Just Because It Doesn’t Have A Price Doesn’t Make It Free
Just Because It Doesn’t Have A Price Doesn’t Make It Free
My mother taught public school for 44 years. She used to have a magnet on her fridge that said “If you think education is expensive, try ignorance.” I can’t help but feel the same way about the current tipping point we face in the battle against climate change.
So many people have spent so much time and money estimating how terrible a comprehensive climate policy will be for the world’s economic growth, but all they are doing is ‘trying ignorance.’ All the while, the economic toll of climate change itself continues to accelerate, distorting and breaking down many of the core economic tools and institutions meant to manage and allocate risk. As we proceed with hearings and we continue to look closer at what happened in Texas last month (February 2021), we cannot lose sight of the reality that it is a symptom of the broader climate crisis. This event also further illustrates how the self serving narratives of our leaders continue to thwart the simplest and most cost effective tools for addressing climate change.
What we saw in Texas was the spectacular failure of every form of energy infrastructure due to the increasingly frequent and extreme impacts of climate change. It is not complicated, and yet it’s not what many folks want to talk about because it’s difficult to fix and requires a new narrative that doesn’t benefit those in powerful positions.
ERCOT has created an energy market that does not pay for capacity or standby generation to improve the reliability of its grid. It has few penalties for not generating other than the impact of having to face market prices for replacement energy. It is a neat and ideologically pure implementation of an energy market. But running an energy market in this fashion is sort of like driving with no car insurance. It’s very cheap until it isn’t and then it has the potential to bankrupt you.
Society has relied on various types of “insurance” markets to socialize risk and allocate it for much of our history. Everyone pays up front in fairly equal measure to either ensure that when something extreme does happen there are funds to fix it or to collectively invest in the infrastructure to mitigate the impacts of such extreme events. Without such structures not only is the whole of society more susceptible to extreme events like what happened in Texas, but the allocation of harm from such events tends to be regressive. By that I mean that the economic and physical impact of the ERCOT crisis is likely to hurt those least able to deal with such harm.
Those who were signed up for retail electric plans that exposed them to the spot price of electricity and now have $10,000 power bills are likely not experts in microeconomics or commodity markets. They likely are individuals and families who opted for the most cost effective energy pricing as they had the least means. If you’re beginning to feel like you’ve heard this story before, it’s the familiar refrain of “climate change will come first for the most vulnerable among us.” Somehow I think most Americans felt that would be residents of low lying areas and agrarian economies in the developing world. I doubt many of them were thinking of service industry workers who live paycheck to paycheck in Houston.
My children are 8 and 10, and in their lifetimes they have seen their home flooded twice. These were “hundred year floods” that happened within 2 years of one another. They have been stuck indoors for weeks at a time due to smoke so thick it would choke them as they played. Recently, we received a letter from our insurance company saying that our home insurance was being cancelled as insurers re-evaluate their risk due to more frequent and more powerful fires, floods, hurricanes, and winter storms. Thankfully, my family can afford to pay the 3-4x increase for premium insurance on our home. Once again it will be those among us who can least afford it who are most exposed to these escalating risks.
Climate change is not something that is impacting other people far away, it is right here in front of all of us, and our economic tools and institutions such as power markets and insurance products are unable to keep up. Those of us involved in the fight for a cleaner economy earnestly appeal for tax credits and industry-specific support that, due to their political expediency, are the only measures we feel we can possibly hope to achieve. As it is, we’re stuck with tax credits we can’t even use unless the government sees fit to make them refundable. All the while we apologetically parry accusations about how expensive these half measures will be and how they will stifle economic growth and hurt those who can afford it the least.
I am getting tired of intellectual dishonesty for the sake of expediency. How much more financial and economic gymnastics can we do to avoid the simple act of pricing an externality? Will we wait for climate risk to render all of our functioning tools and institutions impotent? Do governments have to backstop every major insurance market? Do we need to redesign every power market to create ever more resilience and bespoke products to send the signals that incent cleaner and more reliable infrastructure? Or will we do what must be done and put a price on carbon?
There are glimmers of hope. Recently, the oil and gas lobby pushed the door open a little more when they said the move to put a price on carbon emissions would be a step toward meeting terms of the Paris climate accord. It’s a positive development, but before we start handing out high-fives let’s remember the oil industry has been active in conversation around pricing carbon before — and have worked doggedly to make sure it was structured in a way that maximized the public relations benefit of supporting it while minimizing the actual good it would do.
Still, I welcome the news and I welcome those oil and gas companies that are leading the conversation. We are already paying the bill for climate change and we are fools as a society to have waited this long. The cost of addressing it and mitigating its impacts will be far higher now than it could have been had we started much earlier. When we fail to price externalities they do not become free. Someone eventually pays for them. In late February of 2021, it was the citizens of the state of Texas, especially the most vulnerable. How many more times can we claim that addressing climate change is just too expensive?