Carbonware in the Globe, Hot Air on Carbon Taxes, & Introducing Ed Smith
If you didn’t catch my piece in the Ideas section of the Boston Globe on Sunday, please have a read and let me know what you think. The editorial team at the Globe is top notch and made a good piece (Big Oil gets clean and the world stays dirty) much better, so big props and much thanks to them.
Personally, the concept of carbon arbitrage (where less scrutinized or regulated companies get higher value out of high-emissions assets than highly scrutinized ones) is absolutely frightening. The piece was specifically on public companies and private companies, but carbon arbitrage could easily play out across countries (Latvia regulates carbon heavily and Estonia doesn’t, so Latvian oil fields are sold to Estonian companies which value them more highly), states, or different sizes of companies - anywhere that regulation or pricing is applied differently. That doesn’t mean that we shouldn’t do the work of getting the rules in place to decarbonize, just that the work won’t be truly effective until we get it consistent - otherwise capitalism will find a way around it. Alternatively, if we do get the rules and incentives right, capitalism will drive the innovation and transformation needed to rapidly decarbonize. We are in the midst of the most appalling market failure ever, and while the path to decarbonization will not be painless (the effects of mining so many heavy metals on a large scale will not be trivial), the actual outcome we are aiming for is clear.
A number of people reached out to me after the piece came out saying some version of either “hallelujah, the world needs a carbon tax” or “carbon taxes don’t work, people keep voting them down”. I’ll pull a classy rhetorical move and say “you’re both right”. Yes, though there have been more and more taxes over the years and effective prices have been rising, there are more examples each month that show carbon pricing being voted down.
Yes, Canada’s tax finally moved its way through the Supreme Court, and is rising from $20/ton in 2019 to $40 this year, and Justin Trudeau said it would get to $170/ton by 2030. But here’s the rub, and likely the reason the political economy worked there - every citizen of Canada gets a substantial tax rebate, and the biggest beneficiaries are the lowest income.
I think we’re marketing it all wrong - we’ve inverted it. Though I’m not in the business of giving advice to politicians, it seems relatively straightforward to get one in the US. Turn it on it’s head. Say that our goal is to provide checks to every single American that meaningfully shore up their incomes and give them the freedom to pursue the decarbonized future of their dreams as they deem right for them. And in order to fund that future dream for every single American, we are going to put a fee in place for every bit of evil nasty greenhouse gas pollution that big nasty companies emit (let’s leave aside that it’s personal consumption that drives much of it). Never forget that carbon taxes are broadly popular in the US when marketed right - 2/3 of US voters support a carbon tax at least on fossil fuels if it’s rebated to consumer. And better yet, we’re going to use this as a way of punishing big bad old China - because everyone who imports anything into the US is going to have to demonstrate that their country has taxed the carbon in their imports at the same rate, or else they’ll be subject to paying an equal amount. A “pollution tariff”. Heck, at this point the API (American Petroleum Institute) and several shipping majors including Maersk are saying they want this kind of carbon tax. We just need a way to sell it to a US administration that has understandably said they will not raise taxes. This calls for political legerdemain - let’s sell this properly - we’ve seen in this moment of the pandemic that the US can take broad populist redistributive economics and make them work politically.
And for anyone who says “carbon pricing is just the wrong way to go about it, we need more urgency”, I’ll play the economist geek answer: anything you do to make carbon more expensive or difficult to emit is a price. If you outlaw it completely in a certain sector (leave aside whether that’s actually feasible or desirable or efficient), then the price is ‘theoretically infinite’ but in reality the price is the civil or criminal penalty that you’d face if you broke that law. If enforcement is lax or fines are low, then your expected “cost of emissions” is low. If we are going to make carbon scarce, then the “cost of carbon” is going to go up - whether there is an actual literal price on carbon emissions or not. I recognize that that is an annoying tic for many people who are not economists - “you say you want a carbon price, but then you say any mechanism which results in successful decarbonization is a carbon price!?!?” Well, yes. If we decarbonize, carbon gets scarce. If it’s scarce, then there’s a reason it’s scarce, which means that the ‘cost’ of emitting it went up, otherwise people and companies would have just gone on emitting it. Tautological, circular, but it works for me. And the implication is that we need strong & consistent rule-making. If you don’t like that line of thought, you’re going to have all kinds of objections to the way I think in other arenas. Yes, it’s too late, and yes we need more urgency - at this point we need to have all kinds of inefficient but effective hard legislation and rules which cut emissions faster in certain sectors than a tax could achieve. But we ALSO need a carbon tax which works across sectors to back up those rules and set the wheels of capitalism in motion, because no one can make enough rules to decarbonize the whole world.
All that said, right now the EU is trying to get a carbon tax moving quickly through proposing their own border adjustment to their already successful carbon tax system on energy, transport & steel, and the US is not playing ball - yet. The negotiations are fascinating to observe, but the stakes are very high. If they aren’t pulled off deftly, they’ll dominate COP26 in Glasgow later this year without a result. The FT article below is definitely worth reading for a recent update (skip down below the vaccine section if that’s not your thing).
Please join me in welcoming Ed Smith to Carbonware
I plan to have several co-authors join me in writing for Carbonware as we explore how decarbonization can & should work. Please join me in welcoming Ed Smith as the first guest author.
Ed is a colleague whose career path resembles my own, just 10 years earlier. Ed and I got to know each other as fellow BCG-alumni working at Wayfair, where he ran Wayfair’s Canadian business. Ed then left for his dream job, starting the Carbon business at Indigo Ag.
I was intrigued enough by the stories he told to go join him at Indigo and take the reins of the global carbon business as it expanded, and we worked together closely for a year. Ed’s expertise in carbon is deep, ranging from a practitioner developing a carbon credit methodology, realizing a carbon project on the ground (literally on millions of acres), to the more esoteric policy landscape, to working directly with corporate buyers as they embark on their decarbonization journey.
I’m glad to have Ed joining this week as our first guest author.