Carbon pricing is smart policy

It's up to states to take the lead -- and Massachusetts is already ahead

IT’S UNUSUAL TO find consensus of opinion among a group as big and diverse as the one that includes the World Bank, the International Monetary Fund, Lloyds of London, CalPERS, the New York Times editorial board, EMC Corporation, BP, National Grid, a thousand other companies and investor institutions, 74 countries and 23 subnational governments, and scores of card-carrying traditional economists.  Many of those groups and individuals hold issue positions with which I disagree. But all of them, like me, believe it is important to put an economically meaningful price on carbon, something that is missing from nearly all markets throughout the world.

I’m an environmentalist and energy policy wonk who actually likes markets. My experience as an environmental cabinet officer and utility regulator in Massachusetts and a long-time observer of good and bad public-policy design has led me to want to support policies to make markets work better, when they aren’t working well. That’s, of course, why the idea of carbon pricing is so appealing.

For the most part, when we buy goods and services – and certainly when we make choices about how much and what type of energy to use – we face prices that do not reflect the costs that carbon pollution imposes on our economy and on our planet’s climate. The costs I’m talking about are the ones we now know pretty well: the impacts of extreme weather events, sea-level rise, drought, wildfires, and so many other impacts that the scientific community has concluded are already resulting from climate change.

Massachusetts has not been spared from such impacts. Fortunately, our lawmakers have stepped up in many ways to address carbon pollution, most notably in 2008 with the passage of the Global Warming Solutions Act and the Green Communities Act. These laws have included many market-based policies (including the Regional Greenhouse Gas Initiative that addresses power plant emissions), as well as other complementary programs. With such policies, Massachusetts, like other states, has stepped in to attempt to fill gaps created by the unwillingness or inability of Congress to act on the urgent and important issue of climate change.  But even here in the Bay State, we do not yet have a meaningful carbon price incorporated into the goods and services we buy and consume.

It’s not likely that we’ll see action on direct carbon pricing at the federal level any time soon (even with the impressive but now-stayed efforts of the Environmental Protection Agency to control carbon emissions from existing generating facilities). The states are the ones to be counted upon in the near term to demonstrate further climate-change leadership and enact effective carbon-pricing proposals.

In that regard, Massachusetts is already ahead of the game. At the State House, the Joint Committee on Telecommunications, Utilities and Energy is considering two bills that would implement a carbon “fee-and-rebate” policy – a form of carbon pricing that has been highly effective at reducing carbon emissions in many other places (like British Columbia).

One proposal, S-1747, would charge importers of fossil fuels a fee based on the carbon content of the fuels. Although affected companies will undoubtedly pass along some or all of those fees in product prices to consumers, the actual fees collected would go into a special fund, with the collections returned to households and employers in the form of rebates. Each Massachusetts resident would receive the same rebate amount. Businesses, municipalities and nonprofit organizations would receive a dividend based on each one’s share of the state’s employment.  The other proposal, S-1786, follows a similar fee approach but would invest a portion of the funds in the clean energy sector.

Either way, Massachusetts would be implementing a policy that incorporates a carbon-related cost into all forms of energy use, thereby encouraging residents and businesses to use less fossil fuel and reduce carbon emissions. British Columbia has reduced fossil fuel consumption by 16 percent since the province-wide carbon-fee-and-rebate policy began in 2008.

These are sensible, market-based policy options for Massachusetts: Either approach would reduce our dependence on imported fuels and increase our use of clean, local energy. Either one would keep more of our dollars in our local economy. And either would take us one step further in addressing the urgent problem of climate change.

Meet the Author

The Massachusetts Legislature will soon have the chance to move a carbon fee-and-rebate proposal forward, and I hope it does.  Massachusetts can once again demonstrate its leadership chops when it comes to smart environmental protection.

Susan Tierney, a senior advisor at the Analysis Group, is an expert on energy policy and economics. Formerly, she was assistant secretary for policy at the US Department of Energy; Massachusetts secretary of environmental affairs; and commissioner for the Massachusetts Department of Public Utilities.