Deutsche Welle: "Who should pay for climate action?"

Charli: But as we've also been learning in this series, NOT doing anything about climate change commits us to a much more dangerous and expensive world:

Catherine: Once again, we are not understanding climate change properly, that the cost, that we are all paying now and that life is about choices…

Gernot: If 30, 50 years from now, we are still talking, debating the right price per ton of CO2, I'm afraid we would have lost this particular battle.

Sam: In this series, we're unpacking the real costs of climate change…

Sam: Those are some pretty good incentives. So these are some examples – successful, and less so – of using carrots to help address climate change.

Charli: Carrots?

Gernot Wagner: It's about finding ways to balance the carrots and the sticks. // it's either a price on the fossil fuel, the negative, the carbon, or it's a carrot, it's a subsidy for the good, what we want to subsidize.

Sam: This is Gernot Wagner. Gernot is a climate economist from Columbia Business School. You might remember him from the last episode. And he's saying we've basically got two levers to pull, in order to reduce emissions.

Charli: Carrots and sticks... Please explain.

Sam: Carrots like incentives and subsidies, sticks being disincentives. Now, I must admit, I'm kind of picturing Looney Tunes antics here when I hear this phrase.

Sam: Though, in that case, maybe it should be carrots and anvils? Anyway...

Gernot: There are costs to cutting emissions. Some emissions cuts pay for themselves, but yeah, there are costs. There are adjustment costs. And just to say this out clearly now, the costs of not acting are much larger than the cost of acting. And so, it's important to know who would pay for cutting emissions. At the end of the day, there are three sources of money in the world. Shareholders, consumers, and taxpayers.

Sam: So shareholders – that's companies, consumers – you and me, and taxpayers – also you and me, but via the government.

Charli: Right. So when we're thinking about reducing emissions, with the heat pump example or the EVs in Norway, in those instances that would be taxpayers plus consumers paying for that.

Sam: Yep, but you could come up with a different combination.

Gernot: The question is, okay, so we want heat pumps, who pays for them? In part, clearly, it's the household because they ultimately benefit. Well, in part, it's the taxpayer because, you know, the general public, the planet benefits. And in part, it's the utility, in part it's the fossil gas company that of course ought to be paying a penalty for basically continuing business as usual and encouraging the consumers to keep installing gas furnaces.

Sam: So this combo is sort of in action in Germany. You've definitely got taxpayers and consumers paying. And not sure if you caught this, but Barbara mentioned the price of oil and gas are increasing with CO2 pricing? That's thanks to the European Union's Emissions Trading System.

Charli: Yes, that’s a good point, at the end of the day, most people very understandably just want to go with the cheaper option, and they're concerned about their bottom dollar. But one thing I've always wondered about, if we're talking about footing the bill and particularly with regard to how governments will approach paying for reduced emissions... How about the subsidies that fossil fuel companies have enjoyed for so long and continue to benefit from? Like why don't we stop giving them carrots, and use the savings from that to fund things like heat pumps and decarbonizing the steel industry?

Sam: I've wondered about this for a long time as well. So I put it to economist Gernot Wagner.

Gernot: Actually, there's some famous famous/infamous annual IMF calculation to this point. And they go into the trillions of dollars total per year globally. How we subsidize the wrong stuff. And that's a real problem.

Sam: So I looked up that International Monetary Fund report and it found $7 trillion dollars of fossil fuel subsidies in 2022 alone.

Charli: Right. So, more than enough to cover the roughly $2 to 4 trillion per year we’ll need to transition our energy system - with some left over to help with adapting to a hotter climate?

Sam: Yes. Now some of these subsidies thought are not so clear cut. It’s not like governments are writing checks directly to fossil fuel companies.

Gernot: Actually, one of the major issues is kerosene. Kerosene for aviation is famously exempt from European excise taxes because, well it's global. You fly across borders and international travel is exempt from the regular taxes. Guess what isn't exempt? International train travel. So, you buy a ticket for a train from wherever, from Berlin to Brussels, let's say, and you pay tax. You fly, you don't. That's a subsidy ((on fossil fuels)).

