The Decarbonization S-Curve

Reproduced from: Victor, D., F. Geels, and S. Sharpe. 2019. *Accelerating the Low Carbon Transition: The case for stronger, more targeted and coordinated international action.* Brookings. Available at: https://www.brookings.edu/wp-content/uploads/2019/12/Coordinatedactionreport.pdf. Pg. 14.

The Decarbonization S-Curve illustrates the pace at which zero emission technologies are adopted, which is neither smooth nor steady. Consequently, neither are emission reductions. The graph’s horizontal axis shows time, and the vertical axis indicates how widely used the technology becomes. Adoption is slow at first; the unproven technology struggles to find investors. As government investment, research and development spending, and other subsidies begin, adoption picks up as more firms invest to earn profits from selling the technology. Finally, the takeoff proceeds rapidly as new markets and industries develop, before slowing down as the market matures. It is in the takeoff stage at which the pace of emissions reduction is at its fastest. According to a study published in Research Policy on green technologies in Austria, the takeoff stage can only happen when politics and policy work effectively with the new technology.

In other words, the takeoff of emissions reduction from new technologies does not happen automatically and can be stopped. For example, administrative hurdles to connecting solar and storage projects to the electric grid could result in long waiting times. A shortage of charging stations or battery materials could hamper electric car purchases. According to a report by Brookings, to achieve ambitious emissions reductions governments must pursue R&D policies in the early stages, use capital grants and investment in the takeoff stage, and anchor the market with regulations and standards by the final stage—. If these problems are not addressed, we might find that progress towards our climate goals grinds to a halt. Just because emission reductions can be quick, it does not mean they will be.

Chirag Lala

Researcher

This is a part of the AEC Blog series

Pipelines Threaten Indigenous Safety, Land, and Sovereignty

As of 2019, 26,545 miles of oil and gas pipelines were proposed or planned, and another 9,542 were already under construction in North America. Countless more existing pipelines leak pollutants into the air and soil every day. Not only does further oil and gas development directly interfere with the policies and investments necessary to tackle climate change, the pipelines cross Indigenous lands; many cross lands whose use is governed by treaties.

In Minnesota, Enbridge’s Line 3 faced tremendous public pushback—countless demonstrations against the pipeline were held, defending water and land resources that are critical for many Indigenous communities. This Enbridge replacement project cuts through an area of northern Minnesota on and near treaty lands belonging to the Ojibwe and Anishinaabe First Nations, but no analysis (required under the Clean Water Act, the Environmental Policy Act, and tribal treaty rights) has been done to examine the impacts of the project. The Ojibwe and Anishinaabe signed treaties with the United States government that relinquished ownership of 10 million acres of northern Minnesota lake country in 1855. However, the Tribes retained the right to hunt, fish, gather, and hold ceremonies on the land. In only the second “rights of nature” case ever brought to trial, the White Earth Nation of Ojibwe sued the Minnesota Department of Natural Resources on behalf of wild rice; the case argues that nature itself has the right to exist and flourish and that the Minnesota Department of Natural Resources violated the rights of manoomin (wild rice), which grows in lakes. The plaintiff’s case described allowing Enbridge to pump up to 5 billion gallons of groundwater as an egregious decision on the part of the State.

The current Line 3 pipeline caused the United States’ largest inland oil spill in 1991; in total, 33 spills have occurred on Line 3 since 1968, totaling more than 1 million gallons of spilled oil. With the new line crisscrossing several waterways, including the Mississippi River, 290 interconnected streams and rivers are jeopardized.

