Putting a price on carbon

Kara Miller: This is What if it works? Coming to you from the MIT Energy Initiative and looking at the energy solutions to climate change. I'm Kara Miller. 

Robert Stoner: And I'm Robert Stoner. 

KM: And to start today, I'm going to throw out two words that are going to sound, I'm guessing, kind of insane to you. Here are those two words, carbon tax. And you're thinking, hmm, doesn't really feel like a carbon tax is an idea with a lot of currency right now. But hear me out. This is a story with unexpected twists and turns. 

Catherine Wolfram: There seems to be this pretty pervasive perception in D.C. circles that carbon pricing just will not work in the U.S. It's not wholly pervasive. There have been bills introduced every Congress, including bipartisan bills. But we wanted to really try to get people out of that D.C. narrative. 

KM: That's Catherine Wolfram, a former deputy assistant secretary for climate and energy economics at the Treasury Department. She's also an economist at the MIT Sloan School of Management. And the D.C. narrative, she says, is based on the fact that people tried to get carbon pricing during the Clinton administration and during the Obama administration. But here's the thing: As she noted in a recent piece in the Washington newspaper, The Hill, reality and perception have shifted since then. 

CW: Look though, the beginning of the Obama administration was 15 years ago. A lot has changed since then. I think a lot more people are being exposed to climate change and damaging ways. I used to live in California. We had the blackout suns from the wildfires. Many Californians experienced wildfires in their backyards. That's just one example. 

KM: She notes that among the G20 nations, even though they have varied types of governments and leaders with a wide variety of views, everyone has carbon pricing or is actively considering it. Except that is for three nations. 

CW: The three countries are Russia, Saudi Arabia and the U.S. So just kind of not good company for the U.S. And not only does that set kind of a political example and prove that it can be done, but more and more countries are adopting carbon border adjustment mechanisms, which I think we'll get into and so that will really force our hands. 

KM: But you may be saying very few Republicans would want carbon pricing, so isn't the concept kind of dead-on-arrival? Well, consider this: Wolfram says in an effort to extend the Trump tax cuts, one of the big questions will be, how can you pay for this tax cut? Which is where carbon pricing could come in. 

CW: There is a Republican bill, Senator Cassidy from Louisiana has it's called the Foreign Polluters Fee Act, that would impose tariffs on imports proportional to the carbon intensity of their production. And there's a Democratic side-bill. Senator Whitehouse has introduced it with several co-sponsors. The one big difference is that in Senator Whitehouse's bill, he includes a fee on domestic production as well, where Senator Cassidy doesn't. In my experience in D.C., nothing gets more bipartisan interest than being anti-China. We know that China's production right now is quite carbon intensive. I will say that China's pretty good as an authoritarian government as kind of turning on a dime. So they've been decarbonizing not quite as rapidly as we have, but pretty rapidly. So I think we need to be a little bit careful about getting too entrenched in this mindset of China as this dirty monolith, and it isn't going to change. 

KM: Let me throw a quote at you on this issue of carbon pricing. We talked not that long ago with Ernie Moniz, who, like you, spent some time in Washington, you know as U.S. Secretary of Energy. And we asked like, what do you think about carbon pricing? What do you think of where it's headed? And it's kind of an interesting take. See what you think. 

Ernest Moniz [00:04:18] I think that something like this eventually is going to happen where the big tension will be in how the revenue is used. I cannot name the name, but let's just say I, not that long ago, spoke with a prominent former Republican government figure, well-respected in the finance tax arena. And I was quite surprised when this person said unequivocally, he supported the carbon tax. And we talked more. And then we found where there was a bit of a breakdown in our views. Namely, his view was all the funds should go to deficit reduction. Well, that, of course, is completely regressive. In the end, that may be the negotiation. How much of this funding is returned to the population in a progressive way? How much goes to budget balancing? If I had to guess, I would guess that we may end up with that as the final negotiation. 

KM: I mean, that is sort of aligned with what you said, that maybe you have people on different sides of the aisle interested in this, but maybe they have different approaches. Does that, what Moniz said, does that sort of resonate with you? 

