“Internalizing Costs”

The tendency to frame environmental degradation in terms of externalized costs (usually called “externalities”) is rooted in the work of English economist Arthur Pigou. In 1920 Pigou suggested that private producers whose production had harmful effects on the public (including the costs of pollution) could be taxed to offset the costs. Decades later, K. William Kapp’s 1950 The Social Costs of Business Enterprise argued at length about air and water pollution as paradigmatic cases of private enterprises displacing costs onto a wider public. Around the same time even Milton Friedman acknowledged that the market cannot account for “neighborhood effects.”

Interestingly, Kapp’s discussion of the “costs” of market systems make clear that it would be very difficult to adequately monetize environmental costs. His suggestion that we need to orient production toward “social needs” even sounds vaguely socialist:

Market economies have continued to define their objectives and to gauge their performance in terms of questionable economic indicators which fail to take adequate, if any, account of social and environmental costs of productive processes . . . New criteria and guide-lines of economic and technical development, which must be directly related to individual and social needs, seem to be essential.

Kapp’s doubts notwithstanding, the overall goal of these kinds of analyses of social costs was to empower the public sector to solve the costs displaced onto society by private actors and market systems. And over time they evolved into the idea that environmental costs could be internalized in market prices.  For example, Ronald Coase in “The Problem of Social Costs” (1960), argued that clear private property rights can allow individuals to resolve externalities purely through private contracts.

Environmental economists in particular have found this framework appealing, believing a system of taxes or fees could be deployed to harness the profit motive toward a green future. The idea is that environmental costs not reflected by the market could be monetized into prices. Al Gore mainstreamed this logic in his 1993 book Earth in the Balance: “[we should] find ways to put a price on the environmental consequences of our choices, a price that would be reflected in the marketplace.”

Indeed, pollution could not only be priced but also traded through emission credits (what eventually became known as “cap and trade”). In this kind of system, the overall level of pollution is capped (and the caps should in theory decrease), and because emissions are priced and traded between polluters, the companies with the least cost pollution abatement can benefit from their good environmental behavior.

Today the principle of cost internalization is so dominant that many sectors of the climate movement believe that if we can just force polluters to internalize the true ecological costs of their actions, the market will provide the right incentives to spur a transition away from fossil fuels.

James Hansen, for example, strongly advocates what he calls a “fee and dividend” program (fee being a nicer way to say tax) with the goal of monetizing the ecological costs of climate change. Hansen argues, “at present fossil fuels are the dominant energy only because the environmental and social costs are externalized onto society as a whole rather than being internalized into their prices.”

It’s one thing to promote a carbon fee (or tax) but Hansen was recently quoted criticizing Obama’s “Clean Power Plan” because it uses state power to mandate shifts in the energy sector. “Government shouldn’t be making that kind of decision [to choose energy sources],” he argued. This sentiment reveals an astonishing faith in the market and price mechanisms.

The common-sense need to “internalize costs” has also been accepted by some radical direct-action activists. Tim DeChristopher has suggested that we need to engage in radical direct action to “become the carbon tax,” thereby imposing costs on the fossil fuel industry: “Until there is a carbon tax that accounts for the externality of climate change, we have to be the carbon tax and impose that cost of doing business on the fossil-fuel industry.” Admittedly this is a brilliant way of empowering grassroots struggles, but the logic remains the same: once we internalize the “costs” of fossil fuels it is the market that will seamlessly guide us to a clean energy future.

Interestingly, the carbon tax has emerged as a kind of left alternative to the more obviously problematic cap-and-trade system (which, despite overwhelming evidence of its ineffectiveness, appears to be the bedrock of the Paris agreement, and has been unveiled as China’s new climate policy). Whereas the carbon tax appears strong, unequivocal, and sweeping, a cap-and-trade system is too flexible, prone to fraud and profiteering.

Yet the carbon tax appears entirely out of reach in the political context of the United States, despite Bernie Sanders’s clear support for such a measure. Even Obama’s cap-and-trade policy — with substantial support from the fossil-fuel industry — was politically defeated by only the second year of his first term (never to be revisited).

The defeat shows the magnitude of the struggle ahead. Both cap-and-trade and carbon taxes are market-based policies based in neoliberal ideology. Real progress will require a left alternative that focuses on the role of the public sector in actively constructing our energy transition.

Beyond Cost

We need to construct new political imaginaries beyond the carbon tax (and certainly beyond cap and trade). Perhaps the most obvious reason is that any policy that has the support of Exxon-Mobil is not worth supporting. But, even on policy grounds, the idea that a tax could reflect “true” ecological costs is dubious.

As many critics of market-based environmental policies have shown, ecological systems are complex and it is difficult to quantify the “costs” of something like the loss of a wetland system or the destabilization of the climate. The functionality of a carbon tax would also depend on a stable energy price. But energy markets are extremely volatile.

In July 2008, for example, the price of oil was $147/barrel. After the financial panic of fall 2008, the price collapsed to around $30. Imagine if the climate movement had imposed a carbon tax equivalent to $50/barrel beforehand, in the wake of An Inconvenient Truth and the IPCC report of 2007. In July 2008, the carbon-adjusted cost of oil would have been around $200; in December it would have been $80.