In addition, the sudden influx of pipeline workers into predominantly poor and rural Indigenous communities coincides with increases in violence, illicit drugs, and sex trafficking. Multiple human trafficking “sting operations” have resulted in arrests including at least four Line 3 workers in 2021 alone. A crisis center for Northwest Minnesota had responded to over 40 reports of harassment against women and girls by Line 3 workers as of June 2021; construction began in December 2020. Before the Line 3 project was launched, Minnesota’s Public Utilities Commission acknowledged that “cash rich” workers on projects increases the risk of sex trafficking and yet still permitted the project to go forward. Enbridge reimbursed a local Violence Intervention Project for the expense of transportation and hotel costs to get the victims to safety after three assaults by Line 3 workers. But the influx of pipeline workers also crowds local hotels and limits safe rooms that could be used to house women facing violence. Tribal courts are limited by Federal law in their ability to protect women from rapists, even when there is sufficient evidence to result in a conviction: the courts cannot pass sentences greater than five years. Meanwhile, the U.S. Justice Department has only prosecuted 35 percent of rapes reported on Tribal lands. Of the 5,712 reported cases of missing and murdered Indigenous women nationwide in 2016, just 116 were logged in Justice Department databases.

By contrast, law enforcement’s response to the protests against the pipeline have emphasized punitive action. In Minnesota the Public Utilities Commission has required Enbridge to reimburse police for responding to protests, giving local police a perverse incentive to arrest protestors demonstrating against the pipeline. As of October 2021, $2.4 million had been paid by Enbridge to U.S. police and records indicate the company met frequently with police to discuss ongoing gatherings and protests. Reimbursements were requested for batons, tear gas, and flash-bang devices. Moreover, information on police activities has been classified as “security information,” leaving it ineligible for public records requests, making these reimbursements all the more difficult to track.

Indigenous communities opposing existing and proposed gas and oil pipelines emphasize their lack of control over their own lands, including: treaty rights to natural resources, the distribution of benefits and costs of development on their land, and their own safety and autonomy. Winning the cancellation of new pipeline projects is an important first step. In a previous post, we also highlighted the importance of Tribal access to capital and financing so that they can invest in renewable alternatives to oil and gas. The ability to own the new resources if they so choose is crucial to ensuring Tribes can access the benefits of investment in generation and efficiency as they strive for a future without climate change and for the protection of their lands. And that ownership may also be key to preventing fossil-fuel-intensive investment projects— particularly pipelines and the violence they bring—from harming other indigenous communities in the future.

Liz Stanton, PhD.

Director and Senior Economist

Chirag Lala

Researcher

This is a part of the AEC Blog series

Indigenous Opposition to Line 3 Shows a Path Forward on Climate

Enbridge’s Line 3 is a pipeline carrying crude oil from Alberta, Canada, through Minnesota, into Wisconsin. It was built in the 1960s and is scheduled for replacement, and construction began in December 2020. However, a coalition of local Tribes is fighting the replacement in Federal Court; the Tribes argue that the U.S. Army Corps of Engineers did not properly evaluate the potential damage to wetlands and waterways in Minnesota, including the impacts of a potential oil spill. Other groups argue the Line is in violation of treaties between the United States and the Anishinaabe and Ojibwe peoples, especially of provisions that grant Tribes sovereignty over the land, and harm their ability to use the land for rice cultivation. This is just one of a number of ongoing disputes between Tribes across the United States and pipeline projects: Keystone XL, Dakota Access, Enbridge Line 5, and others.

These critical, and time sensitive, disagreements contesting Indigenous land rights raise an important related question: Why is the United States government continuing to support pipeline construction projects at all?

The United States became an energy exporter during the Obama and Trump Administrations. Oil production doubled and gas production increased by 60 percent between 2008 and 2019. Pipelines are critical infrastructure to continuing this expansion. If the United States does not rapidly shift to renewable generation—an indispensable step in its decarbonization policy—its continued reliance on oil and gas will create additional pressure on firms and policymakers to continue or even expand pipeline projects. The International Energy Agency has already argued that funding for new oil and gas projects must be halted today if the world is to reach net zero emissions by 2050 and limit temperature increases to 1.5 degrees Celsius above pre-industrial levels.

