Low-carbon Transition: Changing Urgently and Equitably

It wasn’t the smoke across the street but the piercing ‘bang’ sounds of stun grenade that made me realize that something was up. It was a drizzly Saturday evening on December 1st, 2018, when I was wading through the mass of holiday shoppers in the Opera area in Paris, France. The sound of explosives jolted the crowd for a moment. Soon, several groups of people with reflective yellow vests, called ‘gilets jaunes’ in French, rushed into the street, and heavy smoke with a smell of burning plastics quickly covered the sky. The crowd started to move in haste in one direction and then in another, instantly turning the bustling shopping district into chaos.

In France, truckers are required to wear gilets jaunes at work for safety purposes. Over the last a few weeks, however, gilet jaunes became the synonym for the quarter million protesters against the environmental tax proposal on gas and diesel fuels by the Macron administration. In Paris, the protest became violent; cars were burnt down, shop windows were shattered, and street banners were set on fire. The violence, which started at the Champs-Élysées area, just began to spill over to nearby areas in the heart of Paris that evening, and I found myself right in the midst of it.

The sound of stun grenade was a sobering wake-up call for a reality check to those of us gathered in Berlin and Paris for two interrelated fora, the European Resource Forum and the Green Growth and Sustainable Development (GGSD) Forum. Earlier that week, I gave a talk at the European Resource Forum, highlighting the need for resource efficient, low-carbon transition through adequately pricing natural resources and carbon. Some of my colleagues and I are convinced that we can't rely only on altruism and goodwill in the face of sustainability challenges; instead, I believe that we need to harness the power of economic systems by pricing natural resources and carbon correctly. 

In fact, the Macron administration did exactly that; the new fuel tax is expected to discourage fossil fuel consumption and encourage energy efficiency and renewable energy development, helping the country achieve the goal of reducing GHG emissions by 40 percent by 2030. Nevertheless, the protest by the gilets jaunes makes it clear that pricing is by no means an easy option. Mr. Bruno Binelli, a 66-year old retired carpenter from Lyon interviewed by the Guardian explains why. As it became increasingly challenging for him to make ends meet, and as electric cars are financially far out of reach, he felt being 'stuck' with his old diesel van, and the new fuel tax proposal feels like a push from a cliff to him. 

What's the magnitude of challenge? Let's take the proposed fuel tax in France as an example. The amount of newly proposed fuel tax is about $0.30/gallon of gasoline or diesel, whereas the mean social cost of carbon at 3% discount rate is estimated to be around $40/t CO2 in current price, which translates to about $0.36/gallon of gasoline or diesel. Under the 'High Impact' case (95th percentile value), however, the social cost of carbon today at 3% discount rate amounts to as much as $120/t CO2, which becomes $1.08/gallon. Furthermore, some scientists believe that the social cost of carbon estimated by the National Academy of Sciences (NAS) are significantly underestimated, and that they should be over $400/t CO2 in today's price, in which case fully loaded carbon tax should be about $3.60/gallon. Notwithstanding all these, both mean and 95 percentile estimates of social cost of carbon are expected to double in real price by 2050. 

In short, not only that scientists' estimates of the social cost of carbon are substantially higher than the proposed fuel tax, but also that fuel tax should increase in the future if social cost of carbon is to be adequately captured in the price. This is obviously a very tall order, begging the question whether the society will have the bandwidth to embrace the impact. Sure, sustainability challenges ahead of us will require nothing less than fundamental transformation in all corners of our society, and it is naive to assume that such a large-scale transformation can be done pain-free. 

The problem is that, however, low-carbon transition has the potential to add extra burden to low-income families. That's because low-income families are often subject to price discrimination against low-carbon alternatives. For example, the US federal government allows the buyers of electric vehicles to claim up to $7,500 of tax credit. While average Americans pay about $9,600 a year for federal tax, significant portion of low-income families owe less than $7,500 to the federal government, in which case they can't claim more than their federal tax liability. It is again expensive to be poor. Moreover, carbon intensities--GHG emissions per dollar spent--of basic human needs such as food, energy, mobility, and shelter tend to be much higher than those of other goods and services, and low-income families have higher share of such items in the total expenditure. As such, low-income families are likely to pay a bigger toll when carbon pricing is introduced.  

Equitable and inclusive transition towards a low-carbon economy therefore requires new ideas in policy design; we need income-group specific and spatially-explicit policies. For example, the current tax break and subsidies for electric vehicle may be relevant for those who are already able to buy fuel efficient vehicles such as hybrid cars but not for those who can't financially afford anything other than their fuel-inefficient clunkers. The GHG emissions mitigation potential, however, is much larger if a policy can convert the latter. Imagine an electric vehicle incentive program that is based on the difference in life-cycle GHG emissions between the fuel inefficient vehicle being substituted and the electric vehicle to be acquired instead of paying a fixed amount per electric vehicle. Such strategies could better serve those who are in a similar situation as Mr. Binelli, while achieving higher GHG emissions mitigation. 

The banging sounds of stun grenade in Opera area, Paris is a blazing wake-up call that today's dominant modeling approach, which views 'consumers' as one entity with average income and average response to price signals, needs a serious reexamination. More than ever, current fossil fuel economy needs an urgent transformation, and the crisis in Paris is telling us loud and clear that low-carbon transition should occur not only rapidly but also equitably and inclusively, for which we need novel ideas and innovative policy designs beyond the thinking in 'averages'. 

#2018erf