Moreover, when energy markets are stable they tend to stabilize at low levels. The internal contradictions of oil (and other commodity) markets are geared toward overproduction and glut that can last decades (much like the postwar period and the 1980s–90s). With the recent collapse of oil prices, we might have a decade or more of cheap oil. When energy markets are glutted and oversupplied, should the carbon tax be higher to reflect this cheapness? What happens to the carbon tax when markets inevitably rebound and boom once again leading to price spikes?

But campaigns around achieving a carbon tax are not the only example of our acquiescence to markets. We also need to abandon the goal of making renewables “competitive” with fossil fuels. Arguments for eliminating fossil-fuel subsidies rest on the idea that renewables would succeed if they were allowed to compete on a more even playing field with fossil fuels. Instead of ceding the outcome to market competition, we need to consciously demand the abolition of fossil fuels on moral and ecological grounds.

Ultimately, the goals of removing subsidies or internalizing costs are based on the mythical idea that a free, fair, competitive market is not only possible, but also the best means to solve massive social and environmental problems. The public crisis of climate change is not something that should be adjudicated by the volatile forces of the market.

There are also ideological and rhetorical problems with a politics of costs. The framework of cost internalization, whether it comes in the form of a tax or cap and trade, inevitably gets translated into warnings about increased costs for consumers. In an era of wage stagnation and mounting debt, anything perceived as an additional cost will be villainized. It is all too easy for anti-climate forces to use this rhetoric to portray climate policy as a government conspiracy to extract wealth from hardworking populations.

A past example demonstrates the problem. In 1993, President Clinton proposed a “BTU tax” — a fee indexed to the amount of BTUs (British Thermal Units) consumed or generated by electric utilities and other energy-intensive industries.

In response, a broad coalition of fossil-fuel interests, coal-based democrats, and consumers rose up to defeat the bill on the grounds that it would hurt working people; opponents called it “Big Time Unemployment.” One letter to the editor from a citizen in Houston laid out the dangers in stark terms. “You will pay this tax every time you turn on your stove, run your refrigerator, iron your clothes, drive your car, water your lawn or flush your toilet. There is nothing that you do or any part of your life that will not ‘pay’ this tax.”

This kind of resistance to environmentally geared energy policies has persisted to the present day: Obama’s cap-and-trade legislation, for example, was reframed by the right opposition as “Cap and Tax.” Of course, this fits into decades of ideological work constructing taxes as the unjust government theft of wealth from hardworking populations. Insofar as energy policies meant to capture ecological costs will necessarily be administrated by states, all these policies can therefore be constructed as injurious taxes.

By framing our policies in terms of cost internalization, we fall into this trap and fail to offer climate solutions that would be more appealing to people who are economically precarious. Supporters of a carbon tax insist that they support a progressive tax that is aimed only at the rich and fossil-fuel industries.

They assure us that revenues will be redistributed to clean energy and anti-poverty programs. This is perfectly reasonable as far as policy goes, but advocates underestimate how these policy nuances will be drowned out through one simple refrain: “This will cost you.” In an era of neoliberal economic insecurity, this refrain resonates loudly.

If the climate left speaks of costs it all, it should not be in terms of a cost internalized into the market. Rather, it must be crystal clear that we speak of costs paid in class terms — that is, we must be clear that corporations and the wealthy will pay costs to fund benefits for working people. The focus should be on the benefits of clean, renewable, and cheap energy for all.

Public Crisis, Public Solutions

Climate change is a public crisis. It is a crisis of public health. It is a crisis of the public commons, the atmosphere, the climate system, and the coastlines. As Christian Parenti has argued, a public crisis requires public rather than market solutions. There is historical precedent for this.

In the 1930s, FDR enacted a massive nationwide energy plan based on the public construction of dams and the provision of electricity to rural areas in need. While we recognize the ecological problems of this project in hindsight, it is nevertheless an example of an energy project that is framed not in terms of costs, but in terms of bringing energy to people.

The political point was made not by quibbling over complicated policy structures, but through appeals to what people actually needed—affordable, reliable energy. Woody Guthrie, for example, was commissioned to sing songs about the Columbia River doing work “for you and me” by providing hydroelectric energy to the masses.

The cost of wind and solar power are now dropping precipitously. But it will take state power and public investment to build the infrastructure of a renewable-energy economy. Such projects should be promoted as ways of bringing cheaper and inexhaustible energy from the sun and wind to economically struggling working people, and creating good jobs doing socially useful work. Just as our modern fossil-fuel infrastructure — highways, dams, rural electrification — was a product of public works and state investment, so should the green energy economy be.

In order for this vision to become reality however, we need to change the language of climate politics. Climate change is not an exceptional market failure that can be corrected by getting the prices right. Capitalist markets are simply not wired to meet social and ecological needs — they will always “fail” in this regard. We cannot cede our future to a game of market competition by simply hoping renewables will overtake fossil fuels in the market. Collective action and public-oriented solutions are our only hope for survival.