Sam: So that's one type of subsidy. Obviously, sort of hidden, but you can see how it works. Another type of subsidy for fossil fuel companies is when we're not fully charging what it costs our economy to use that fossil fuel. So we're not charging for the things like global warming and local air pollution that we do have to pay for in one form or another.

Charli: So essentially fossil fuels are cheaper than they should be because we don’t factor these costs?

Sam: Right, cheaper than they should be for the burden they put on our economy.

Charli: And so how do you figure out how much they should cost then?

Sam: Well, climate economists like Gernot actually have done the math–

Gernot: $281.62. Kidding, around that much. Like, you know, it's in the 200s emphasis on there being a range, sort of high 200s, let's call it around $300 per ton of CO2.

Charli: But how do they actually figure that out? How do they come to this figure?

Gernot: It's complicated. It is invariably described (the process of coming up with this) as the world's most expansive calculation here. It's about as global, as long-term, as uncertain as these calculations get. But basically, you look at damages of CO2 in the atmosphere, every ton of CO2 emitted today stays up there for a while, hundreds of years. For each ton today, 40% of that ton is still there 1,000 years from now. And yes, CO2 up there causes damages down here, droughts, floods, storms, and so on, and lots of other things, of course, too, sea level rise and so on. And those are all damages. So climate economists look to the science to tell us the physical impacts. Then climate economists turn those damages into dollars. And then the calculation basically is, let's discount those damages back to today to calculate what each ton of CO2 emitted today causes over its lifetime in the atmosphere.

Charli: Woah. So based on these calculations, we should be paying somewhere in the high 200's or even 300 dollars every time we emit a ton of carbon?! But that's so much higher than the price that Canada had for consumers, which I think Catherine said would go up to only $50?

Sam: Yeah. At least for now, Canada does still have a price on major heavy emitting industries, which vary by province. And there are prices on carbon in other parts of the world that are higher. In the EU's Emissions Trading System, it costs about $70 per ton of CO2.

Gernot: China by now has a carbon pricing system. It is much less ambitious overall. Of course, it covers 1.3 billion people. Uruguay has a carbon tax. Uruguay, the world's highest carbon tax, not in Sweden, not in Denmark, not in Norway, in Uruguay! $130 or so per ton of CO2.

Charli: So we should be paying like $280 per ton of CO2, but the handful of countries that are charging people for CO2 are only charging them at most $130.

Sam: Yep.

Sam: So, I think this whole episode about who foots the bill for climate change really points to the conversation we should be having right now. Not if we pay or not, not if we do something, not if (or when) we reduce our emissions, but how do we do it?

Gernot: At the end of the day, it can't just be taxpayers. It can't just be shareholders either. And it definitely can't just be consumers either, right? It's not possible to say to say, look, we are doing this on the backs of households, individuals, consumers, while the shareholders are made whole and the state taxpayers pay very little. And of course, that's not really what's happening precisely because it's not the right move. It's not possible politically to go in that direction. The politics comes in when we are looking at trying to create the right balance between who pays.

Charli: And as we’ve seen with examples in this episode from Germany and Canada and Norway, there isn’t a one-size-fits-all formula to figure out how to spread the costs out in a fair way, and sometimes governments get it right, and sometimes they won’t.

Sam: Yeah. I don't have all the answers, of course, but I think if we - consumers and voters that is – if start having this debate and figuring these things out, we will be headed in the right direction. Companies are certainly offering up their opinions already in the form of lobbying, and usually their vote is to do nothing, keep the status quo (and those fossil fuel subsidies). And we know who will be paying that bill down the road –

Charli: Taxpayers.

Sam: Right. So if we want to have a say in what the future holds, we have to start participating in this debate about how we distribute the costs and we need to be having it, now.

Gernot: If 30, 50 years from now, we are still talking, debating the right price per ton of CO2, I'm afraid we would have lost this particular battle. What is necessary is to find the appropriate policy mix to get off the dirty and move toward the clean.

Sam: And I keep thinking back to one thing Catherine kept saying throughout our conversation, over and over, kind of like a mantra:

Catherine: You know, it's been really hard to be honest. Like, hard things are hard and nothing is harder than climate policy.

Sam: And that's ok. We can do hard things.

Audio clip: "Who should pay for climate action?"