Opposition from Tribes to new and existing pipeline projects amplifies the voices of climate activists across the world. The Canadian Government’s Missing and Murdered Indigenous Women and Girls (MMIWG) report highlighted the role of worker camps on oil and gas projects—the so called “man camps”—as centers of perpetuating violence against and disappearances of Indigenous women. Stop Line 3, a campaign organizing against Enbridge’s Line 3 replacement, has highlighted the State of Minnesota’s calculations showing a cost to society from emissions enabled by the pipeline totaling $287 billion over the project lifespan of 30 years . Stop Line 3 demands decommissioning the old Line 3 and justly transitioning to a “renewable and sustainable economy.” EarthJustice recommends a number of additional steps for the Biden Administration to take that build on the precedent-setting cancellation of the Keystone XL pipeline earlier this year, including: cancelling cross-border permits for oil and gas pipelines, directing the Department of Energy to research the climate impacts of exporting liquified natural gas, eliminating the nationwide permit system for pipelines and only permit pipelines on an individual basis, and require a federal review of life cycle emissions from pipeline projects.

But even these steps would be insufficient to do both what Indigenous groups demand and what would help meet regional and international climate goals. Real transformation requires large and sustained investment in the dissemination and production of renewable energy and energy efficiency measures, just transition assistance for Indigenous workers who would be affected by the transition, and financial guarantees that empower Tribal governments to take proactive investment of their own, such as the Kayenta Solar Project on Navajo Land. Other legal changes should make it easier for Tribes to own and operate renewable generation without onerous regulations; a 2005 Federal Law enabling Tribes to own wind and solar generation on reservation land has yet to be used in part because it includes a requirement to partner with external parties. This forces Tribes to lease their land to energy developers instead building and owning their own energy sources. Facilitating Tribes’ financial and legal agency to chart their own path would not only be in the spirit of treaties between Tribal governments and the United States, it would represent a meaningful alternative to leverage against pipelines like Line 3.

Chirag Lala Researcher

This is a part of the AEC Blog series

What Happens to Consumption when we Decarbonize?

A commonly expressed concern about climate models used in policy making is that they place too much emphasis on achieving economic growth, even kinds of growth that interfere with greenhouse gas emissions reduction targets. For example, a report by the European Investment Bank warns against letting economies grow too fast, suggesting that higher growth—say from a massive climate investment program—might increase emissions if the investment unintentionally drives fossil fuel investment as well. In the EIB’s view, climate investment and a healthy economy are benefits to be traded off against one another: We can only have one or the other.

But this argument is unnecessarily bleak. Investment in new renewable generation, energy efficiency improvements, zero-carbon manufacturing, and clean transportation makes green goods and services for workers to purchase, and gives workers and income with which to make these purchases. Even though climate investment increases the size of the economy, emissions continue to fall because the new investment is replacing money spent on dirtier technologies, not adding to it.

Instead of facing a tradeoff between climate investment and economic well-being, rich nations can make climate investment succeed by facilitating the rapidly increasing market in cleaner goods and services. For businesses to invest in zero emissions products they need to see a track record of success: customers buying those products. That increased certainty will lead businesses to spend more on improving green products, making them cheaper, and disseminating them widely.

Effective government policy can accelerate this process. In the United States, the government could use an aggressive clean energy standard. Direct federal purchases of cleaner technologies, such as by electrifying the government’s entire fleet of vehicles or transitioning all government properties off fossil fuel energy sources, would kickstart an enormous market for greener production. Any effort to tax goods that result in greenhouse gas emissions should be paired with dividends to consumers, giving them funds to spend on cleaner alternatives. All of these policies to boost green consumption are necessary complements to policies that focus specifically on green technological innovation, commercialization of new technologies, or policies that help businesses overcome capacity or supply chain problems. These actions can also cement the political viability of decarbonization by ensuring that workers and communities reap the rewards of clean investment.

Chirag Lala Researcher

This is a part of the AEC Blog series

Give States the Room to Decarbonize

In a previous blog post, I wrote about steps the U.S. federal government can take to invest sufficiently in decarbonization despite the self-imposed limitations on congressional appropriation. Similar steps are needed for states and municipalities. They are the first governments to feel the impact of natural disasters and increased pressure on public services. And they play an outsized role in the financing of American infrastructure.

