Proxy pricing adds a hypothetical carbon surcharge to market energy prices when choosing among emissions-intensive goods and services.
According to the National Association of State Budget Officers, state governments spend about $105 billion each year on capital expenditures. These governments could lower emissions by choosing contracts and equipment in a way that accounts for the carbon emitted by those goods and services. For example, in analyzing energy efficiency retrofits to government facilities or choosing fleet vehicles, agencies could use energy prices that take into account the carbon intensity of the fuels and electricity involved, thus economizing on energy where the emissions benefits are highest. This would help manage the governments' fiscal risk as major energy users, harmonize abatement incentives across agencies, and rationalize investments across competing objectives.
Second, governments could use the process by which they develop their internal carbon pricing policy to catalyze an even broader public discussion. Although hard to quantify, the spillover potential of the state governments' leadership could be substantial as it would raise the profile of proxy pricing, provide practical approaches that other entities can adopt, and further prove the principle that carbon pricing can cost effectively reduce emissions. At the very least, the policy would draw the attention of the firms that receive the billions of dollars in contracts annually. With thoughtful stakeholder outreach, the impact could be even broader.
Is this proposal for a practice or a project?
What actions do you propose?
I propose that U.S. state and local governments interested cost effective climate action band together to develop common procurement and contracting methods that account for the carbon intensity of the plant, equipment, and services they acquire. This would exploit the economy of scale in developing such methods and garner attention from firms that do business with state governments, making it in their interest to demonstrably lower emissions to compete for taxpayer business.
However, this idea is applicable outside the United States. In principle other country goverments, federal and sub-federal, could do likewise.
Governments could choose whatever carbon price they deem appropriate. For example, they could choose the social cost of carbon that pertained in the Obama Administration for analyzing the costs and benefits of federal regulations.
Who will take these actions?
State and local governments, including their budget offices, procurement executives, and those involved in planning and acquistion of energy-intensive good and services. In principle, the exercise could also involve accounting for a broader set of greenhouse gas emissions and sinks, thereby involving municipal waste, land use, forestry, and other officials.
Non-governmental organizations and associations of state government officials could assist in this effort. For example, many states already participate in the Climate Registry: https://www.theclimateregistry.org/programs-services/voluntary-reporting/membership-benefits/.
For a compendium of state climate actions, into which this would naturally fit, see this page of the National Governors Association: https://www.nga.org/files/live/sites/NGA/files/pdf/1201CLEANENERGYGHGPOLICIES.PDF.
Where will these actions be taken?
At the state level, ideally with the cooperation of multiple states, counties, and municipal government. In principle, similar actions could be taken abroad. This proposal is particularly relevant in jurisdictions and sectors that do not already have policies in place to price carbon explicitly.
In addition, specify the country or countries where these actions will be taken.
No country selected
No country selected
No country selected
No country selected
What impact will these actions have on greenhouse gas emissions and/or adapting to climate change?
The goal would be to reduce the emissions intensity of state and local government activities, including the emissions of their suppliers and contractors, and to catalyze broader experience and comfort with a price on carbon. In addition, by lowering emissions, the approach would improve the sub-federal fiscal consequences of a federally-imposed carbon tax or similar measure.
What are other key benefits?
Analyzing the carbon intensity of government activities, both directly and via the supply chain, will draw attention to those emissions sources and incentivize ways to cost-effectively reduce them.
More broadly the benefits would be to further socialize the concept of internalizing the negative social costs of economic activity, including by governments themselves. Some governments could gain an appreciation for the potential to adopt a state-level carbon tax, expand existing state fuel excises, or support a federal carbon price.
What are the proposal’s projected costs?
The costs for each state would depend on:
- the scope of emissions attributable to state government activites;
- the scope of coverage of the proxy pricing initiative; and
- the proxy prices the governments choose.
One benefit of this approach is that it caps state spending on emissions-reducing activities at the carbon proxy price, ensuring that taxpayer dollars do not support emissions reductions that cost more than the social benefits of the emissions reduction. This stands in contrast to many other green policies, such as energy efficiency and renewable power mandates.
This could and should begin immediately.
About the author(s)
Adele Morris is a senior fellow and policy director for Climate and Energy Economics at the Brookings Institution. Her expertise and interests include the economics of policies related to climate change, energy, natural resources, and public finance.
She joined Brookings in July 2008 from the Joint Economic Committee (JEC) of the U.S. Congress, where she spent a year as a Senior Economist covering energy and climate issues.
Before the JEC, Adele served nine years with the U.S. Treasury Department as its chief natural resource economist, working on climate, energy, agriculture, and radio spectrum issues. On assignment to the U.S. Department of State in 2000, she was the lead U.S. negotiator on land use and forestry issues in the international climate change treaty process. Prior to joining the Treasury, she served as the senior economist for environmental affairs at the President’s Council of Economic Advisers during the development of the Kyoto Protocol. She began her career at the Office of Management and Budget, where she conducted regulatory oversight of agriculture and natural resource agencies. She holds a Ph.D. in Economics from Princeton University, an M.S. in Mathematics from the University of Utah, and a B.A. from Rice University.
See more at https://www.brookings.edu/experts/adele-morris/
This proposal is closely related to a blog I posted explaining why the U.S. federal government should shadow price carbon: https://www.brookings.edu/blog/planetpolicy/2015/07/13/why-the-federal-government-should-shadow-price-carbon/
I am not aware of another Climate CoLab proposal related to this one.
State expenditure data come from this report: https://higherlogicdownload.s3.amazonaws.com/NASBO/9d2d2db1-c943-4f1b-b750-0fca152d64c2/UploadedImages/SER%20Archive/State%20Expenditure%20Report%20(Fiscal%202014-2016)%20-%20S.pdf