “widely dispersed” technologies that experienced unpredicted exponential growth because of a virtuous cycle, within which the increasing scale of production drove sharply lower costs—which in turn drove even faster growth.
The most frequently cited precedent for this phenomenon is the computer chip industry. As noted earlier, Moore’s Law—which accurately predicted the relentless 50 percent cost reduction for computer chips every eighteen to twenty-four months—is not a law of nature, but instead a law of investment. In the early days of the computer revolution sixty years ago, chip manufacturers came to two conclusions: first, the potential market for computer chips was enormous and fast-growing—almost limitless; second, the technology development path was highly sensitive to innovation.
These dual realizations caused the leading chip manufacturers to devote enormous sums to research and development in order to protect their prospective market share against competitors. Over time, a collective consensus emerged that so long as they could continue reducing their costs on the pathway described by Moore’s Law, they would be likely to retain or grow their market share. In other words, Moore’s Law was transformed from a description of the past into a self-fulfilling prophecy about the future. Policies designed to create the rational expectation of steadily growing markets for renewable energy technologies can steepen a similar self-sustaining cost reduction curve for renewable energy.
The fourth policy option is widely known as cap and trade. This proposal is also designed to mobilize market forces as an ally in achieving CO2 reductions. In spite of the relentless attacks on the mechanism, cap and trade remains favored by many policy experts as the best approach for se
curing a global agreement. Although I strongly favor a CO2 tax, one of its disadvantages is that it is difficult to imagine coordinating national tax policies in many countries around the world with widely differing tax systems and differing compliance records. By contrast, a global cap and trade system would be inherently easier to harmonize among countries around the world with widely varying tax systems.
Cap and trade is based on an extremely successful policy innovated by former president George H. W. Bush to reduce emissions of sulfur dioxide (SO2) in order to mitigate the acid precipitation in states downwind to the north and east of the Midwestern coal plants. The policy was embraced by Republicans as an alternative to government regulations mandating reductions in each plant.
The theory was that a slowly declining limit on emissions, when coupled with an ability to buy and sell emission “permits,” would maximize reductions by giving a market incentive to those companies that were most efficient in limiting emissions, while simultaneously allowing a little more time for those companies having difficulty. The results were astoundingly successful. Emissions dropped much faster than predicted at a cost that was only a fraction of what was predicted. Consequently, advocates of CO2 reductions felt that this mechanism could serve as a bipartisan compromise that would effectively reduce global warming pollution.
Unfortunately, as soon as cap and trade was presented as a bipartisan compromise, many conservatives who had originally supported the idea turned against it and began calling it “cap and tax.” Thus have fossil fuel companies and their ideological allies paralyzed the policymaking process both at the global level and in the United States.
For many years, the effort to achieve a global consensus on action to solve the climate crisis was bedeviled by the international fault line between rich and poor nations, with poor countries insisting that the priority they placed on quickly replicating the economic development that had already occurred in wealthy countries meant that they could not afford to participate in a global effort to reduce global warming pollution. Proposed treaties routinely placed the first obligations on wealthy countries alone, leaving any requirements on developing nations to future rounds of negotiation.
After all, the need for more energy to power sustainable economic development in poor countries is acute. An estimated 1.3 billion people in the world still have no access whatsoever to electricity, and in spite of historic reductions in global poverty, the per capita income levels in many energy-poor countries are so low that it is easy to understand why they have resisted any constraints on potential increases in CO2 emissions at a time when the wealthier countries have made such profligate use of fossil energy during their own past periods of economic takeoff and development.
Much has changed, however. The reality of the climate crisis has become much more apparent in developing nations as they experience harsh impacts and struggle to find the resources for disaster recovery and adaptation that are more readily available in developed countries. As a result, many developing countries have now changed their tune and are actively pushing the world community to take action on climate, even if it means that they too must shoulder part of the burden for responding. The World Bank estimates that more than three quarters of the costs from climate disruption will be borne by developing countries, most of which lack the resources and capacities to respond on their own.
Expenditures for the installation of renewable energy sources in the developing world now exceed those in rich countries. According to David Wheeler at the Center for Global Development, developing countries now are responsible for two thirds of the new renewable energy capacity since 2002 in the world, and overall have more than half of the installed global renewable energy capacity.
Even the richest countries are now being forced to recognize the economic toll of climate-related disasters. In the U.S.—still the richest country in the world—political controversies over the rising costs of disaster relief have resulted in cutbacks to emergency recovery programs that have hampered the ability of many communities to get back on their feet after climate calamities. But 2011–12 was a wakeup call.
