Climate change: Biden should establish a carbon price benchmark

Virtually every form of economic activity and personal behavior has an impact on the global climate, and climate change will affect communities all across America and around the world. Seriously combating climate change will require a whole-of-government approach to ensure that we mitigate risks throughout every corner of our society.

To quickly ramp up an ambitious, transparent and coordinated government approach to climate change after his inauguration, President Biden could adopt a carbon price benchmark to guide U.S. policy. From Environmental Protection Agency (EPA) regulations to Pentagon procurement to working with Congress to negotiating with foreign governments, such a benchmark would operationalize a whole-of-government response and lay the foundation for a whole-of-economy effort in combating climate change.

A carbon price benchmark — which could be set initially at $50 per ton and rise over time — would reflect the benefits of reducing the pollution causing climate change. Biden would ensure that decision-makers across government rigorously consider the benefits of mitigating climate change in their every action. Explicitly accounting for the climate impacts of their decision-making would deter them from moving forward with activities that impose significant climate damages. Moreover, the benchmark creates incentives for ingenuity and innovation — as a performance metric, it will encourage agencies to explore new ways of delivering their services while contributing to the fight against climate change. 

This benchmark is akin to “internal carbon prices” used by many corporations in the United States and around the world to account for climate change in their decision-making, including Microsoft, GM and BP. Some companies use an internal carbon price to guide long-term strategy, others in the evaluation of specific investments, while others use it as the basis for a company-wide carbon tax. By requiring consideration of climate change throughout the company’s decision-making, internal carbon prices convert what would traditionally be a narrow environmental or regulatory concern and make it part of the everyday process of running the business. A government-wide carbon price benchmark could likewise ensure that climate change is accounted for through the everyday activities of running the government. 

Agencies could set emission goals, akin to their 2009 and 2015 efforts, based on how their emission reductions would be justified by the benefits associated with the carbon price benchmark. This would reorient government agencies’ strategies and operations. Budget planning would account for climate benefits, and new approaches to the management of vehicle fleets, buildings and other assets that account for climate change would emerge. 

The carbon price benchmark could enable more ambitious regulations by monetizing their climate benefits. This could lead to higher fuel economy standards for cars and light trucks, more energy-efficient appliances and lower emissions at power plants. Such a benchmark could apply beyond executive branch regulations and also inform the actions of independent regulatory commissions, such as considerations of carbon pricing in wholesale power markets at the Federal Energy Regulatory Commission and in climate risk disclosure standards at the Securities and Exchange Commission (SEC). 

The White House could direct agencies to change their procurement rules to require government contractors to adopt their own internal carbon prices. Initially, such rules could promote the public dissemination of contractors’ internal carbon prices. Over time, the rules could require that these converge on the government benchmark. This would build on the experience in the private sector, where investors have advocated for disclosure of internal carbon prices through the CDP (formerly known as the Carbon Disclosure Project). It would also reflect the efforts of major corporations, such as Walmart, that have sought to reduce the carbon footprint of their supply chains. 

The White House could support legislation — clean energy subsidies in a stimulus package, a national clean energy standard or a carbon tax — so long as the carbon benchmark justifies the cost of doing so. This would ensure that climate change policies make sound investments on behalf of the American taxpayer.

The $50 benchmark reflects the global benefits of reducing carbon dioxide pollution. This would signal a renewed commitment to working with partners around the world in addressing climate change. It would also establish our expectation that they would reciprocate by accounting for their emissions’ global impacts when ramping up the ambition of their domestic emission mitigation programs. 

The federal government could also review and update this benchmark over time, reflecting the latest scientific and economic evidence. Updating carbon prices over time can allow for new knowledge and the reduction of key uncertainties to be incorporated in the price driving public policy. This would also serve as an early indicator in the Biden administration of how public policy will be informed by rigorous evidence again.  

The expectations for immediate climate action must confront the challenge that new regulations, legislation and international agreements take time. By establishing a carbon price benchmark, Biden would initiate the ambitious whole-of-government and whole-of-the-economy approach necessary to address climate change. 

Joseph Aldy is a professor of the Practice of Public Policy at the Harvard Kennedy School. He served on the 2008-2009 Obama-Biden Presidential Transition Team and as the special assistant to the president for Energy and the Environment over 2009-2010.