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Shadow Carbon Pricing: The Unexpected Costs of Fossil Fuel Opposition

Progressive opposition to Manchin’s proposed permitting reforms has unexpected and undesirable consequences.

Originally published in The Hill with the title, “Progressives Should Have Supported Manchin’s Permitting Reforms: Here’s Why.”

When Congress passed the Inflation Reduction Act earlier this year, the U.S. took a huge step forward toward a long-overdue transition away from fossil fuel energy. Sen. Joe Manchin’s (D-W.Va.) crucial 50th vote for the bill came in part after Senate and House leadership promised to find a way to enact permitting reform for energy infrastructure projects. But language introducing permitting reform was stripped from the National Defense Authorization Act on Tuesday [December 6], leaving that promise at risk of going unfulfilled.

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Opposition from the Congressional Progressive Caucus was pivotal to this outcome, but some of the reasoning behind their opposition is perplexing and counterproductive.

Manchin’s proposed permitting reforms aim to increase the federal government’s ability to get critical energy infrastructure built. His proposal would shorten National Environmental Policy Act (NEPA) review to a maximum of two years for big projects (one year for smaller projects) and give the Federal Energy Regulatory Commission the ability to designate electricity transmission projects in the national interest. Other provisions include one that some find particularly galling: A requirement that federal agencies issue all the necessary approvals for a natural gas pipeline in Manchin’s home state of West Virginia.

Majority Leader Chuck Schumer (D-N.Y.) noted that Manchin’s proposed language would help expedite the construction of clean energy projects, accelerating the benefits from the IRA subsidies. This is a crucial point: One more natural gas pipeline won’t threaten the clean energy transition, but if renewable energy developers can’t get the necessary permits to take full advantage of the tax credits in the IRA, we will have a lot more trouble meeting our emissions goals.

Source: Wikipedia

Progressives are instead focused on the fact that the permitting reforms allow fossil fuel projects to go forward. Rep. Ro Khanna (D-Calif.) has called it a “giveaway to the fossil fuel industry.”

After the IRA passed, progressives celebrated the fact that it represented a different approach to addressing climate change than the one favored by centrists and economists. Instead of pricing carbon, we’re subsidizing clean energy. 

But this stance by progressives on the permitting bill creates some of the very same consequences they themselves fear from carbon pricing. For example, in one widely circulated article critical of carbon pricing, the authors argue that “We cannot raise the cost of energy for millions of underpaid Americans — many of whom are Black and Indigenous — and expect the policy to stick.” Yet, blocking permitting reform does exactly that.

Indeed, the arguments that the progressives make against carbon pricing are exactly why they should have supported Manchin’s permitting reforms. Blocking fossil fuel projects makes it more costly to deliver energy with existing fossil fuels. In effect, it creates a kind of carbon price, just one that’s haphazardly applied, usually extremely high, and where the revenues accrue to fossil fuel producers instead of the government. Call this a “shadow” carbon price. At the end of the day, low-income households’ energy bills go up. 

Consider one example. Five years ago, Kinder Morgan proposed building a natural gas pipeline that would have connected New England markets with the rest of the United States. Environmental opposition helped kill the proposal. Last winter, while the rest of the country generally paid less than $5/mmBtu for natural gas, New Englanders, devoid of any way to bring that same relatively inexpensive natural gas into the region, were saddled with prices that were three or four times as high. High natural gas prices also created high electricity prices because the region’s electric grid is dependent on gas. Things could get worse this winter — electricity grid operators are warning of rolling blackouts. 

If instead, the pipeline was allowed but emissions reductions were achieved through a far more moderate carbon price on natural gas emissions nationwide, consumers across the country would have experienced milder price increases and the market would have economized on emissions. What’s more, with a true carbon price, revenues would have flowed back to government coffers, useful for any number of things, including helping low-income households with higher bills. Instead, the private firms that control the flow of natural gas to New England make large profits.

Many policies leave us with hidden high carbon prices. Every time a city bans gas stoves, states stop pipelines, or shareholder activists prevent investment in new energy infrastructure, we are raising the price of energy to consumers and, in some cases, driving up profits for fossil fuel companies. 