CW: I'm thrilled that that's what Moniz said. I think I've updated my forecast of the probability of carbon pricing passing by several percentage points. That's amazing. 

KM: Your hope-casting is now like morphed into forecasting. 

CW: Yeah. 

RS: So, I mean, I don't remember anyone responding favorably to the federal government raising taxes in this country or just getting used to it. I mean, there's enormous political pressure not to do that. The late George Shultz, who was a good friend to MITEI and was on our advisory board for many years, chaired it, used to talk about a revenue-neutral carbon tax, whereby everybody would pay these taxes, but then the Social Security mechanism would be used to send everyone a monthly check refunding all of that additional revenue to the people so that it wouldn't be an additional source of revenue. What happened? 

CW: So yeah, Shultz is a very prominent proponent of the Baker-Shultz idea and the revenue neutral carbon prices there. As an economist, the most important thing to do is get the tax in. It actually doesn't really matter from an economics perspective what you do with the money. Let's put it back into the 2025 framework where we're thinking about these tax cut extensions. One of the tax cuts we're thinking of extending is the child tax credit. That's very, very progressive and was shown, you know, it was expanded during the Biden administration, was shown to have tremendous impacts on reducing childhood hunger. So, if you use the revenue from the carbon price to pay for a child tax cut extension, that's even better than the Shultz idea, right? Because it's very progressive. It's not giving everybody a check. It's giving low-income people a check. 

KM: And it's something that both Republicans and Democrats have really said, yes, we should not only give that credit, but it should be more than it is. So you can see that there are multiple constituencies from different places that could say like, yeah, let's make that tax credit, $5,000, $6,000, you know? 

CW: Yeah, if we have the money. Exactly. Exactly. 

RS: Yeah. It's a species of carbon or revenue neutral tax in the sense that the money is going back out there, not using it for other purposes or the general budget. 

CW: Yeah, but you're not getting a check that says this is your carbon rebate. 

RS: Yeah, so you can’t compare them. Well, maybe that's bad. I mean, if you can compare them, you say, hey, I made money on carbon this month. 

CW: Yeah, I think that there is a lot of research on like what the best way to give the money back is. And there's some research from Canada that suggests that even, you know, getting a check that says this is your carbon rebate, people don't put the two things together. That when they're at the gas pump, they see, you know, higher gas prices and don't remember that they got the check. 

There's also you could flow it back through electricity bills. And so, then it's kind of a line on your electricity bill and people see that their electricity bill is lower. As I say, I think the most important thing is to get it in. And so, like whatever helps us solve the political dynamic and get, you know, a bunch of people in Congress on board. That's my main ambition, is to get it in place. And so I think whatever works in terms of using the money, that gets as many people on board, that's what we should go for. 

KM: But it sounds like you feel like there's been enough disruption in people's lives from flood, you know, whatever it is, that things have changed, like it's not the Obama administration anymore. You know, that people have moved enough on climate change that they're like, yeah, okay, I'm willing to do something. 

CW: That's what the polling suggests. 

KM: So let's talk about something I know you both have thought a lot about, which is, you know, so okay, so we're talking about potentially implementing, you know, a price on carbon in this country. But as you were saying, and lots of countries have already done this, we're kind of way behind. So how are other countries doing this and is it working out? 

CW: Yeah, in general, there are two ways to implement carbon pricing. One is just a straightforward tax and basically they're kind of equivalent from an economics perspective. There are some subtle differences. The other way to do it is more complicated. The idea of what's called “cap and trade.” And essentially this involves the government creating essentially a chit that says whoever holds this chit has the right to emit a tonne of carbon, but it only creates a limited number of those chits, and then kind of reduces the number of chits over time. Europe is on a path to reduce the number of chits to zero to get to near net zero by 2050. And then companies, whomever wants to emit the carbon, have to trade those chits. You have to hold one of those chits for every tonne of carbon that you eventually emit. And essentially the market determines the price. It's much more complicated to set this up than to, you know, as I said, add to our existing excise taxes. But the advantage is that it creates something of value, these chits, essentially.