Unlike the federal government, most state governments are constitutionally required to balance their budgets. This restrictive practice can result in undesirable outcomes during recessions when additional government spending is badly needed to turn the economy around, but states and municipalities are experiencing dramatic declines in tax revenues. A bad enough economic crisis could force states to cut allocations to renewable energy and efficiency investments. The bond market for state and local governments is not much better. According to Yakov Feygin at the Berggruen Institute, the smaller size of municipal bonds, sheer variety and lack of standardization, and number of municipal governments limit the bond market’s ability to effectively finance infrastructure. The lack of a permanent emergency lender also means interest rates sharply increase in financial crises—making borrowing more expensive.

Three specific reforms should be enacted to give states and local governments more room to respond to the climate crisis. First, Congress should institutionalize a permanent system of grants to state and local governments that rise automatically when unemployment increases. Second, the Federal Reserve should revive an improved version of the Municipal Liquidity Facility that it used to stabilize interest rates in the municipal bond market during the early months of the Covid-19 pandemic. This time, it should lend at more generous rates instead of at a penalty, accept bonds of longer maturity, and expand the eligibility of borrowers. The Federal Reserve should also specify that it will specially seek out bonds for purchase that fund climate investment (so-called “green bonds”). Finally, Congress should create mechanisms by which the Federal government can borrow money on states’ behalf, provided they use it for specific purposes like decarbonization. This would effectively bypass the straitjacket on state-level fiscal policy imposed by balanced budget amendments or local laws that limit tax increases.

State and local governments have a lot of agency to address the climate crisis. The Political Economy Research Institute (PERI) publishes climate plans for specific states with tailored policies for pursuing ambitious climate targets. Carrying out those plans will be expensive. California climate plan’s would enable it to become a zero emission economy by 2045 by spending 3.8 percent of its GDP ($138 billion) per year on average between 2021 and 2030. West Virginia would need to spend 2.4 percent of its GDP ($2.1 billion) per year between 2021 and 2030 to reduce emissions to one-half of 2018 levels by 2030. While the PERI reports meticulously detail ways to raise the money, the additional steps proposed in this post would greatly increase the capacity of states to painlessly raise funds without making harsh cuts to other vital programs or pursuing unpopular tax increases. These actions would also ensure municipal interest rates remain low—which the reports argue would keep overall costs down—or fall even lower. Best of all, states on course to meet their climate targets could cheaply and profitably invest in more capacity to help lagging states.

Chirag Lala Researcher

This is a part of the AEC Blog series

A Better Way to Finance Decarbonization

Congress is currently debating the fate of President Biden’s twin infrastructure packages. One proposal—the fate of which remains to be determined—is the $300 billion in so-called “Clean Energy Tax Credits” over ten years. That provision alone would be the one of the largest single green appropriations in U.S. history. However, it is not nearly enough to meet the challenge of decarbonization. A relatively conservative estimate by University of Massachusetts-Amherst economist Robert Pollin suggests the United States would need to invest 2 percent of economic output per year in decarbonization efforts from both private and public sources between now and 2050 in order to limit temperature increases to 1.5° Celsius above pre-industrial levels. That is over $400 billion in 2021 alone. And that pace would have to continue every year regardless of who the President is or which party controls Congress.

Raising this money through congressional appropriation is not promising. In the 2010s, multiple government shutdowns occurred because a divided Congress could not pass budget bills. Climate policy in the United States is uniquely vulnerable to rapid swings between administrations that deny and recognize climate change. And a combination of harsh budget rules and an insistence that investment packages be paid dollar-for-dollar in tax increases or spending cuts disadvantages large increases in public spending. Finally, the Senate in particular can only pass a limited number of spending bills with a simple majority of 51 senators; all other legislation require a supermajority of 60 Senators to agree before a bill can move forward.

