No Con Economics

In a February 16^th posting on the Resources for the Future blog,  Burtraw and Fischer summarize key aspects of the Mistra Carbon Exit Swedish research project. This posting emphasizes three key observations in the report and then indicates why the US is unlikely to adopt the Swedish approach. To put the Swedish project in context, it’s important to point out that the European Union Emissions Trading System, in which Sweden participates, employs a capping and trading of allocated emission allowances. That approach differs significantly in both its efficiency and equity effects from carbon fee and dividend policies under consideration in the US. Nevertheless, despite US policy maker reluctance to learn from others, it’s worth knowing about the Swedish approach to achieving net zero emissions.

Observation #1: The Mistra report focuses on the supply chain of buildings, transportation infrastructure, and transportation systems which account for an estimated 18% of CO₂ emissions in Sweden.  Transformation to zero emissions for consumers of final goods will generate small increases in the cost of products that use cement and steel but negligible cost increases for the economy overall. 

• Cement would increase the cost of cement by 70%, but the price of buildings would rise by less than 0.5%.
• The substantial investment needed to produce low CO₂ steel would increase the cost of steel by 25%, but the price increase per car produced (for example) would also be less than 0.5%.
• Successful transformation of both these industries will require coordination across the value chain of production through to its final products (such as buildings, roads, and automobiles.) 
• Success will require that 1) low CO₂ materials be required in public procurement, 2) new infrastructure such as electric vehicle charging stations be opened, 3) renewable energy production be markedly expanded, and 4) monitoring, reporting, and regulation be designed and implemented to facilitate the envisioned decarbonization process. Clearly, all these changes will not be easy to implement even in Sweden.

Observation #2: Carbon pricing has played an important role in starting a transformation process to reduce CO₂ emissions, but free allowances for specific sectors such as buildings, transportation and power production need to be removed if the zero emissions target is to be hit.   Serious carbon pricing is a necessary component to achieving zero emissions, but it alone will not trigger behavior sufficient to reduce emissions to zero. Infrastructure support and policy changes are also needed.

• In the European Union Emissions Trading System (EUETS), a cap and trade structure forms the base for carbon reduction policy within which various entities are provided with free emission allowances allocated across various sectors. Recipients can sell their emission allocations through the ETS.  In Sweden, the price of purchasing such rights for carbon dioxide exceeds $100 per metric ton.  The Mistra report (page 33) indicates that Swedes would be willing to pay $129 per ton to reduce greenhouse gas emissions by 30%.
• Within the EUETS, existent emissions allowances cover only about half of EU emissions including the following sectors: electricity and heat generation, energy intensive industries, and commercial aviation.  A Swedish proposal adopted by the EUETS in 2018 has led to an increased cost per CO₂ allowances from 5€ per ton in 2018 to 30€ per ton in 2020 and recently to over 60€ per ton.

Observation #3: The Mistra report identifies three levels of barriers to implementation of its suggested policy.  Clearly, the magnitude of each barrier varies across countries.

• System level: innovation is inhibited by a lack of strategic investment, a lack of testing of new technology, and inefficient regulations and standards
• Market level:  insufficient competition to drive innovation
• Organization level:  within various entities, legacy cultures sustain existent biases in terms of production, poor incentives for change, and a lack of knowledge regarding how to change

Is the Swedish model possible in the US?

My sense is that US policy makers will not adopt this approach for a variety of reasons.

• The US has not adopted carbon pricing at all.
• The population is much more divided than the Swedish population on the importance of addressing climate change.
• Transformation to a zero carbon emissions economy will be expensive, which has and will continue to inhibit both private and public policy changes. For example, recent rising in the price of gasoline have generated political interest in reducing the gas tax.  Rather than discouraging the consumption of fossil fuels, such a policy encourages the status quo.
• Political resistance in the US is reinforced by continuous political campaigns infused by funding from and lobbying by those businesses and consumers who resist changes in their production and consumption behaviors.  In contrast, Swedish national election campaigns occur every four years and according to Michael Hill, campaigning for the most part takes place over just two months whereas electoral campaigns in the US seem to never stop. Furthermore, Hill points out that voter turnout tends to fall as electoral campaigns lengthen; so shorter campaigns might induce higher voter turnout.

Transformation to a zero-carbon economy requires substantial upfront costs in order to avoid the long term cost and quality of life implications of not addressing climate change.  See my previous posting on this topic. There is little evidence that either the US populous or elected policy makers have the political will, courage, or incentive to trade the short term inconvenience required for long term well-being.