The US infrastructure bill creates lots of "good climate things", but no carbon scarcity

Or: “we've met the enemy, and it is us”

It’s not just heat waves, fires and floods of staggering proportions that are hitting the headlines this summer. We have also seen a wave of climate legislation & regulation proposed in Europe, the US, China and beyond. We’re in the run-up to COP26 in Glasgow, and country-level commitments are pouring in, both good (China set a target date for net zero, albeit 2060, but included all GHGs not just carbon), and potentially bad (India didn’t show up at the pre-meetings, and hasn’t submitted revised goals as of this writing).

But what’s important for corporate leaders and voters to recognize amid all this news is two ideas underlying where we are:

  1. We’ve already made an enormous amount of progress on the supply of the things we will need in a decarbonizing and decarbonized world

  2. We’ve made zero aggregate progress globally in actually decarbonizing the world1, and until we make rules that actually create carbon scarcity2, it’ll be slow & indirect going

This is a result of the way many governments work - they like to give money to people & companies for doing more of some things, and they hesitate to take money away from people & companies.

Let’s pause for a moment and recognize how far we’ve come with these supply interventions. Policy and ingenuity have delivered gains in solar technology and scale where it’s more profitable to build a new solar array and operate it than it is to keep running a coal plant. Wow. Heat pumps are, for most people, a great investment in heating and cooling your home vs an oil or gas furnace. EVs have come far enough that some people prefer them to similarly priced ICE cars on the merits of speed & tech stack alone. Wow. Those achievements are amazing, and they have come with virtually no meddling with the demand side, all supply side. That’s a lot to congratulate ourselves for.

So, the US, the infrastructure bill has a fair bit to like in it, and like most large-scale bills, there’s a little something for lots of folks. EV chargers? Check. Grid infrastructure and FERC empowerment? Check. Public transit? Check. Direct Air Capture R&D? Check. Money to keep older nuclear plants running while we build the fleet of renewables we’ll need? Check. Lots of supply side climate goodies.

But what’s not in there? Carbon scarcity. There’s nothing that actually makes it so that we can’t emit as much CO2 / other GHGs as we like3. There are complements for a decarbonized world (you sure are going to want an EV charger nearby if you own an EV, and hydrogen hubs are another path forward for heavy transport and other hard to decarbonize sectors) and substitutes for high carbon equivalents (tax credits sure are nice if you were on the fence about buying an EV, and we can argue about the Direct Air Capture R&D hubs and if they are a way of driving scarcity4). There are all kinds of flavors of building new things - each of which may be great in itself, but each of which actually has a carbon footprint itself, at least in terms of the embedded carbon emitted in producing it. But there’s no “let’s actually emit less”. And it’s obvious why, at the most basic level, because it’s politically kryptonite to make things people need more expensive. Raising the federal gas tax by a penny? Hasn’t happened in decades - it was last raised in 1993 because voters don’t like it. Would consumers actually notice once it was passed? Nope. But it would make for terrifying political attack ads. Heating oil? Incentivize substitutes (like natural gas furnaces), but don’t make the actual problematic thing more expensive, or, god forbid, institute laws to phase it out.

So now those of us who want carbon scarcity (aka, mechanisms which actually directly result in emissions reductions) are waiting for the reconciliation bill, which contains the Clean Electricity Standard (CES), which is a kind of “feebate”. Utilities which shift to the targeted portion of renewable energy get a reward, ones which lag and don’t reach the amount of renewables pay a penalty.

But why, some will ask, don’t we just build all the new things that we’ll need in a decarbonized world? Haven’t we gotten to the point where it’s already less expensive to build and operate a new solar field than to just operate a coal plant? Why yes, we have. But unfortunately, the real world doesn’t just automagically shift just because economics says it should. If you own a coal plant today, and you’re making less money than you used to, and it’s just bumping along but still marginally profitable, you aren’t going to shut it down, and if you did, you woudn’t get a good price & immediately have the capital to deploy into a solar array. You’ve likely already paid off the cost of construction, and you’re just going to ride it down as long as it lasts - so long as the marginal profit is positive (ie, you make $1 when you’re operating) you’re going to keep it going. And, because you’re making so little money, you’re likely to defer maintenance and investment in keeping it up to snuff and emissions low. These are called zombie plants, and there are plenty of examples. So what’s going to force those marginal plants offline sooner? Only if their actual operating profit goes down below zero. And that would require carbon scarcity - some (negative) value or cost being placed on the emissions themselves, or a regulation capping the amount. It’s true that if retailers of electricity are forced by a CES to buy a greater proportion of zero-carbon electricity, and less dirty electricity, that will eventually change the price these plants receive. But it’s an awfully indirect method of getting there.