RS: And a prospect of global market in chits if people find their way to move them around. 

CW: Yes. And so I think that's one real advantage for lower income countries because then people in higher income countries can buy their chits. 

KM: So potentially somebody in a poor country has these little chits and they can give them to a wealthier country for a bunch of money, and then that oil driller can drill for oil. Yeah, but so in exchange, that poor person has a bunch of money now. Yeah. Which is okay. 

RS: The idea being it's cheaper in those countries to make some of the mitigative measures that could reduce their emissions. 

KM: What do you mean? 

RS: Well, you know, a lot of countries in Southeast Asia, for example, burn coal to generate power with practically no abatement of any kind whatsoever and very inefficient combustion systems. So you could improve those combustion systems without spending a lot of money, whereas we're already kind of at a much more aggressive level… 

KM: I see. 

RS: …I think, in the developed world. Okay. And that the extra tonne, the marginal tonne, costs a lot more to abate here than there. So. Okay, I'll pay you to do it right. 

KM: Okay, so cap and trade, how well does that work? Us like trading. You know, I have an oil drilling business, so I pay you bunch of money to buy, basically, permission to emit a bunch more stuff. Does that work well? 

CW: Yeah, there's tons of economic evidence. Either the carbon tax or the cap-and-trade system really helps reduce emissions. You know, of course, the higher the price, the more it helps. You know, getting back to our conversation about D.C.’s resistance, I do think the thing that frustrates me most is when people say, well, carbon pricing just doesn't work. Because that's counter to all the economic evidence. We do, to get to, you know, net zero by 2050 goals, we would need pretty high carbon prices. But I definitely think that we need an all of the above strategy. And carbon pricing is an important part of the all of the above. 

RS: I would say, I mean, just further on what you're saying about the U.S. falling behind Europe and Europe being more progressive…I mean, the approach that we're taking in this country, which is kind of the national spirit and it's kind of what this program is about, is to innovate like mad, to find a way to develop technologies that are not more costly but are far less carbon intensive. And there's a great deal going on here, a great deal more going on here, I would say, than in Europe. So, you know, it's a different way of thinking about the problem. I would see the European one as more punitive. 

CW: That's often the way it's characterized. Europe did have and still does have a lot of subsidies as well. So this gets back to my point that they work together well. I don't think it's an either/or proposition. If you have carbon pricing, it encourages those innovators to, you know, find ways to avoid paying those prices so they can work well in tandem. 

KM: So what have other countries in the way they've implemented a price on carbon, because you said there's like different ways of going about this, what have they taught you about if we were to do this and the President were to say, what would you advise? How should we do this? What would you advise? 

CW: That's a good question. So all of the bills that have been introduced, I'd say in the past, like five Congresses, maybe not literally all, but there's definitely been a trend in the U.S. away from cap and trade and towards carbon taxes. So the most recent Congress, I think all the bills are for carbon taxes and not for cap and trade. I'm not quite sure why that is, but I kind of tend to defer to people who understand politics better than I do and imagine that that's for a good reason. Administratively, it is easier to implement the carbon tax. If you have the cap-and-trade system and you create these chits, there's political pressure to give away those chits. So then the carbon pricing scheme doesn't end up raising as much money. 

I do think the experience in Europe highlights one advantage of a cap-and-trade system that is worth noting, and that is that it's flexible and it basically responds to changes in the environment. So, for instance, before Russia invaded Ukraine, the carbon price in the European Union cap-and-trade program was about $20 a tonne, €20. I'm not sure. After Russia invaded Ukraine, natural gas got a lot more expensive and so it was harder for electric power plants to switch from coal to natural gas. And so, after that invasion, carbon prices basically quadrupled. They went from $20 to $80. During this crisis, right? And so, you could never imagine if it had been a tax system, the European parliament getting together and saying, okay, let's quadruple the price of using carbon in this time when we're facing a huge energy crisis because of the invasion. But there was no, you know, I was kind of scanning because I was worried about this. There was no obvious pressure to get rid of the cap-and-trade system at the time of the invasion or in the immediate aftermath. But as I say, you know, the price kind of adapted to the fact that the energy situation was different and rose dramatically. 

