Does Biden’s insurance policy for the climate go far enough?

President Biden has come into office with a mandate to launch a frontal assault on the climate crisis. So far he’s not letting climate advocates down, issuing a series of executive orders to slash emissions, create jobs, redirect billions in federal spending and rejoin the international fight to save this habitable planet we all share. And his administration is just getting warmed up. 

Biden is expected to make a big push for investment in his ambitious $2 trillion climate plan. But will all this be enough to hold global warming to 1.5-2 degrees Celsius (2.7 – 3.6 degrees Fahrenheit) above pre-industrial levels, the target set in the Paris Agreement? 

The truth: nobody knows.   

The Biden administration’s early moves are a major step in the right direction. But if we want to make sure that we cut carbon emissions enough to head off a catastrophic rise in global temperatures, we need another piece in the climate policy mix: an insurance policy for the climate.

There is only one way to be truly certain that we cut emissions at the pace and scale needed to pass the climate litmus test: we must clamp a hard ceiling on the total fossil carbon we let into the nation’s economy and ratchet it down year by year. For example, a 90 percent cut in U.S. emissions from fossil fuel combustion between now and 2050 — from 5 billion tons per year to 0.5 – would require reductions of 7.5 percent per year. 

To limit the amount of carbon entering the economy (and ultimately the atmosphere), the government can auction permits up to the ceiling — much as the Northeastern states now do in the Regional Greenhouse Gas Initiative (RGGI) for power plants. At every pipeline terminal and coal mine head, corporations would have to relinquish one permit for each ton of carbon dioxide that will be released when their fuel is burned. No exceptions.

If other climate policies succeed in cutting demand for fossil fuels at the necessary rate, the insurance policy will prove to be redundant and the permit price will fall to zero (or to the floor price set by a carbon tax). But if other measures fall short, the insurance policy guarantees that we meet the target.

A carbon cap is not the only tool in the climate policy kit, but it’s crucial. Think of it as a backstop; policymakers should go full steam ahead on climate investments, especially given macroeconomic conditions, but we don’t know how much emissions will be reduced for each dollar of investment. Green investments and regulatory standards complement a carbon cap. But proponents of these and other measures should not object to adding an insurance policy to be on the safe side.

If the cap turns out to be binding, a foreseeable consequence is that fossil fuel prices will go up, as happens just about always when supply is restricted. The impact will be felt by gasoline consumers at the pump. It will be felt in the costs of natural gas and coal-fired electricity. In the absence of compensating policies, this price effect could lead to an outcry from the public.

This makes putting a ceiling on carbon hard in a second sense, too: it will be politically difficult.

The backlash risk was manifested dramatically in France when, in response to President Macron’s 2018 announcement of a fuel price hike to fight climate change — a hike that was accompanied by tax breaks for the rich — the Yellow Vest movement rocked the country. 

Fortunately, however, there is a straightforward way to reverse the effect of higher fuel prices on the incomes of working people: auction the permits (rather than giving them free-of-charge to corporations as in now-defunct “cap-and-trade” proposals) and return all or most of the revenue equally to every resident as dividends. The dividends would be akin to the stimulus checks during the COVID-19 pandemic, but paid monthly or quarterly and funded by the carbon permit revenue. This idea has gained support on both sides of the political aisle. 

With carbon dividends, everyone — individuals, corporations and governments — still has an incentive to reduce their own carbon footprint. Those who fly a lot in airplanes, or heat and cool bigger houses pay more in higher fuel prices than they get back in dividends. But the vast majority of households, who consume lower-than-average amounts of carbon (because the average is pulled up by the outsized carbon footprints of the wealthy), come out ahead financially, not even counting the environmental and health benefits of the transition to clean energy.

An insurance policy for the climate is both necessary and feasible. There is no planet B. 

James K. Boyce is a senior fellow at the Political Economy Research Institute at the University of Massachusetts Amherst and author of “The Case for Carbon Dividends.”

Mark Paul is an assistant professor of economics and environmental studies at New College of Florida.