The situation is not, however, hopeless. The federal government has tools to ensure significant on decarbonization even if Congress does not act every year. In a previous post, I argued for green banks which could raise private funds with a small amount of public capital. Congress could also make green spending “mandatory,” which would automatically authorize the federal government to spend money on designated climate programs. This tool is successfully used for other critical programs like Social Security and Medicare and protects the spending Congress does authorize from future volatility in the budget process. Finally, the Federal Reserve could extend a permanent credit line to states, municipalities, and regional agencies that issue “green bonds.” The Federal Reserve would agree to purchase any bonds that private investors do not at prices that would ensure low interest rates to issuers. If the terms are not generous, local governments will not take up the offer, as we saw with the Fed’s Municipal Liquidity Facility during the pandemic. In addition, such a scheme would require a “green ratings” agency or process to protect against greenwashing.

If done strategically, these tools could ensure hundreds of billions—even trillions—of dollars are reliably spent on decarbonization each year. The United States could exceed its own green spending targets and invest in additional capacity to help other countries decarbonize faster. But to do that, policymakers and activists have to think strategically about green finance. Too many excellent climate programs rely too much on congressional appropriation—a process that gives fossil fuel interests an annual opportunity to scuttle progress, too easily results in vetoes of ambitious spending plans, or unnecessarily conditions them on tax increases. These proposals also fail to consider how rare it is for the Presidency and both houses of Congress to be controlled by the same party. When progress does become possible in Congress, it happens in sudden waves like the Obama-era Recovery Act or the Biden-era American Jobs Plan. Despite the size of these spending bills, their green provisions are too small relative to what is necessary to meet climate targets. Decarbonization is too important for that. Institutions that sustain high levels of green investment independently of Congress are the solution.

Chirag Lala Researcher

This is a part of the AEC Blog series

Energy efficiency is not a “dwindling” resource

A 2018 paper by Amory Lovins at the Rocky Mountain Institute argues that economic models wrongly identify “energy efficiency”—using less energy to power the same activities—as a limited and dwindling resource. Current models assume that once a certain amount of energy saving is achieved, the potential for further savings diminishes. It is a common misconception that remaining energy savings can only be achieved at ever high costs when in fact there remain ample opportunities for energy efficiency and peak reduction in homes and offices, through both passive and active measures.

Lovins argues that the premise of dwindling energy efficiency is mistaken on two counts. First, additional savings from energy efficiency do not have to come just from new products like better air conditioners. Additional savings can come from “artfully choosing, combining, sequencing, and timing fewer and simpler widgets to achieve bigger savings and more co-benefits.” This approach—which Lovins dubs “integrative design”—is also cheaper.

Lovins offers numerous examples of the integrative approach in action for buildings:

Timing deep retrofits to coincide with planned renovations of HVAC systems and glazing can achieve larger savings with smaller capital expenditures.
Buildings can achieve greater energy savings without additional technologies being purchased if they optimize daylighting, airflow, heat transfer, and other similar factors.
A 2013 paper by L.D. Danny Harvey at the University of Toronto found that meeting the Passive House Standard—which sets temperature, load, and comfort standards on buildings—achieves a reduction in heating load by a factor of 5 to 10 for an additional cost that ranges from 0 to16 percent of the construction costs of a reference building.

Apart from Lovins’ examples of more passive measures, there is substantial untapped savings from more aggressive building retrofits. The American Council for an Energy-Efficient Economy (ACEEE) argues for mandatory building performance standards as a powerful policy tool for energy and emission reductions. ACEEE states that given the current pace of energy efficiency upgrades, it will take more than 500 years to retrofit all U.S. housing and more than 60 years to retrofit commercial buildings. It offers several examples of building performance standards that have been successfully implemented—including in Tokyo, Japan and Boulder, Colorado.

A recent study released by the U.S. Department of Energy (DOE) lays out a policy framework for buildings to actively interact with the electric grid through smart technology, and thus reduce energy usage and shift demand away from peak hours. The study incorporates passive and active measures. One example is shifting demand by having grid-connected water heaters pre-heat during off-peak hours. DOE also recommends that building codes should be adapted to incorporate such demand-shifting measures and facilitate these types of communication between buildings and the grid.