KM: So if carbon pricing was implemented in the U.S. in the way that you think would be best, as a regular consumer, how would I see that show up? 

CW: It depends on how exactly it's implemented. But say we carve out retail gasoline and I've done some modeling work on this, you probably…

KM: You carve out, meaning we're not going to touch the price of retail gasoline? 

CW: Yeah. 

KM: Because like, people are too sensitive to that. They freak out. 

CW: Exactly. Yeah. The U.S. is so sensitive to gasoline prices. So, you know, functionally the way it would work is refineries would get a refund proportional to the amount of retail gasoline that they sold. And so the prices of retail gasoline wouldn't go up. You know, I honestly think that you wouldn't notice it that much. Our modeling suggests that adding a modest $15 a tonne carbon price, that kind of increase gradually over time would increase the average U.S. households electricity, gasoline, kind of total energy bill by 1%. 

KM: So would it mostly show up in like my monthly energy bill? 

CW: It would show up there. It would also, you know, the industries that would really feel it are industries like cement, iron and steel, aluminum. And so the iron and steel, the metal that goes into making your toaster would become more expensive. 

KM: But you don’t buy toasters that often…hopefully…

CW: And metal isn't a huge part of the toaster cost, so you know, maybe your toaster becomes like 2% more expensive. I don't think that you would notice that. 

KM: Okay. Homes, though, maybe. Maybe like home and building construction. I'm just saying, I think what uses a lot of steel. 

CW: Cars, maybe?

KM: But also, like, if you're building a high-rise or you were building... 

CW: Okay, so maybe the cost would go up. Maybe the builder would say, huh, the design that uses a lot of steel, I don't like that quite as much. Maybe I'll go with this different design that uses some alternative building materials. And so, you wouldn't see the price because they've done what we want them to do and use less carbon. 

KM: So let's take a quick break here. We will come back and talk about a totally new approach that Europe is taking to getting carbon out of its imports. We will be right back. 

You're listening to What if it works? I'm Kara Miller, in conversation with Rob Stoner and economist Catherine Wolfram. And we're talking about creative economic incentives to reduce carbon emissions, one of which is an idea that Europe has adopted. It's called CBAM, the Carbon Border Adjustment Mechanism. 

CW: And what it does is basically at the border it poses an adjustment for imports proportional to the carbon that's used in making those imports. 

KM: So imagine you're Europe and you're importing, let's just say, Chinese steel. 

CW: Say it takes three tonnes of carbon dioxide to make a ton of Chinese steel. And say you're a Chinese steel maker trying to send your steel to the EU. Before the CBAM, you had a huge advantage because the EU steel makers were paying for their carbon emissions. The Chinese steel makers weren't. So with the CBAM, it basically says when you try to export your Chinese steel to the EU, you're going to have to pay proportional to the CO₂ that you've used to make your steel. And so it completely erases that kind of competitive advantage that you described. We can no longer…it's no longer cheaper to buy things where carbon isn't priced because we're doing this border adjustment to make sure that all the carbon is priced. 

The other thing I'd like to say about CBAM is, and I think this is where the real beauty of the CBAM comes in, it credits exporters if they have already paid a carbon price in their home country. So going back to these Chinese steel producers, if China expands its carbon pricing scheme to cover the steel producers, then whatever its paid, whatever the steel producer is paid domestically, gets credited and it pays a lower border adjustment. 

KM: This seems like it gets complicated very fast, though, right? I mean, you're a steel producer in China. China charges a different level of tax than France. You pay it, or so the government says. Like A, they may have it completely different. They may charge a third of the tax, you know, and so France is like, well, that's not enough. I'm sorry. Like, we want 3%. You're charging 1%. It’s not going to do it. And also, we don't even know whether to believe you. Like, have you really paid it? The government says you have. So I'm not sure that there's tons of trust with many countries and the government that they're very, very closely tied into industry. I don't know what…I mean…tell me how this works. 

