Energy Pricing

There are several ways in which energy is over- or under-priced.

Social Cost of Carbon

Greenhouse gas emissions, primarily from energy, have harmful impacts on the future climate that are generally externalized from the emitter. Imposing a tax at the point of emission internalizes those costs. Following are select estimates of damages.

Select estimates of the social cost of carbon, assessed per ton of CO₂, 2019 USD. Sources: Hänsel et al. ¹, Interagency Working Group on Social Cost of Carbon ², Moore and Diaz ³, Nordhaus ⁴, Ricke et al ⁵, and Wang et al. ⁶. A major source of variation in SCC estimates is the discount rate, or the extent to which future economic damage should be valued less than present costs. Rennert and Kingdon ⁷ illustrate how an SCC estimate can vary by discount rate.

Major damages in climate economic modeling include rising sea level, severe weather, wider range of tropical disease, direct impact of heat, and increased cooling costs. Models generally take into account the benefits of lower heating costs and CO₂ fertilization of crops ⁸. Most countries will be harmed by climate change, with India hit particularly hard, though Russia, Canada, and Scandinavian countries could benefit ⁵.

Throughout much of Urban Cruise Ship, we have used a social cost of carbon of $50/ton CO₂e, which translates to 45 ¢/gallon for gasoline ⁹.

More recent estimates suggest that a higher price may be appropriate. Based on a weighted median of nearly 6,000 estimates of the social costs of carbon collected by Richard Tol ¹⁰, with more recent estimates given higher weights, we estimate that a cost of $141.40 per ton (2024 dollars) is appropriate. We have used this figure in more recent work.

Carbon Pricing Policies

A carbon price typically imposes near-term economic costs with long-term climate benefits and more immediate health benefits by reducing other forms of pollution. Recent modeling has found the following costs, climate benefits, and health benefits from recent carbon pricing proposals in the United States Congress.

Analysis of carbon pricing proposals. A carbon price of $52/ton CO₂e is assumed. Source: Hafstead ¹¹. The proposals analyzed are the Climate Action Rebate Act (Coons) ¹², the Energy Innovation and Carbon Dividend Act (Deutch) ¹³, the America's Clean Future Fund Act (Durbin) ¹⁴, the MARKET CHOICE Act (Fitzpatrick) ¹⁵, the America Wins Act (Larson) ¹⁶, the Raise Wages, Cut Carbon Act (Lipinski) ¹⁷, the SWAP Act (Rooney) ¹⁸, the Healthy Climate and Family Security Act (van Hollen) ¹⁹, and the American Opportunity Carbon Fee Act (Whitehouse) ²⁰.

Fossil Fuel Subsidies

The International Monetary Fund has released several reports detailed energy subsidies and unpriced externalities. The 2019 values are as follows.

Energy subsidies and unpriced externalities, as estimated by the IMF ²¹.

Direct subsidies include tax breaks or direct payments, often to consumers. "Other Externalities" include externalities related to traffic, such as congestion. While we believe that such externalities should be internalized, such as through congestion pricing, it is debatable whether they could be termed energy subsidies when they apply regardless of how a car is powered.

Clean Energy Subsidies

In our deployment section, we note that technology deployment has social value via the learning-by-doing effect. We estimate the learning-by-doing value as follows.

Estimated learning-by-doing value for clean energy technologies.

Not all of the value estimated here is necessarily an appropriate subsidy, as the developer of the energy system will capture some of the learning benefits.

Carbon Offsets

Sometimes it is too expensive or infeasible to reduce onsite emissions, and in that case one may purchase carbon offsets to reduce emissions elsewhere. Such purchases may be done voluntarily or to comply with a cap-and-trade law. As of January-March 2018, the prevailing price for carbon offsets was $3-6 ²².

Among certified offsets, forestry and land use projects are currently the most popular.

Certified carbon offsets in the first quarter, 2018, by type of projects. Source: ²²

Carbon offsets have been criticized for failing to deliver the promised emissions reductions ²³, ²⁴, ²⁵, ²⁶, ²⁷. An estimated 85% of forestry projects under the Clean Development Mechanism, one of the main certifications of carbon offsets, are estimated to overstate emissions reductions ²⁸, and in 2023, Carbon Direct estimated that fewer than 10% of asssessed projects meet their standards for high quality ²⁹. However, offsets in California have been observed to reduce emissions ³⁰.

It may be the case that many of Clean Development Mechanism's wind power projects would have been built without the offsets, and thus they do not reduce emissions, a problem known as additionality ³¹, ³². Independently, it is estimated that 37% of REDD+ projects (deforestation and land use projects) and 24% of ARR (Afforestation, Reforestation and Revegetation) projects overlap areas that are already protected, a problem known as double-counting ³³, ³². Carbon offsets have also been criticized for obstructing deep decarbonization of sectors such as transportation ³⁴. Additional problems with offset effectiveness are leakage--the tendency for emissions reductions in one place to result in increased emissions elsewhere--and permanance, or uncertainty over how long carbon will be sequestered ³².

In California, regional averages have been used to estimate sequestration capacities, but landowners are then able to select land areas that have lower-than-average sequestration; over-crediting in this manner has been estimated at 29% of claimed reductions ³².

At prices below the social cost of carbon (about $50/ton), an estimated 3-13 billion tons per year of carbon offsets may be available ³⁵. This contrasts to world emissions of about 40 billion tons annually.

Corporate and Municipal Clean Energy

A Renewable Energy Certificate (REC) is similar in concept to a carbon offset, in that one REC represents a megawatt-hour of renewable energy generation. Typically, when corporations such as Google or Apple announce that they run on "100% renewable energy", it means that they purchased enough RECs to cover their full usage portfolio ³⁶.

RECs are useful to renewable energy generators in that they represent an additional revenue stream. However, the price of RECs has fallen to 97 ¢/MWh in the West to $64/MWh in the Northeast, in most the country too low a price to meaningfully incentivize new renewable energy generation ³⁷.