GASOLINE prices are above $4 per gallon in much of the country, a reminder that our dependence on oil carries a great cost. President Obama has promised that the Justice Department will be vigilant in pursuing price-gouging at the pump, but what we really need is to address the full set of energy-related problems, with a focus on spurring clean energy innovation.
Our trade deficit arises in large measure from the hundreds of billions of dollars we pay for foreign oil. The imbalances threaten America’s economic stability and national security. Our consumption of fossil fuels and our energy inefficiency are a drag on our competitiveness and increase air pollution and the threat of climate change.
To compete globally, we need to encourage clean energy innovation while letting the market decide which particular technologies prevail. Experience in fields like information technology and telecommunications suggests that creating demand for innovation is far more effective than subsidizing company-specific research projects or providing incentives for particular technologies. Governments just aren’t good at picking winners; witness the billions wasted on corn-based ethanol subsidies.
The best way to drive energy innovation would be an emissions charge of $5 per ton of greenhouse gases beginning in 2012, rising to $100 per ton by 2032. The low initial charge, starting next year, would make the short-term burden on consumers and businesses almost negligible.
An emissions charge is not a radical idea; making people pay for the harm they cause lies at the heart of property rights. European countries participate in a cap-and-trade system that effectively imposes a carbon charge. Even China is pushing to shut down inefficient coal-burning plants by imposing emissions charges. Thus, instituting a carbon charge would have only a minimal impact on American competitiveness — and might even improve it as the incentive for efficiency and innovation kicked in.
Our proposal would apply to all greenhouse gas emissions, so that everybody, and every fossil-fuel-dependent form of energy, would be included. Coal-burning power plants would pay based on the emissions measured at their smokestacks. Oil companies would pay for every gallon of gas or oil delivered. Yes, these costs would be passed on to consumers, but this is what motivates changes in behavior and technological investments.
Some will say that even the modest emissions charge we propose is politically impossible, given the death of the cap-and-trade bill that the House passed in 2009. But the ballooning federal deficit has created a new political imperative. A modest emissions charge will look attractive compared with raising individual income taxes or burdening the economy with new corporate or payroll taxes.
Let’s be clear: the main goal is not to raise revenue. It is to create a powerful incentive for a gradual but steady shift toward clean and sustainable energy sources. In the short term, an emissions charge would create a major impetus for a move from oil and coal to natural gas, with its much lower carbon content. Gas would likely become the preferred fuel for new power generation, and by extension, for transportation, as electric vehicles become cost-effective alternatives to internal combustion cars.
Technological advances have made vast quantities of domestic shale gas accessible. The shift to gas as a transitional fuel would allow the United States to cut greenhouse-gas emissions by up to 50 percent over the next decade. In the longer term, the prospect of a steadily rising emissions charge would focus the private sector’s attention on energy-saving and carbon-reducing innovations. The calculus for investments would immediately change. Anyone pursuing an energy-consuming project, like a power plant, would factor in the rising long-term charge into their choice of technology. People buying new cars would have an added incentive to think about fuel economy.
Entrepreneurial spirit would be unleashed in companies from multinational enterprises to back-of-the-garage inventors. By stimulating major gains in energy productivity and renewable energy, our approach would help stimulate global growth and free up resources to meet other pressing needs.
In tackling our trade imbalance, budget deficit, competitiveness challenges and oil-related vulnerability — not to mention climate change — our plan has a powerful logic. And because it harnesses our capacity for innovation and entrepreneurship, it could attract broad support, and a bipartisan majority in Congress.
Daniel C. Esty is the commissioner of the Connecticut Department of Environmental Protection. Michael E. Porter is a professor at Harvard Business School.
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