CW: Yes, I agree with the potential negatives that you've laid out. I have some thoughts on that. Let me first articulate the positive. And we are seeing this, is that the EU CBAM has just really galvanized the discussion worldwide about carbon pricing. 

So, Turkey, for instance, half of Turkey's total manufacturing gets exported to the European Union. Turkey did the calculation that its industrial producers were already paying a carbon price. They were just sending the check to Brussels. If Turkey put on a carbon price, you know, nearly as high as the European Union's, it would collect the revenue and keep it locally instead of sending it to Brussels. And so that kind of logic is just percolating throughout the world. And there are a lot of countries that are thinking since the CBAM about implementing their own carbon prices. So, you know, one thing you said is, well, what if the exporter hasn't paid as high a carbon price as they would pay in the EU? Then you just get credited for whatever you pay. 

KM: Okay. To pay the remainder. 

CW: You have to pay the remainder. And so again, that incentivizes the foreign country that the exporting country to the EU to increase their carbon price to the level of the EU so that they keep all the revenue. You articulated the concerns about monitoring. Yeah, I think those are real and I think there are measurement challenges. I guess I would say two things. One, as I said, I think the beauty of the CBAM—and you know, it has this funny acronym, it sounds very esoteric, very complicated—I frankly think that it's the most important thing that we've seen in global climate mitigation circles in the last couple decades. I think it's really, really important and is really helping solve a lot of the problems involved in getting global carbon mitigation. 

So, I think one thing you can do is not say I'm going to try to measure for every single tonne of steel how much carbon was used. But I'm going to look at the whole country where it came from and charge them based on kind of average carbon emissions in China. And so you might think that that's kind of messy. And then individual steel producers don't have an incentive to reduce their carbon. But what it does give an incentive to and where the real bite of the CBAM is, is it gives policy makers. So if you're charging every single export from a country based on the country's average carbon emissions, then the country has an incentive to reduce their overall carbon emissions or impose a carbon price. So, for instance, I like to say that the ideal CBAM is a CBAM that's never implemented because every country is encouraged to charge their own carbon price domestically, and then you're all paying carbon prices and there's no need to border adjust. 

Your point about do we really believe, like, is some foreign country actually collecting the money? Are they actually really charging the carbon price? I think that is a real concern. I am encouraged by the developments that there have been in satellite monitoring. I mean, it sounds kind of like 3D and futuristic, but we have satellites out there. I have a former graduate student who's running an entity that's measuring kind of factory by factory, seeing what carbon emissions are coming out. So, you know, it's harder to hide it. It's really harder to hide. 

RS: So a lot of the countries we're talking about, big exporters to Europe or the United States, for that matter, are low-cost producers. And these are typically emerging economies. And what we're doing with those taxes is trying to push them in the direction of developing low-carbon manufacturing capacity and just generally low-carbon economies. But that takes a lot of capital. So there's this sort of conflict that I struggle with. Where does that capital come from? If you are a poor country, you may be up against your debt limit, for example. 

CW: Yeah, that's a huge issue in global climate circles: climate finance. How do we essentially transfer money to low- and middle-income countries to the Global South to help them decarbonize and help them, as you say, kind of grow in a in a low-carbon way? If I were president of the world, I would basically use the CBAM as a reason to get a bunch of high-emitting countries together and talk about what kind of an ideal structure looks like. And in my view, part of that ideal structure would be using the revenues from the CBAM, from carbon pricing in the Global North, to transfer money to the Global South, as you say. I think there are two reasons to do that. One is economic. As we've talked about, there are more opportunities for low-cost mitigation in the Global South. But the second is really moral. The Global North was able to develop using carbon. You know, a huge proportion of the carbon that's already in the atmosphere comes from Global North emissions. And the Global South is predicted to bear the brunt of carbon, of sorry, climate change. So, you know, hotter temperatures, places like India are really, really going to be hit by those higher temperatures. And essentially the Global South is suffering from a problem that the Global North has created. 

