The atmospheric concentration of carbon dioxide (CO2), the main contributor to global climate change (1), now exceeds 412 parts per million (ppm) compared with approximately 280ppm at the start of the industrial revolution. As climate change accelerates and its impacts become more severe and widespread, the recently concluded 26th Conference of the Parties (COP26) UN Climate Summit in Glasgow issued a statement that expressed “alarm and utmost concern that human activities have caused around 1.1°C of global warming to date and that impacts are already being felt in every region.” At the same time, national commitments (called Nationally Determined Contributions, NDCs) to reducing greenhouse gas emissions remain woefully inadequate to avoid the worst and likely irreversible climate damages.
So why is it that we are still pumping more than 30 billion metric tons of CO2 into the atmosphere every year? One reason is that greenhouse gas pollution remains largely free, i.e., unregulated, for many cogs in the wheel of the world economy. The atmosphere is also a global commons, a term used to describe a group of natural resources that are shared by and freely accessible to everyone and that are in finite supply. These types of resources tend to be overexploited because of ‘free-riding’, i.e., the selfish but economically rational determination by resource users (in this case carbon emitters) that they are better off avoiding emission cuts even if others reduce theirs.
Carbon dioxide emissions are essentially an unwanted byproduct of a world economy that is still heavily dependent on burning fossil fuels—65% of worldwide carbon dioxide emissions originate from fossil fuel use in energy generation, including transportation, and industrial processes and another 11% come from agriculture, forestry and land use changes.
Economists refer to uncompensated environmental harms that result from someone’s actions as negative environmental externalities. Essentially, the market fails to properly account for the damages caused by the carbon emissions in the prices of goods and services.
This market failure can be corrected in three main ways: command-and-control regulatory approaches prescribe mandatory emission cuts for individual emitters in order to achieve the desired aggregate emission reduction, but they are typically economically inefficient.
The other two options—cap-and-trade systems and carbon taxes —are market-based instruments. Cap-and-trade systems provide emitters with a total and declining quantity of emission allowances per compliance period via free allocations or auctions. The emission allowances can then be sold and bought in an emissions market. Market participants who can abate CO2 at costs below the prevailing allowance price can sell excess permits to those who are more emission-intensive, thereby giving cleaner businesses and organizations a leg up in the market while the declining cap over time forces everyone to invest in decarbonization.
The third option is to impose a carbon tax on emitters. Carbon taxes make carbon-intensive processes and products more expensive compared with lower carbon alternatives, thus spurring (i) short-run substitution away from dirty goods and services and (ii) long-run investments in research and development of cleaner technologies and products.
Many economists prefer carbon taxes for their economic efficiency but they may in some circumstances raise concerns over regressive effects, for example, in situations where lower income households depend disproportionately on older, less fuel efficient cars, longer commutes and poorly insulated homes without readily available or affordable alternatives. Such equity concerns can be addressed by redistributing some of the carbon tax revenues in the form of a ‘carbon dividend’.
The next question then is How big should the carbon tax be? Existing proposals, such as that of the Citizens Climate Lobby (CCL) call for an initial tax of $15 per metric ton of CO2e (2) and escalating by $10 every year. Canada imposed a $20 per ton CO2e tax in 2019 that will grow to $50. Recalling that climate change is an environmental externality impacting a global commons, the socially efficient carbon tax should be set equal to the social cost of carbon (SCC), which is the present value of estimated (global) societal damages caused by an additional ton of carbon dioxide emitted today (or reach to it over time)(3). The Obama Administration’s Inter-agency Working Group on the Social Cost of Carbon conducted an in-depth analysis and determined a 2021 value of $52 per metric ton of CO2. Other studies put the value at $125 or even higher.
According to the World Bank’s carbon pricing dashboard, 35 national and sub-national jurisdictions currently have carbon taxes in place. Corporations and higher education institutions, too, are beginning to use carbon taxes or fees to achieve carbon emission reductions by stimulating internal innovation and emission-reducing behaviors and decision-making.