In addition to updating regulations and building codes, policymakers can alter fiscal rules to institutionalize regular active and passive efficiency upgrades as a key goal of public investment and procurement. One possibility is to allow public spending on efficiency upgrades to proceed without offsetting increases in tax rates since the benefit of that spending is a reduction in future

Chirag Lala Research Assistant

Tyler Comings
Senior Researcher

This is a part of the AEC Blog series

Energy efficiency: The Key to Growth and Climate Stabilization

Can economic output (called “gross domestic product” or GDP) and population continue to increase while greenhouse gas emissions fall? This phenomenon is known as “absolute decoupling”—economic growth is “decoupled” or operating separately from emissions growth—and is a difficult goal. Most countries have achieved the more modest goal of “relative decoupling,” in which GHG emissions grow more slowly than GDP or population growth. Global emissions likely peaked in 2019, but will need to fall by a consistent 6 percent per year (or more) until 2050 to successfully limit warming to just 2° Celsius. (Limiting warming to 1.5°C would require 10 percent emission reductions per year.) The United States’ emissions peaked in 2007; since then, annual emissions have been lower even as GDP grew (absolute decoupling). But the United States still sees occasional increases in emissions from one year to the next even if total emissions has stayed below 2007 levels.

To offset the nation’s own historical contribution to atmospheric greenhouse gas levels, the United States needs to accelerate the annual pace of emissions reductions and to make time for lower and middle-income countries to invest in steep reductions of their own.

Investments in reducing global energy use are a critical part of making both global and U.S. emissions reductions happen. Energy efficiency improvements reduce the amount of energy required to do the same activity (energy efficiency is not the same as energy conservation, which involves cutting back on activities or consumption). Energy efficiency improvements permit economic growth to continue while energy use and emissions decline. Between 1980 and 2014, U.S. GDP grew by 149 percent, while energy usage only grew by 26 percent. Data from the U.S. Energy Information Administration show that U.S. energy consumed per dollar of GDP fell consistently over the past two decades and projections suggest that it will likely continue to fall.

Globally, GDP rose 84% from 2000 – 2017, while energy usage only rose 38 percent; 40 percent of the energy saved came from using less fossil fuels for power generation while the rest came from reductions in energy requirements for final uses. The energy savings from reduced coal and gas use both equaled 10 percent of 2017 global demand for coal and gas respectively.

Further energy efficiency improvements could build on this global relative decoupling of energy use and GDP. As shown in this figure from a paper in the Journal of Energy and Environmental Science, energy efficiency (top left in light grey) reduces energy demand, meaning less new renewable generation is needed to produce 100 percent of electric demand. As energy consumption declines, fossil fuel generation will retire.

A joint-study by the Center for American Progress and the Political Economy Research Institute argued that it is possible to lower U.S. energy consumption to 30 percent of 2010 levels in 20 years, all while continuing economic and population growth. Similarly, the American Council for an Energy Efficiency Economy estimated in 2015 that large and cost effective energy efficiency improvements could reduce energy usage by 40-60 percent relative to current forecasts. The United States also has a higher energy use per dollar of GDP than most European countries, which suggests additional room for improvement using existing technologies. Policies to implement these reductions are an important part of any serious climate strategy.

Chirag Lala Research Assistant

This is a part of the AEC Blog series

Climate Models and Full Employment

As climate change increasingly becomes part of the public consciousness, so too do debates about the cost of reducing greenhouse gas emissions. Economists run models to determine the social cost of carbon, which represents the economic damage caused by an additional ton of carbon dioxide emissions. For example, if the social cost of carbon is $30 per ton of carbon dioxide emissions, society should be willing to spend that much money to not emit an additional ton and avoid those damages

But this type of analysis has a major limitation. Climate economic models typically use an assumption called “full employment”: every dollar spent on investments to combat climate change takes a dollar away from spending on other priorities, like consumption. This is made explicit in the climate models that inform the U.S. government’s estimates of the social cost of carbon, including the DICE model by William Nordhaus.