RS: People talk about this idea of a carbon budget, that we've only so much carbon that we can emit over the ensuing several decades. You're thinking is that we would make more of that carbon budget available to emerging economies so that they could develop through their initial stage at least and get rich enough to make these sort of large capital investments. But doesn't that mean that we're imposing a higher carbon tax on ourselves? And are we ever going to do that? 

KM: You mean like it's more expensive to make a toaster? Is that what you mean? And then we have to pay for that, or…?

RS: Yeah, well, somehow, I mean, if we're going to constrain our emissions in order to make more room for them to emit, then we're going to have to increase our carbon tax. So, I'm trying to be an economist here. 

CW: Yeah, that’s exactly right. 

RS: So we're, it's a funny way of transferring capital, but that's effectively what's happening. We're taking it in through taxation and transferring it to those countries by giving them more space. 

CW: If, this is again, if I were president of the world, I would…

RS: I'd vote for you. 

CW: I would be very focused on climate change, but if I were president of the world, I would allow for kind of a graduated carbon pricing scheme. So coming back to the CBAM, you could imagine designing it so that low-income countries get credit for kind of five X, whatever carbon price they charge. So if the European price is a hundred, then a price in Mozambique of 20 would get them out of paying the European carbon price and effectively that is letting those countries use more carbon than we are giving, more, as you say, of the carbon budget to lower income countries. 

KM: When you talk about the kind of economic unfairness, it's a little you know, what we're saying in some ways is like, okay, you all get refrigerators, okay, now everybody’s gonna have to start paying a lot more to get a refrigerator. And everybody in this country is going to have to bear that, whereas these people already got theirs. And that doesn't seem fair. Yeah, it sounds like. 

CW: Yeah, right. Yeah. So let them get their refrigerators for a little bit less. It's not going to be a lot more. These are all kind of like rounding around the margins and, yeah, but we're going to get let them get their refrigerators reflecting a lower carbon price. 

KM: But I thought the thing that you said before about Turkey was really smart, that like Turkey sends a bunch of stuff to, let's say Italy and it was getting taxed. And so where does Italy send it? To Brussels, where the EU headquarters is. And Turkey is like, well, we we want it to stay in Turkey, so we'll just be more efficient with our use of carbon. Use less of it. Then we'll tax ourselves, you know, get it all in our deep and stay in our country and then send it over. You know, it's pretty clean. And we'll send it over to Italy. 

CW: Yeah, right. I have a policy brief that shows basically counts the number of times carbon pricing, cap and trade, decarbonization, those words have shown up in the press in countries that don't currently have carbon prices and that aren't the U.S. And you really see that after CBAM it quadruples. It has literally started a global conversation about carbon pricing. Not only about carbon pricing. We also track things like green steel and decarbonization and clean energy. So it's, as I say, it sounds esoteric, but I'm super excited about CBAM. 

RS: How much is CBAM influencing U.S. policy? We export some stuff to Europe. 

CW: Not that much, I don't think. I think the U.S. is a little bit insular, to be honest. You, you know, continue to hear, well, carbon pricing is impossible and yet lots and lots of other countries are doing it. But right now, the EU CBAM is kind of in a pilot measurement phase. No money is changing hands. It will be implemented in 2026. As I say, there are all these other countries that are thinking about it. And so I do think between that and between the conversations about how to bring in money to pay for the Trump tax cuts, that conversation will take place in 2025. You know, that's why I’m hope-casting some kind of carbon pricing. 

KM: I mean, we've been talking mostly about like what should the U.S. do? What's Europe doing? These kind of wealthier, more mature economies. But I just wonder, on the other side of this, you've got countries where all the time lots of people are moving into the middle class. They're poorer economies, but they're getting richer faster. We've kind of already been through that sort of growth spurt. I wonder how you deal with the fact that there's a lot of the world when you think about like pulling carbon out or emitting less carbon, there's a lot of the world that's still on the growth trajectory. And I mean, what does that demand look like from your perspective? 