Microsoft, for example, uses an internal carbon tax of $15/metric ton for its direct emissions and those associated with purchasing electricity. It also imposes $5 per ton (and rising) on emissions associated with its supply chain (4). The company reports that the charge is effective in integrating emissions tracking in supplier contracts and motivating product designers to reduce the energy consumption of devices such as the Xbox. In higher education, Yale University is pioneering carbon pricing by recently revamping its internal fee to incrementally rise to $50/per metric ton CO2 equivalent by 2025. It applies to top-level administrative units for building-level carbon emissions and the revenue supports efforts to reach zero-emissions by 2050.
Williams College, too, incorporates carbon pricing into its operations and decision-making in several ways. Planning, Design and Construction (PDC) uses a range of ‘carbon shadow prices’ of $52-$150/metric ton to identify and select investments into building energy efficiency and retrofit measures that would otherwise not have been net-positive on a cost-benefit basis. Since many construction projects come with a substantial carbon burden due to their material requirements such as concrete and steel, PDC has also begun purchasing offsets for this so-called embodied carbon. Looking ahead, the Energy and Carbon Master Plan that is currently being developed with engineering firm RMF will provide the blueprint for the College’s largest-ever transformation of the campus heating, cooling and domestic hot water systems with the goal to reduce scope 1 emissions by at least 80% by 2035 and with a view towards net-zero by 2050. The College, furthermore, eliminates carbon emissions from purchased electricity with the help of renewable energy certificates (RECs)(5), and neutralizes the remaining net emissions through the purchase of carbon offsets.
As we aim to reduce our reliance on external carbon offsets over time, an important next sector to tackle is College-sponsored travel, which accounts for approximately 30% of our net emissions in a normal (non-Covid) year; roughly evenly shared between academic departments and administrative/operational units. Electrifying the campus vehicle and mobile equipment fleet (including lawnmowers) will make a substantial contribution, but much of College-sponsored travel is outside of our control in terms of fuel and technology use. That said, we have some agency in choosing if and how we travel and move about and can educate ourselves about the carbon footprint of those choices. Incorporating carbon pricing in transportation helps raise awareness and reduce emissions. The recent CEAC proposal to add a carbon tax to air travel has highlighted that doing so in an effective, fair and equitable manner is not easy, but the accelerating and deepening climate crisis calls on all of us to take action without delay.
-Tanja Srebotnjak, Director of the Zilkha Center for Environmental Initiatives
1. Atmospheric water vapor is the largest contributor to Earth’s so-called greenhouse effect. However, the amount of water vapor that the atmosphere can hold is temperature dependent, i.e., the maximum amount of atmospheric water vapor is positively correlated with its temperature. Carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O) and other greenhouse gases are non-condensable and can thus continue to increase in concentration in the atmosphere, which causes atmospheric temperature to rise, which means it can hold more water vapor, thereby positively increasing the greenhouse effect and creating a positive feedback loop.
2. The ‘e’ in CO2e stands for ‘equivalents’ and allows for all greenhouse gases to be converted to equivalent units of carbon dioxide based on their respective global warming potential.
3. Given carbon dioxide’s long residence time in the atmosphere, the damages also accrue over a long period. These long-term damages can be converted into dollar estimates today using net present value calculation.
4. There are 3 scopes of emissions: scope 1 refers to direct greenhouse emissions that occur from sources that are controlled or owned by the organization, scope 2 refers to indirect greenhouse gas emissions associated with the purchase of electricity, steam, heat, or cooling, and scope 3 emissions encompass activities from assets not owned or controlled by the organization, but that are part of its operations. Microsoft’s $15/ton CO2e apply to scope 1 and 2 emissions and the $5/tone CO2e to scope 3.
5. As part of the Farmington solar PV project and by purchasing additional, unbundled RECs.