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Bibliographic details
- Authors: JAMES H STOCK
- Published: February 11, 2022
Summary of central argument
- As green energy costs drop, policy emphasis should shift from economy-wide carbon pricing to tailored sectoral policies.
- Economy-wide carbon pricing remains desirable but is a lower priority today than when green energy was expensive.
- Multiple market failures (greenhouse gas, innovation, and network/chicken-and-egg externalities) imply the need for multiple, sector-specific instruments rather than a single one-size-fits-all policy.
Evidence and targets cited
- United Kingdom adopted a target of 78 percent emissions reductions by 2035, relative to 1990 levels.
- United States announced a (nonbinding) goal of reducing net greenhouse gas emissions by 50–52 percent by 2030, relative to 2005.
- A $40/ton carbon tax implies $0.36 for a gallon of gasoline.
- US Energy Information Administration projected the price of petroleum jet fuel to be $2.77/gallon in 2050 (2020 US dollars).
- US power sector modeling suggests a national policy that effectively puts a price on carbon—such as a clean electricity standard—is necessary to achieve substantial near-term decarbonization, say 80 percent by 2030.
Three externalities shaping policy choice
- Greenhouse gas externality: emitters do not bear full costs of damages to others now and in the future.
- Innovation externality: private innovators cannot fully appropriate gains, justifying public financial support for basic research and other innovation-related policies.
- Network (chicken-and-egg) externality: infrastructure complementarities (for example, EVs and charging stations) can create multiple stable equilibria—low-adoption and high-adoption equilibria.
Sectoral implications and policy recommendations
- Light- and medium-duty vehicles (EVs):
- Declining battery costs and manufacturing experience point to parity or lower cost for new EVs compared with internal combustion engine vehicles during this decade.
- Network externalities (charging infrastructure) and innovation externalities for advanced batteries are more effective levers than a moderate carbon tax for accelerating EV adoption.
- Transitional, time-limited policies to overcome infrastructure bottlenecks (overnight and at-work charger availability) can shift the economy from a low-EV to a high-EV equilibrium.
- Aviation:
- Sustainable aviation fuel faces a daunting price-competitiveness challenge versus petroleum jet fuel at $2.77/gallon in 2050 (2020 US dollars) absent carbon pricing.
- Policy should strongly support development and commercialization of advanced, scalable, truly low-carbon sustainable aviation fuel now, paired with a credible commitment to a high sectoral carbon price in the future.
- Phasing and design matter: premature fuel standards risk privileging first-generation fuels and crowding out scalable zero- or negative-carbon alternatives.
- Power sector:
- In parts of the United States, new wind and solar are less expensive than coal and natural gas, but national decarbonization requires sectoral policy (e.g., clean electricity standard) that effectively prices carbon to achieve substantial near-term decarbonization.
- Deeper decarbonization likely requires significant innovation-driven cost reductions in storage technologies.
- Institutional and infrastructure constraints—time-of-day pricing, load management, siting new transmission—must be addressed.
- Supporting research and development of long-term storage technologies and resolving transmission and institutional limitations are essential complements to sectoral pricing mechanisms.
Role of economy-wide carbon pricing
- An economy-wide carbon tax combined with government subsidies for renewable power could accomplish similar decarbonization in the power sector and yield emissions reductions in other sectors.
- However, at politically plausible prices, economy-wide carbon pricing alone is neither efficient nor sufficient to drive deep decarbonization across all sectors today.
How economists and institutions can help
- Economists excel at disentangling incentives, anticipating unintended consequences, and assessing costs and benefits of candidate policies—skills needed for nuanced sectoral policy design.
- Key sectoral policy design questions include:
- How to design charging station policies to maximize EV adoption rather than providing inframarginal transfers?
- Is subsidizing domestic battery production a cost-effective long-run emissions reduction?
- Will subsidies for purchasing EVs be passed through to consumers and thereby stimulate sales?
- Which policies most efficiently support low-carbon sustainable aviation fuels?
- Economic policy institutions like the IMF can play a critical role by enhancing and providing nuanced sectoral expertise to promote the transition to a greener—and in many cases, cheaper—energy future.
James H. Stock, Driving Deep Decarbonization, September 2021.
Content in this bundle
- Sur la voie d’une décarbonation profonde
- James Stock: Driving Deep Decarbonization – IMF F&D
- 推动深度脱碳 - 金融与发展 - 国际货币基金组织季刊 2021年9月号·第58卷·第3期