Why a Shift to Renewables Cannot Happen without a Carbon Tax

For many reasons, this is a great time to be a renewable energy advocate, and a lot of companies within this sector are happily riding this current boom. Despite the chokehold oil and gas companies have on the economy and the global political system, clean energy continues to grow worldwide -- even here in the U.S., now the world’s largest oil and gas producer.

Despite very low oil prices (never mind the recent small uptick in costs), which many believe is Saudi Arabia’s chess move to demolish energy sectors of countries including the U.S., Russia and Iran, renewable energy technologies such as wind power and solar continue to scale. Renewables have become cheaper, more efficient and more accepted nationwide, from Gov. Jerry Brown’s affinity for solar in California to the wind power boom in Rick Perry’s and Ted Cruz’s Texas. And despite the fact that gasoline is under Michelle Bachmann's $2 a gallon threshold in much of the U.S., the sales of electric vehicles keep increasing.

More corporations are investing in renewables, many states are still offering incentives to invest in clean power, and electric cars keep getting better and better. Even the Middle East oil kingdoms of Saudi Arabia and the United Arab Emirates are investing in solar power as they visualize a post-oil future (thanks largely to Masdar). So, the clean energy crowd can declare victory, right?

Not so fast, say a trio of professors from the Massachusetts Institute of Technology and the University of Chicago.

In a recent paper, Will We Ever Stop using Fossil Fuels?, published in the Journal of Economic Perspectives, Thomas Covert, Michael Greenstone and Christopher Knittel argue:

“Our conclusion is that in the absence of substantial greenhouse gas policies, the U.S. and the global economy are unlikely to stop relying on fossil fuels as the primary source of energy.”

The bottom line in their argument is that, yes, such clean-energy technologies as solar, wind and battery storage have become far more efficient and will continue to improve over time. But in parallel, so has the oil and gas industry here in the U.S. and worldwide. In fact, increased efficiency in exploration is largely what has made America the world’s largest oil and gas producer in recent years. Better oil exploration technology has made it easier to “drill baby, drill.”

In 1949, the odds of a successful exploratory well was only 20 percent, and even drifted as far down as 16 percent 20 years later. But with the discovery of the Alaska North Slope field, that rate of success doubled by 1979. And by 2007, it peaked at 69 percent. That rate is hovering around 50 percent, but one out of two is still a pretty respectable batting average. The result is that the U.S. alone has at least 50 years of oil and gas reserves. If they dry up, well, the U.S. Energy Information Administration has estimated that as much as 93 percent of the world’s shale oil and 90 percent of shale gas are outside the U.S. Improved oil extraction and recovery rates also have bolstered the conventional energy sector.

So, what is the solution if society is going to reduce the risks associated with climate change? The paper’s authors argue that a carbon tax is necessary if the U.S. is going to be serious about addressing carbon emissions — which continue to rise as a stable economy and population growth only keep boosting U.S. emissions. And considering the current low prices of fossil fuels, now -- or really, yesterday -- is the time to do it. Not only would a tax further encourage the development of clean-energy technologies, but it could also offset the cost of externalities that fossil fuels foist upon the economy — examples of which include the increased costs of health care services, along with the expensive infrastructure costs due to rising sea levels.

Considering the fact that the current U.S. president cannot even get a Republican on the Supreme Court this year, the probability of Congress enacting such a tax is about as likely as Jeb Bush and Donald Trump running together on the GOP ticket. But as MIT’s Professor Knittel told his university’s press office: “Taxes on externalities are not inconsistent with the free-market system. In fact, they’re required to make the free-market system achieve the efficient outcome. This idea that a pure free-market economy never has taxes is wrong. The point of the paper is that if we don’t adopt policies, we’re not leaving fossils fuels in the ground.”

Image credit: Leon Kaye