Many who are interested in addressing climate change strive for an orderly transition. Yet if we refuse to build or maintain fossil fuel infrastructure before we have built a robust clean energy system to replace it, we are left with a transition that is disorderly and expensive, leading to things like $20 natural gas prices in one part of the country while the rest of the country pays a fraction of that.

There are other legitimate concerns with the Manchin reforms. Short-circuiting the regulatory process could leave essential environmental justice considerations out of the conversation, for instance. We can address these important concerns, but that need not stop investments.

There is room for a happy medium. Centrists like Manchin can concede that not all fossil fuel infrastructure investments are worth making. Economists can concede that we can make much progress even without an explicit economy-wide carbon price. And those who worry about the consequences of carbon pricing for ordinary households should stop to recognize that other policies, including bans on fossil fuels investments, impose high costs too, and often are in essence a more dysfunctional form of carbon pricing.

Keep up with Energy Institute blog posts, research, and events on Twitter @energyathaas.

Suggested citation: Wolfram, Catherine. “Shadow Carbon Pricing: The Unexpected Costs of Fossil Fuel Opposition,” Energy Institute Blog, UC Berkeley, January 3, 2023, https://energyathaas.wordpress.com/2023/01/03/shadow-carbon-pricing-the-unexpected-costs-of-fossil-fuel-opposition/

Catherine Wolfram View All

Catherine Wolfram is Associate Dean for Academic Affairs and the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. ​She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.

Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.

She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.

11 thoughts on “Shadow Carbon Pricing: The Unexpected Costs of Fossil Fuel Opposition Leave a comment

  1. I don’t think that the article is really about carbon pricing, it’s the old debate between the perfect and the good (If you can agree which alternative is “perfect”).
    On the one hand, infant-industry subsidies and the market might bring forth newer, cheaper, resilient and dispatchable renewable technologies that will suffice to displace current fossil-fired power plants without requiring any new ones.
    On the other hand, maybe they won’t and we should accept that some gas capacity will be needed and may be small enough, or new,clean and seldom-utilized enough, to allow climate to bounce back toward its old equilibrium.
    But on the third hand, maybe by allowing the development of improved capacity we prevent the market from bringing forth those better, cheaper renewables, and once the gas capacity is around how do we ensure it is “seldom-utilized”?
    But on the fourth hand if we may need those gas plants later, shoudn’t we start planning for them now, to make their development cheaper and more efficient and to ensure we avoid any possible resource inadequacy?
    I feel like I’m in Fiddler on the Roof!
    We can do one “perfect” thing now (no gas), and wait to see if it works; or we can do the “good” thing too (ease the development of gas plants) and see if they strangle the deep green future in its cradle. We hear about the dangers of not doing one or the other; but what is the cost of waiting in each case?

  2. Thank you for this clear-eyed, truthful and insightful article. You could have gone further and mentioned that during the most recent winter episode in New England up to 40% of energy generation was from fuel oil, with far worse air emissions than from natural gas, again because Progressives and extreme environmentalists would not allow one more NG pipeline to be built among the thousands already existing in this country. There is a subset of Progressives and environmentalists who are utopians, living in a fantasy land devoid of math, physics or economics, and who are not transparent about facts on the ground. They should not be allowed to define our energy policies.

  3. Any utility, with the name GAS in their title, is totally dependent on profits of delivering natural Gas through its 100-year-old infrastructure. Renewables will eventually replace even natural Gas so the utilities with GAS in their name, asked the California Public Utilities Commision (CPUC) to look at cutting what they have to give in credits to rooftop solar customers so they will switch back to natural Gas in the wintertime from electric heat paid for with credits from their old net metering NEM 1.0 and NEM 2.0. Claiming a bogus cost shifting to the poor, it will actually raise the electrical prices to the poor as well as Natural Gas prices will rise from the “additional use” from the before switched over to electric heat rooftop solar adopters as the clock runs out on their NEM 1.0 and NEM 2.0 Contracts with the utilities. The mandate for rooftop solar be installed on all new homes will put a solar system on a 30-year loan that will never even pay back the interest on the loan as the utilities strip 75% off the value of grid fed energy away in profits in the electricity they get to keep and re-sell and for their additional natural gas sales in California. Just as cigarette companies lied about their products not creating lung cancer and oil companies lying about lead in gasoline, the utilities lied about cost shifting to the poor from rooftop solar panels. The program called CARE already took rich people’s money and gave it to the poor in a bigger measure than the rooftop solar using the system and not paying a “fair share” of infrastructure. My solar panel system let me shut off my furnace, for the winter, and use the banked electricity from the summer months, the utility has already collected and re-sold to others, to power Electric heaters. NEM 3.0 will end that practice for everyone in the future.

