What do We Learn from the Missing Piece in Hillary Clinton’s Energy Plan?
This week Hillary Clinton rolled out an ambitious policy proposal on energy and climate change. It sets the goal of generating a third of US energy from renewable resources by 2027. It builds on the Obama administration’s Clean Power Plan, but regards that plan’s goals as a floor, not a ceiling. It calls for extensive federal investment in research and infrastructure. It proposes generous tax incentives for private industry. Yet one piece is conspicuously missing: There is no carbon tax or any other mechanism for putting a price on carbon emissions.
Any energy policy that does not include a carbon price is deeply flawed. As her primary opponent Sen. Bernie Sanders put it in a Huffington Post op-ed last year, “A carbon tax is the most straight-forward and efficient strategy for quickly reducing greenhouse gas emissions.” The Clinton plan intentionally omits the best way to limit carbon emissions in favor of others that are both more complex and less efficient.
Leveling the playing field?
Clinton’s fact sheet pays lip service to leveling the playing field for clean energy, but the only way to really do that is by putting a price on carbon. A carbon tax puts pressure on both users and producers of all forms of energy that is proportional to their contributions to total emissions. It treats energy used for all purposes equally. At the same time, it allows users or producers to respond flexibly, cutting back use by a greater or lesser amount according to how easy it is technically to do so, and how valuable the foregone production or consumption is.
No combination of subsidies, tax breaks, and mandates can do the job. One problem is that subsidies, tax breaks, and mandates always target a particular set of energy suppliers or users. The magnitude of the incentive provided for each abatement measure will be different. The dollar incentive per ton of carbon saved for photovoltaic will be different from that for wind; for clean energy generation it will be different than for lighting efficiency; for home insulation different from that for energy-efficiency of appliances. The targeted nature of administrative measures makes them inherently political. The technologies that get the biggest incentives are not those that have the greatest abatement potential, but those that have the best lobbyists or the most money to contribute to campaigns. There is nothing level about that playing field.
A second problem is that even if regulators’ intentions are of the best, mandates and subsidies are too blunt an instrument to make fine distinctions within categories. A tax break for insulating your home? Fine. But the payoff of insulating a home in Minnesota, in terms of carbon abatement, is a lot different from that of insulating a home in Oregon. Even within Minnesota, the payoff of insulating a house on an isolated hillside is different than for one tucked into a sheltered suburb. We don’t want to give those two homes equal incentives to insulate; we want each to have an incentive that is appropriate to its circumstances, as is the case for a price-based policy.
Third, mandates, subsidies, and tax breaks are inherently biased toward the established and against the new. Suppose you subsidize photovoltaic power. Fine, doing so encourages the spread of that technology. But what if some dreamer has the idea of a fuel cell run on bio-methane? It’s not listed in the relevant legislation, so it gets no subsidy. Even if its technical merits turn out to be strong, it faces an uphill battle to break through against subsidized incumbent technologies. Instead, a universal price signal that penalized high-carbon energy at a uniform rate, thereby rewarding all low-carbon energy equally, would genuinely level the playing field between conventional photovoltaic and the unheard-of bio-ethane fuel cells.
Finally, mandates, subsidies, and tax breaks are notoriously hard to get rid of even if they later turn out to be ill conceived. The ethanol mandate is a case in point. When it was first introduced, many environmentalists believed it would spark a bio-fuel revolution that would dramatically cut carbon emissions. Now no one does. As a Senator, Clinton opposed ethanol. Now, facing a battle with Sanders in the Iowa primary, her new line is “support and improve” the mandate. Even Sanders’ resolve seems to be weakening. In 2011, he voted against extension of the ethanol mandate and issued a strong statement explaining why. In March of this year, however, he gave a disappointingly evasive answer to a question about ethanol during an interview with Iowa Public Television.
Incentivizing the consumer
Still another problem with the kind of subsidies and mandates Clinton supports is their failure to incentivize consumers. Corporate Average Fuel Economy standards (CAFE standards) for automobiles are a good example. They mandate the production of fuel-efficient cars, which are all well and good in themselves. The problem is, compared with the alternative of a higher fuel price, CAFE standards give no incentive for people to drive less—to ride share, to consolidate shopping trips, to take public transportation, to live closer to work, or whatever.
In fact, they actually create a perverse incentive to do less of those things. If you are forced to buy a high efficiency car, that reduces your incentive to car pool or take the bus to work. So more driving partially undercuts the effectiveness of the CAFE standards. Economists call this the rebound effect.
The same goes for appliance efficiency mandates or home insulation standards. If you are forced to buy a more efficient hot water heater, that reduces the cost of taking longer showers. If you upgrade your home insulation, you will find it less expensive to turn up the heat in winter or use more air conditioning in summer.
It is unlikely that the rebound effect is strong enough to entirely offset intended reductions in energy use, but even a partial offset significantly increases the cost of meeting any given conservation goal. The least costly way of achieving a given reduction in energy use is to split the cost burden between more efficient technology and reduced consumption. In economic terms, the idea is to equate the cost at the margin of saving fuel through better design or less intensive use. Instead, CAFE standards, insulation mandates, and energy efficiency requirements wastefully give us super-efficient cars that are driven too much; super-insulated homes that are heated or cooled too much; and super-efficient appliances that are used more hours or at higher settings than they should be.