Recall too that building new things today (regardless of how important they will be in a decarbonized world) almost always has a carbon footprint. You might really want an EV charger, but the cement and electricity needed to build it are likely going to put more CO2 into the atmosphere. So you have to run a calculation that determines “is this zero-marginal-carbon machine worth the incremental fixed embedded carbon emissions of building it?” And the answer, in most cases is yes - as Saul Griffith’s magisterial 1 Billion Machines work points out. However, without carbon scarcity, it’s very difficult to measure which investments with real embedded carbon are most worth it vs which will have limited impact.

And the CES only affects a single sector - that pesky ‘E’ - electricity. There’s no CFS (clean fuel standard) to go along with it, nor the beginnings of carbon scarcity in all the other sectors that need to get going on forcing the worst out of business - agriculture, steel, airlines, and on and on.

Why this is scary is that the US is again kicking the can down the road. The signal that companies should start to work actively on how to deliver their net zero 2050 commitments did just get more serious for electricity (and, admittedly for the users of electricity), but it was deferred again for every other sector.

Smart CFOs who rely on power as a material cost will begin to incorporate a calculation for how their electricity costs may change over the coming decades, and some may start sourcing zero carbon electricity. This, in turn, may well result in a number of efficiency projects. But those who are either direct CO2 emitters themselves, or who rely on inputs (like steel) which are not yet facing carbon scarcity, will need a real kick from investors to begin planning for when the regulator comes for them. More climate focused investment funds being raised mean that investors are betting decarbonization (read: carbon scarcity) will happen, which does align incentives for some of them to lobby the regulator to begin the job.

A bright spot remains Europe’s Fit For 55, which continues to increase its ambition in both the set of sectors targeted, the degree of emissions reductions targeted, and the consistency of mechanisms leading to more efficient outcomes. While it will require a long period of input and won’t necessarily come out exactly as planned, it’s the right direction. International alignment (via a CBAM, or the proposed but hard-to-imagine US “carbon tariff sans carbon tax”) will be important, because heavy emissions companies are starting to see the carbon arbitrage playbook emerge5.

So, we begin to see the outlines of carbon scarcity appearing in the US with the Clean Electricity Standard - assuming it is passed. And electricity is a big chunk of US emissions, so this is no joke and needs all the support that can be mustered. It remains to be seen just how much will make it through the legislative process, and what will be in the eventual reconciliation bill.

But keep that hypothetical marginally profitable coal plant in mind6. Think how much carbon scarcity you and your company want to support and prepare for in order to achieve the energy transition we’ve collectively promised.


Global emissions are on track to another record in 2021; higher than they’ve ever been before, after a pandemic dip in 2020.


Note: there are some rules that do create scarcity in some sectors and geographies, most notably the EU ETS which caps emissions from the heaviest carbon sectors and ratchets them down over time to ensure they meet their Paris commitments. Canada has a similar mechanism. Other countries, like the US, have no mechanism for scarcity (though some states like California have mechanisms). And some countries have mechanisms that could theoretically work, but the constraints that have been imposed don’t really bind or drive behavior because they’re set too lenient - China is the poster child for this.


Anyone who’s followed me knows that this carbon scarcity is what really truly matters. We can build all the other great things we need in a future where we are emitting less carbon - but if we don’t limit the amount of carbon dioxide (+ methane, other GHGs) we emit, then we’re likely to do all the old dirty stuff AND the new cleaner stuff, and that’ll result in a world that is just as dirty if not dirtier. When hybrids were introduced, instead of improving mileage standards we left them stable, and so Americans just took advantage to build bigger cars. We need constraints, otherwise the gains we get on the supply side don’t manifest in reductions on the demand side.


Much has already been written about whether DAC or other forms of CO2 removal / CDR constitute complements to fossil fuel usage and thus are a form of moral hazard that discourages us from creating carbon scarcity or cutting emissions.


Look no further than the final paragraph of this article from on carbon taxes for a chilling reminder of why we will rapidly need consistent global policies:

It will be a fine balancing act, therefore, to make sure you both "punish" polluting importers for their emissions and stimulate your domestic businesses to invest in cleaner production. The act becomes even finer in light of plans to make carbon increasingly expensive. The higher the price of emissions goes, the more businesses would need to invest in reducing their footprint. Eventually, many may opt for relocating and emitting instead of paying through the nose for low-emission output.


Speaking of coal plants, recent reports say large investment banks are courting investors willing to forgo some returns in order to fund the purchase and decades-early retirement of some Asian coal plants. This is emerging news - it’s not clear who the purported investors are, what returns are on offer, nor what the potential scale is - but in terms of actual reduced global emissions, these coal plants would be some of the highest priorities.