The assumption of a hard tradeoff between investment and present-day consumption is a long-standing feature of many macroeconomic models. ”Full employment” assumes that all workers are employed, and all factories are running at full capacity. But we know from recent experience that full employment of the labor force, factories, and other workplaces is not a given in the United States and around the world. Following the Great Recession of 2007-2009, U.S. unemployment exploded and stayed at elevated levels for nearly a decade. During the COVID-19 pandemic, unemployment skyrocketed to unprecedented levels. Workers who were ready and able to work—remotely or in-person—could not find jobs and many dropped out of the labor force entirely. Women’s labor force participation plummeted during the pandemic. The prime-age employment to population ratio, a measure of labor market health, has never returned to the high (i.e. healthy) levels last seen in 2000. the economy can go and has gone for decades without ever hitting full employment.

To make matters worse, under conditions of high unemployment businesses will forgo crucial investments when they lose confidence that consumers will be able to buy their products. When this happens, additional public investment spending on renewable generation Isn’t the tradeoff imagined in climate economics models: either green investment or consumer spending. Instead, the green investment gives jobs to workers that might otherwise lack them (and these workers have money to spend at other businesses), brings idle capacity online, and incents the private sector to increase its own investments in renewables, energy storage, and efficiency measures.

The climate models calculating the U.S. government’s social cost of carbon understand climate investment to be a bad thing, a sacrifice that hurts people’s standard of living. In an economy like ours that has plenty of room to grow, climate investment is a promising source of jobs, technological change, and revitalized communities. Governments should incorporate that understanding when they calculate the SCC and recognize that failing to act means depriving the economy of economic growth. That is a cost of climate inaction too.

Chirag Lala Research Assistant

This is a part of the AEC Blog series

Carbon Border Adjustments

The Biden Administration raised concerns in March about a key plank in the European Union’s proposed climate policy: a border carbon adjustment(BCA). BCAsimpose fees on imported goods and rebates on exports to account for differences in carbon tax rates (or carbon prices) between countries. The goal of the adjustments is to prevent “leakage”—a carbon tax in one country from forcing its consumers to shift their purchases to buy products from a country without a carbon tax. Leakage also occurs when companies move production abroad to dodge carbon taxes at homeThe hope is that the EU’s BCA will increase the price of trading partner’s wares enough to incent them to implement tougher climate policies, all while increasing the political support of carbon taxes among manufacturers, labor unions, and industrial regions.

And the BCA approach seems like it could work to reduce emissions. An analysis of various BCA studies found that unilateral climate policies lose 5 to 25 percent of their promised emissions reductions without a BCA. The same study found that a BCA could reduce that leakage by 6 percent. Considering these figures, it is not surprising why the EU is considering a BCA. They already have a price on carbon dioxide through their emissions trading scheme that has been climbing steadily this year and stands above $61 euros per ton of carbon dioxide as I write.

On the other hand, the United States does not have a national carbon tax or emissions trading scheme. U.S. Climate Envoy, John Kerry described BCAs as a “last resort” while emphasizing that countries should pursue other cooperative forms of emissions reduction. He is right that the BCA is no substitute for policies that help companies reduce emissions in the manufacturing process. But his reasoning for opposing Europe’s BCA misses the point. Rather than complain about the EU’s adjustment and treat it like a hostile tariff against American products, the United States should set a comparable carbon tax and BCA of its own and negate the impact of foreign BCAs on our own exports.

The Energy Innovation and Climate Dividend Act, whose dividend I wrote about in a previous blog post, already includes a border adjustment. The Biden Administration is also trying to create a global minimum corporate tax rate to combat tax evasion. Passing a domestic carbon tax and including a BCA would apply the same principle to countries shirking their climate responsibilities. It would extend two basic features of a carbon tax–increasing the price of dirty energy and reversing the subsidies given by governments to fossil fuel industries–beyond isolated domestic markets.

Chirag Lala Research Assistant

This is a part of the AEC Blog series