In 2011, the U.S. had eight climate-related disasters, each costing over $1 billion. Tropical Storm Irene, which mostly missed New York City, nevertheless caused more than $15 billion in damage. Texas experienced the worst drought and highest temperatures in its history, and wildfires in 240 of its 242 counties. Thousands of daily all-time-high temperature records were broken or tied. Tornadoes, which climate researchers are still unwilling to link to global warming (partly because the records of past tornadoes are incomplete and imprecise), ravaged Tuscaloosa, Alabama, Joplin, Missouri, and many other communities; seven of them caused more than $1 billion in damage. In 2012, more than half of the counties in the U.S. suffered from drought. Hurricane Sandy cost at least $71 billion.
One of the principal objections to cap and trade in the United States has been based on the fear that developing countries would not be subject to the proposal and that U.S. industries would therefore be at a competitive disadvantage. In the last two decades, the emergence of Earth Inc. has inspired fear among factory workers in the U.S. and other developed nations that their jobs were being taken away and redistributed to factory workers in poorer countries where labor was cheap and advanced technologies were becoming available. Consequently, any perceived additional competitive advantage for developing countries became politically toxic in much of the industrial world.
That is one of many reasons why there is support for proposals to integrate CO2 reductions into the World Trade Organization’s definition of what is permitted by way of “border adjustments” to add the cost of CO2 reductions to the price of imported goods from a country that does not require them to a country that does. In 2009, the World Trade Organization and the United Nations Environment Programme jointly published a report supporting such border adjustments.
I have long been a vocal advocate of reciprocal free trade even though that position did not endear me to my own political party. And I continue to strongly believe in free and fair international trade. But a fair set of rules is one that is designed to create and maintain a level playing field, and, in my view, CO2 reductions certainly qualify as one of the factors that should be included in border adjustments.
When I was vice president, I joined with others in negotiating a global treaty in Kyoto, Japan, to adopt the cap and trade mechanism as the basis for the world’s effort to reduce CO2 emissions. The Kyoto Protocol was adopted by 191 countries and by the European Union as a whole, and in spite of the U.S. refusal to participate, and in spite of implementation problems, has been a success in most of the nations, provinces, and regions that are striving to meet its commitments.
Even though some nations using carbon credit trading have manipulated and abused the system, and even though problems emerged in the early days of the European system, Europe has taken action to address the problems and most nations with well-designed systems are on course to sharp emissions reductions. One policy analyst with the Potsdam Institute for Climate Impact Research, Bill Hare, said, “I can’t see any other way to do it. Other policies are not easier to negotiate. The carbon market may be complex, but we live in a complex world.”
Unfortunately, the decision by the United States not to join the Kyoto Protocol and the failure to gain commitments from China and other “developing countries” (China in those years was still labeled a developing country) meant that the two largest emitters of global warming pollution were not included. If the U.S. had joined, the momentum for global participation and compliance would have been overwhelming and developing countries would have faced unrelenting pressure to join in the treaty’s second phase, as anticipated.
Yet even though the U.S. political system is still paralyzed at the federal level, governments of many other nations are beginning to adopt new policies in recognition of the dangers we face and the opportunities to be seized. In addition to the European Union, Switzerland, New Zealand, Japan,
one Canadian province, and twenty U.S. states will imminently begin cap and trade systems. Most significantly, California began implementing its system in 2012.
Australia, the largest coal exporter in the world, has adopted a plan that includes both a CO2 tax and a cap and trade system that has been linked to the European Union’s system. South Korea is in the process of setting up its own system and fourteen other countries have announced formally that they are planning to launch cap and trade systems: Brazil, Chile, Colombia, Costa Rica, India, Indonesia, Jordan, Mexico, Morocco, South Africa, Thailand, Turkey, Ukraine, and Vietnam.
Wolfgang Sterk of the Wuppertal Institute in Germany says, “The carbon market is not dead.… If a national system emerges in China, depending on the design and scope, it may become the biggest in the world, and allowances in that system would then give a global price signal.”
China is implementing a cap and trade system in five cities (Beijing, Tianjin, Shanghai, Chongqing, and Shenzhen) and two provinces (Guangdong and Hubei). These pilots are intended to be up and running in 2013 in order to provide a learning experience that will be used to implement a nationwide cap and trade system by 2015.
As with some of the other commitments made by the Chinese government, some experts remain skeptical that they will follow through on this plan, but observers report that progress has already been made in most of the pilots that were designated. Together, the areas in the pilot program represent almost 20 percent of the Chinese population and almost 30 percent of its economic output.
China’s commitment to sustainability and renewable energy has at once helped and hurt the world’s ability to solve the climate crisis. By limiting imports while using subsidies to drive the cost of renewable energy technologies below the level at which Western companies can compete, China has served its own interest in dominating what everyone expects to be a key industry of the twenty-first century, but has damaged the rest of the world’s ability to reap the benefits of fair competition in quickly advancing the state of these technologies.
