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Why the cost of carbon is increasing — and how that affects climate policy


Here in the U.S., many power companies and manufacturers have little idea about how much carbon they emit. Whereas in Europe, they know exactly how much. That's because they have to pay for it. It's known as a carbon market. The idea is to give businesses flexibility by letting them buy the right to pollute instead of having the government set limits on each power plant or factory. Businesses bid against each other for these pollution rights because there are only so many for sale. And now the price of carbon is going up. Michael Greenstone directs the Energy Policy Institute at the University of Chicago. Here's how he explains the jump in price.

MICHAEL GREENSTONE: I think we're swinging out of the COVID recession and there's tons of economic activity going on around the world, and that's leading people to drive more, buy more things and use more power. And so what it means is that there are more people competing for a fixed set of allowances, and that causes the price to go up.


KELLY: The price of carbon recently hit 90 euros a ton in Europe. It could hit 100 euros by the end of the year. Greenstone says those rising prices incentivize polluters to pollute less. They also present an opportunity for companies that make green technology.

GREENSTONE: They send a signal to firms, hey, come up with a new idea on how to produce energy with less carbon or to pull carbon out of the atmosphere or to bury it as it comes out of the smokestack. And right now, that price signal is, you know, largely not present around the world, and higher prices send a much clearer signal. I expect if we had consistent carbon pricing, they would pave the way to kind of a golden era of innovation in climate.

KELLY: So, in a way, is this carbon markets doing exactly what they were designed to do? They're supposed to make it financially attractive for companies to pollute less. If it's costing a company more to pollute, that's the market kicking in and doing exactly what it was designed to do.

GREENSTONE: You know, it's in the heart of every economist that rather than having government dictate to plants or to industries exactly how they reduce their carbon emissions, that there be this price signal and then that can set off creative ideas and innovation and looking for new ways to cut carbon. But the key thing is that in the places that have these cap and trade markets, the level of CO2 emissions is fixed.

KELLY: And what is the set up here in the U.S.? I mentioned in Europe, power companies know exactly how much carbon they emit; here in the U.S., not so much, although California has a robust carbon market. Is it state by state?


GREENSTONE: There's effectively two markets in the U.S. California has one of its own. And then there's kind of 10 New England or mid-Atlantic states that have banded together for something called the Regional Greenhouse Gas Initiative, or RGGI. And they have their own carbon market. But I think if you were to step back from it, what's really noteworthy is carbon pricing is an example of kind of American exceptionalism, and probably not the American exceptionalism we want. We're the only G-7 country without a national carbon price. And I think, you know, to be kind, or maybe unkind, the reason that we're exceptional with respect to carbon pricing is that we're effectively ignoring the science and economics of climate change and just wishing they weren't true.

KELLY: For ordinary people listening, we all obviously have a stake in our planet and climate and wanting to rein in emissions, which is what these markets are designed to do. Is there any other practical impact? Do higher prices for polluters in the carbon market translate down to, I don't know, bigger utility bills that are going to hit my mailbox?

GREENSTONE: Absolutely. And some people think of that as a bug. I think of it as a feature. If you're causing carbon emissions, you're causing damages to my children, your children and their children. And there should be a penalty for that. And that's exactly what carbon pricing does. So it absolutely filters down. And that filtering down is what causes people to make different choices over the long run.

KELLY: I understand there's some debate now over whether prices are too high, whether government should step in and do something about that, or to the point you were making earlier, that this is exactly how these markets are supposed to work. Who's right?

GREENSTONE: Oh, I think it's very clear, even with the run-up in Europe, no, they're not too high. In fact, I would say they're too low. And so even in Europe, where the prices are maybe about 90 euros, those prices are lower than the damages from releasing an additional ton of CO2 as best we understand.

KELLY: Let me guess, you're also the guy who argues that American gas prices are too low and we should be paying more to use less. I'm going to make you really popular with people listening.

GREENSTONE: Yeah. I think they're too low relative to the damages that we do when we drive. And we might not like it. We might not like paying for higher prices, but when we're using gasoline, we're increasing the odds of disruptive climate change and making our lives and our children's lives and their children's lives more complicated and difficult. And the idea of doing that to my children is not very appealing, and even though I dislike paying the higher gas prices, but that's just the way it is.

KELLY: Michael Greenstone, professor and director of the Energy Policy Institute at the University of Chicago. Professor Greenstone, good to speak with you. Thank you.

GREENSTONE: Thank you. Transcript provided by NPR, Copyright NPR.