CW: Yeah. So, this is something I've done research on. People when you're very, very poor, if your income goes up, you spend more of your income on higher quality protein, for instance, or just higher quality calories. But as you come out of poverty and enter the middle class, you start doing things like buying a refrigerator, buying a car, buying a motorcycle. And those things all require energy. So, you do see this kind of, you know, step change in energy consumption as more people come out of poverty and enter the middle class. That said, we've been talking about this from a climate change perspective. So that is accompanied by more carbon emissions, but it's also accompanied with people getting access to refrigerators, right.? And refrigerators are great because they keep food cool, keep medicines cool. And, you know, being able to drive gets people to better jobs. So those things are associated with economic progress, which we want to cheer for. It's great when people come out of poverty and come into the middle class. You know, the hope is that we can get to a point where energy systems don't emit as much carbon or don't emit nearly as much carbon, so that as people come into the middle class, they're buying refrigerators made with green steel or they're driving, you know, electric mopeds. And so that the kind of increase in carbon emissions isn’t associated with that economic growth. 

KM: Does that feel realistic? If you're talking about millions of people or tens of millions of people entering that wealthier sort of phase. I know we're hoping that we can mitigate the amount of carbon in the air. We can produce less. But does that feel reasonable when you look at countries that are on the upward sort of growth trajectory? 

CW: On the one hand, fossil fuels have been used because fossil fuels have lots of great properties. I know that sounds funny for someone with a climate perspective to say. But, you know, oil has become so dominant globally because it's a very good energy storage mechanism, basically. It's not that heavy. You can use it in a car for transportation, and the energy you get out of that oil is super valuable for the weight of that oil. That said, we are making a lot of progress on making electric vehicles cheaper, making batteries cheaper, making things like solar panels cheaper. And I will say, I think we don't, we can't paint the Global South with one brush. There are parts of the Global South where, you know, solar and wind is super abundant. If you think about Africa right now, leaving out South Africa. Over half of the electricity is made with renewable, you know, hydro or geothermal electricity. And they have very great solar potential. 

Coming back to the CBAM, I heard at COP the head of an NGO from Africa describing his vision for green-led African growth. He was saying that it used to be the case that in Europe energy flowed from the east to the west. You had coal mines in Poland and they were feeding the auto manufacturing plants in Germany. His vision is that in the future, in a world where we're pricing carbon, where that coal is really expensive to use, he hopes that we will see energy flowing from the south to the north. That African potential to have, you know, very abundant solar, abundant wind, will help fuel the production. You know, maybe some of that production will actually move to Africa, and Africa can become, you know, a green steel powerhouse and send that steel to the consumers in Europe. So kind of transform the way energy flows based on the huge renewable energy, solar potential that we see in Africa. 

KM: Rob, you've spent so much time in Africa. I don't know, I wonder if you had some of those concerns of like, this is great, people are doing better, but then the pressure that that puts on, you know, as Catherine said, I mean, fossil fuels, there's a reason people use them. Like coal, oil, these are very, very effective, easily transportable. There's lots of things that are good about them except for the obvious. 

RS: Yeah. It is always ironic that Africa is a big producer—many, many parts of Africa are big producers of oil and gas—and yet they benefit very little from that. I mean, the present-day carbon footprint of Africa is so trivial that I think it's not an issue, and the emphasis should be on economic development. However, you can do it in at least the foreseeable future. But you know, beyond that stage, they certainly have to get onto a renewable track or a low-carbon track. And I think they can, but they really stand to be beneficiaries of what we learn in the next couple of decades. 

KM: I guess finally, you know, we've talked so much about economic policy, and I wonder if what we have looked at on the menu in terms of like these are the carrots and sticks or as Ernest Moniz said, the carrots and twigs that we're using. Do we have like the right things on the menu? 