What does Clinton’s energy plan tell us about the candidate?
So much for the economic merits of Clinton’s energy plan. Turning to politics, what does the plan tell us about her candidacy and potential presidency?
First, it tells us that either she is not getting good economic advice, or that she is not heeding it. According to news reports, among other economists, she talks to former Treasury Secretary Larry Summers, to Columbia University professor and Nobel memorial prize winner Joseph Stiglitz, and to the economics staff at the Center for American Progress. All three have strongly endorsed a carbon tax. (See here, here, and here.) Evidently, she is not listening.
Second, her aversion to a carbon tax shows a bias against transparency and a preference for policies whose costs are high but less visible. Perhaps Clinton thinks that the widespread concern about climate change that is revealed in opinion polls is broad but shallow—that people really care less about the planet than about their electric bills. If so, she may think they need to be manipulated into backing an energy policy that keeps pump prices and electric bills “affordable,” even if such a policy is less effective and more expensive in the long run. Realistic? Cynical? Take your choice.
Above all, what it tells us is that Clinton backs policies that she thinks will get her elected, rather than wanting to be elected so that she can back policies she believes in. That, at least, is what the New York Times seems to think. “Mrs. Clinton’s strategists see climate change as a winning issue for 2016,” the Times says in a recent article. “They believe it is a cause she can advance to win over deep-pocketed donors and liberal activists in the nominating campaign, where she is facing Democratic challengers to her left on the issue. It is also one that can be a weapon against Republicans in a general election.”
The same article claims that her energy plan is not drawn up by economists like Summers or Stiglitz, but rather, by her campaign manager (and her husband’s former Chief of Staff) John Podesta. Podesta was founder and is now Chair of the Center for American Progress, so maybe he is in a position to keep his candidate away from that organization’s economists.
The Times also notes that the Clinton plan is crafted to fit within parameters set by the billionaire environmentalist Tom Steyer, who spent $74 million on political races in 2014. To receive Steyner’s support in 2016, candidates must propose policies that would lead the nation to generate half its electricity from clean sources by 2030, and 100 percent by 2050. Although subsidies, tax breaks, and mandates are an inefficient way to cut carbon emissions, the Clinton campaign evidently considers them just as good as a market-based approach for attracting contributions.
There is hope, though. Speaking in Iowa, Clinton promised to flesh out her energy and climate policies with more specifics soon. If you go to her website and dig deep enough, past the invitations to contribute to her campaign, volunteer, and buy Hillary-branded merchandise, you eventually come to a contact form. I’m going to forward a link to this post as soon as it is up and running. If you agree that the Clinton plan should add a carbon tax, please do the same!
3 Responses to “What do We Learn from the Missing Piece in Hillary Clinton’s Energy Plan?”
While I agree with the general idea that we should not give out tax breaks/incentives to anyone, I think that the government has done a very good job of helping creating new technologies through these incentives. The latest example is fracking which was entirely funded and started by the US government.
I also disagree that a carbon tax is the only way to tackle this problem. What we have currently is TOO much incentives in the wrong areas. For example we currently subsidize the us road system by about $150 billion per year because fuel taxes are kept artificially lower then what is needed. This creates higher demand for roads, cars, and oil and lowers demand for mass transit.
One of the simplest ways to decrease oil consumption would be to remove this subsidy and have roads pay for themselves by raising the fuel tax by $1 per gallon. We already saw the effects this had from 2005 to 2013, oil consumption dropped by 2.5 million barrels per day, with continued high prices the consumption trend would keep going lower.
I wrote about this here: http://www.automotive-fleet.com/channel/maintenan…
Since transportation creates roughly 40% of all the emissions in the US we could really cut some the emission and reduce state/local sales and property taxes at the same time.
If we look at California which has instituted the carbon tax, it really isn't a carbon tax at all. Looking at the budget, California transfers the same amount of money from the general revenue fund to the highway fund that it creates from the carbon tax. Basically we now have 2 taxes doing the same thing that 1 tax should be.
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I agree we should move to a miles driven based system. An even better proposal would be a GPS type system where you pay a fee based on what type of road you are driving on. If your driving on country roads because you live in the rural areas your fees shouldn't be as high as people who live in the city and require the construction of major highways.
I'm just pointing out that economically cars and thus oil are getting a HUGE break in our current system. If we institute a carbon tax of ~150 billion per year, which would right now cover just the general revenue transfers from Cities, states, and US government to the road system then we are applying a cost to electricity users, industry users, and anyone else that emits carbon to subsidize the road users. This is basically what California has done, everyone is now paying for something the road system should be paying for itself. That alone if the fuel costs reflected the real costs would drive the emissions down because mass transit becomes more economical.
Those taxes coming from states and cities come mainly from sales taxes, property taxes, and other taxes that are applied to the general population not to road users. Those taxes are even more regressive then a fuel tax and hurt the poor more directly, in the same way that a carbon tax would be more regressive then a fuel tax increase. That doesn't help the current problem of inequality in our society when we add more regressive taxes to solve a problem that wouldn't exist in the first place if we eliminated the subsidies.