  4. @oldsurferdude –

    During the week of Sept. 6th over half the energy consumed in the portion of California served by CAISO was created by burning natural gas.

    You may want to consider the possibility that an orderly transition that takes longer than you may prefer is in fact preferable to one that kills old surfer dudes such as yourself due to blackouts.

  5. This is a disappointing article. It fails to support its premise, in its body it presents a bait-and-switch, and its bait-and-switch is unsupported. I actually agree with the underlying assertion stated in the title, but not for any reason cited.
    The article’s premise is about permitting, and that Progressives killed expedited permitting because of a specific provision regarding a West Virginia natural gas pipeline project authorization. This is true, and you should have focused on that and stopped there. The simple argument could readily have been made that expedited permitting, in bulk, would assist clean energy projects, and that sometimes legislative compromises are a necessary evil: yup, got it.
    But instead, the bulk of the article is about Progressives’ alleged support for subsidies instead of carbon pricing. Aside from being a non-sequitur, that bait-and-switched argument is unsupported. Most progressives support carbon pricing, and the two citations found in the article allegedly suggesting that Progressives support subsidies over carbon pricing fail to support that supposition.
    I strongly encourage an article on the subject of carbon pricing — and real carbon pricing, not cap-and-trade — and a close and supported review of which factions support it and oppose it and why. A strong starting point could be the European Commission’s new Carbon Border Adjustment Mechanism. But please don’t sidle into the conversation on this important topic by going off-topic with unsupported assertions in an unrelated subject.

  6. Indeed, we have used clumsy workarounds to carbon pricing with some success. It’s still a second-best or third-best solution.

    Subsidizing nuclear in competitive markets would not be necessary if a carbon price of $30-$50/ton were in place. A tax credit for solar and wind would not be needed. Then, nuclear, wind, solar, and energy efficiency could compete on a level playing field.

    Tax credits for EVs and EV charging infrastructure may be needed as an infant industry subsidy, just as air mail contracts launched the airline industry and space contracts launched the semiconductor industry. But not for long.

    I continue to believe that the best climate legislation ever introduced was Bob Inglis’s “Raise Wages Cut Carbon” bill in the 2009 legislative session. It imposed a carbon tax of $15/ton, rising each year (it would be $34/ton this year, moving towards $100/ton in 2040), with a border adjustment for imports and exports.

    The whole bill was only 15 pages. https://www.govinfo.gov/content/pkg/BILLS-111hr2380ih/pdf/BILLS-111hr2380ih.pdf

  7. Fully agreed with: “What’s more, with a true carbon price, revenues would have flowed back to government coffers, useful for any number of things, including helping low-income households with higher bills.”

  8. First and foremost, the climate catastrophe is an existential threat.

    Non-renewable resources are being extracted from the finite earth at a rate that, with current technology, cannot be increased. And this article that suggests that this shouldn’t change.

    “… if renewable energy developers can’t get the necessary permits …” So why not improve the process for the renewable energy developers?

    “We cannot raise the cost of energy for millions of underpaid Americans ” Since when has the energy industry given a rat’s patootie about underpaid Americans. Case in point, the California utilities used this same argument to gut rooftop solar but gave no provisions to change pricing for these disadvantaged ratepayers.

    This article wants you to take your eye off the ball, we’re fighting for our existence. Oh, and by the way, the existence of 80% of all species.

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