CW: I think it depends on what you describe as the menu. Like if the menu is the set of things that policy makers can choose from, I think we have the right things. Yeah, carbon pricing is an old idea in economics that's been around for over 100 years. It's really kind of an Econ 101 answer to an externality, which is what we have. We have a global externality with climate change. You know what policy makers are ordering off the menu, I think, is the is the challenging part. And it's a global problem globally without something like CBAM, every individual country has the incentive to kind of sit back and hope that other countries really take the lead. And so that's why I'm really encouraged by CBAM. It pushes countries not to, as economists would say, free ride around along with other people's or other country’s policy initiatives but join those policy initiatives. And so, yeah, to use your menu analogy, I think that the CBAM and related initiatives will help policy makers make the right choice off that menu. As I've said, I think it's an all-of-the-above strategy. I think as we talked about, subsidies are great, subsidies and taxes are even better. So, I would love a world that had both. Yeah, carrots and sticks. 

KM: I wonder, too, if there's something of a kind of outsized influence of like when Europe says we're going to tax carbon, and so Turkey says, well, in order to sell our stuff to Europe, we're going to have to reconfigure things around here. Or as you said, you know, we'll tax carbon ourselves and then we'll get all the revenue and then we'll sell to Europe and then be like, okay, great. The tax was levied. Okay, perfect. Come on in. And I wonder if then you get this kind of domino effect where even if we don't, even if the U.S. just has too many divisions, we cannot get together politically, it cannot happen, all the stuff we get from Turkey and Vietnam like it's already been taxed for carbon because in order to sell to France and Italy and the UK, they have to do it anyway. 

CW: Yeah. And I think the real domino effect and that's exactly the analogy that it becomes this kind of tipping, you know, positive feedback cycle. And if Canada and Mexico imposed CBAMs, the U.S. would pay attention. We export a lot to those countries. We don't export that much to the EU. I hope that it doesn't take that though. Yeah, I think that's kind of part of what will get politicians’ attention. But as we talked about at the beginning, I think the revenues that carbon pricing introduces as well as kind of seeing that this is what's happening around the world, I think we can kind of forecast that it might happen that we would be taxed by Canada and Mexico instead of waiting until that actually happens. And hopefully we'll kind of get off the ground quicker than…yeah, I'm waiting for those. 

RS: I'm developing this image as you're talking of countries segregating their manufacturing into a clean part that goes to Europe and a dirty part that comes to the United States. 

KM: But you see it’s not worth it. You know, it makes me think of like when California says, well, this is how cars are going to have to be. What are you going to have a plant where you make the cars for Utah? Like one for California? It doesn't make sense. 

RS: No, but you could keep all your coal plants in China and say, okay, well, those coal plants are going to run all of these factories, and these solar panels are going to run those ones. We'll export that stuff to Europe. We'll export the coal. 

KM: There's some dominoes that probably just fall because it's just too complicated. But maybe there's some that wouldn't.

CW: No. And as you say, if enough countries do it, it helps the technologies get cheaper. That's exactly the California analogy. Yeah, I like that. 

RS: Yeah, I agree with you. I'm just trying to cast a doomy or gloomy, sort of pile over this. 

KM: You know we're hope-casting, wish-casting, we're hope- and wish-casting. 

Catherine Wolfram is the former deputy assistant secretary for climate and energy economics at the Treasury Department. She's an economist and professor of energy economics at the MIT Sloan School of Management. Catherine, thank you so much for taking time to be here. 

CW: Thanks so much. 

RS: Thanks, Catherine. 

KM: What if it works? is a production of the MIT Energy Initiative. If you like the show, please leave us a review or invite a friend to listen. And remember to subscribe on Apple Podcasts, Spotify, or wherever you get your podcasts. You can find an archive of every episode, all of our show notes and a lot more at energy.mit.edu/podcasts and you can learn more about the work of the Energy initiative and the energy transition at energy.mit.edu. Our original podcast artwork is by Zeitler Design. Special thanks to all the people at MITEI and MIT who make this show possible. I’m Kara Miller.

RS: And I'm Rob Stoner.

KM: Thanks for listening.