Accounting for the Cost of Carbon

February 26, 2020

OurEnergyPolicy (OEP) brought together three carbon pricing experts—Robert Litterman (Founding Partner, Kepos Capital), Gavin Donohue (President and CEO, Independent Power Producers of New York), and Marc Hafstead (Fellow and Director of the Carbon Pricing Initiative, Resources for the Future)—for a panel discussion in New York City on February 26, 2020.

Moderated by:
Amy Davidsen
The Climate Group
Co-Hosted by:


Robert L. Stout, Jr.
Vice President and Head of U.S. Policy
BP America
Keynote Speaker
Gavin Donohue
President and CEO
Independent Power Producers of New York

Marc Hafstead
Fellow and Director, Carbon Pricing Initiative

Resources for the Future
Robert Litterman
Founding Partner
Kepos Capital, LP
Event Summary:

Litterman, Donohue, and Hafstead discussed federal and state carbon pricing policies, how to set the price, the urgency of acting, the viability of passing a carbon tax, and other aspects of the issue. The event was part of OEP’s Energy Leaders Luncheon Series. Amy Davidsen (Executive Director, North America, The Climate Group) moderated the panel discussion. Bill Squadron, (OEP President) and co-host Robert L. Stout, Jr. (BP America Vice and Head of U.S. Policy), started off the event.

Squadron invited attendees to add their comments to an online discussion “Time for a Price On Carbon,” hosted by OEP February through March 6, 2020, with U.S. Congressman Ted Deutch (D-FL-22) on his Energy Innovation and Carbon Dividend Act (H.R. 763). Stout emphasized BP’s commitment to carbon pricing and decarbonization goals, and mentioned the announcement earlier that day that BP will withdraw from two trade associations due to differences on carbon pricing.  

“Make no mistake—carbon pricing policy and advocating for it now is part of BP’s core corporate purpose and one of our key aims,” Stout said.


Highlights (read more below)

  • Carbon Pricing in New York State (IPPNY CEO Gavin Donohue): Carbon pricing is essential to reach NYC’s energy goals.
  • Challenges with State-By-State Carbon Pricing (RFF’s Marc Hafstead): Carbon pricing does lower emissions, and the flight of industry to another state is not as big of a problem as some may think.
  • Global Carbon Price Ramifications (RFF’s Marc Hafstead): The world is looking to U.S. leadership on carbon pricing. 
  • Carbon Pricing & Managing Risk (Kepos Founder Robert Litterman): We should have started pricing carbon 20 years ago; lessons from risk management indicate we should err on the side of caution and start pricing carbon very high immediately.


Carbon Pricing & Managing Risk

As an economist, Robert Litterman (Founding Partner, Kepos Capital) said a failure to price carbon is the root cause of climate change—the environmental impacts of carbon-based energy have not been priced into the overall cost. He said where there is uncertainty, we need to err on the side of caution.

“There is risk associated with the externality of emissions [and] we’re creating too much risk,” Litterman said. “Had we priced emissions 20 years ago, we would be in good shape. [But] the risk is exploding right now. We have no time to delay…. When you’re managing risk, if you have enough time, you can solve almost any problem. It is when you run out of time that a problem can become a catastrophe.”

Litterman said we should start pricing carbon high on the national level and drive the price by what it would cost to pull that carbon out of the air.

“Everyone responds to incentives. And right now, the incentives go the wrong way,” he said. “Our foot is on the accelerator, we’ve got to slam on the breaks. And that means putting a price on carbon. When we change the incentives, we’re going to change behavior.”

Carbon Pricing in New York State

Gavin Donohue (President and CEO, IPPNY) said that his organization—which represents three quarters of all the generation in New York State—has been the leading cheerleader of carbon pricing in the governor’s office outside of the New York Independent System Operator (NYISO).

“We are very supportive of putting a price on carbon,” Donohue said. “RGGI [the Regional Greenhouse Gas Initiative] was supposed to be a national model. It did not turn out to be that way. We would like to see carbon pricing, and what we’ve done in New York…be the framework for the nation and the region.”

Donohue said he believes a tariff in New York State accommodates carbon pricing and that the state has set the stage for moving forward. He said carbon pricing is a market-based policy that will ultimately help rate-payers over the long-term and help the environment. 

“Regulatory uncertainty, government in the marketplace, picking winners and losers to achieve a policy objective is just wrongheaded for markets. It ultimately is going to stifle innovation; it’s going to hurt consumers,” said Donohue. “We have a state policy of now promoting 3,000 MW of storage, 9,000 MW of offshore wind, carbon-free electricity, [and] renewable targets. We can’t get there without carbon pricing. It just is impossible.”

He said it is incumbent upon them to do everything they can to push New York State and Governor Cuomo to support carbon pricing. Donohue recommended that attendees see information in the carbon pricing studies by the Analysis Group on behalf of the NYISO.


Challenges with Carbon Pricing in States

Marc Hafstead (Fellow and Director, Carbon Pricing Initiative, RFF) focused on carbon pricing policies in states. He said some voters are concerned that if one state passes a carbon pricing policy, this will result in the “flight of industry” where carbon-intensive industries in that state will move to states without a carbon price, preventing any net decrease in greenhouse gas emissions. Hafstead said this concern is overblown and hasn’t been shown to happen as much as people expect.

Hafstead said a state issue that does concern him is that people might think a carbon pricing initiative is unsuccessful if it works in one state but not another. He said people sometimes do not think of how characteristics of a state, such as location, demographics, and main industries make a big difference. For example a carbon price in a state that produces 1% of its electricity from coal will have a very different impact than in a state that produces 90% of its electricity from coal. Other times, people think a carbon tax was not successful because it didn’t lower carbon emissions, but it did keep carbon emissions from rising, such as in British Columbia. 

“I worry that people are going to look at that and say, ‘Carbon pricing didn’t work,’” Hafstead said. “It’s not that it didn’t work—it’s just that you’re focusing on high-cost abatement options. And if you actually put a carbon price somewhere [with] low abatement cost options, it would look much more effective.”

Hafstead said that passing a carbon price is more important than agreeing on the exact carbon price at which we should start. 

“We don’t know what the right price is,” he said. “Theoretically, there is a concept called ‘social cost of carbon’ and that is the right price. [But] there is so much uncertainty there…. We don’t have 5 years to argue about the price. So let’s get a price in place and go from there.”


Global Carbon Price

Hafstead and Litterman said they agree on the importance of moving toward a globally harmonized carbon price.

“We don’t have time for state-based approaches. We’ve got to globally price emissions very high immediately,” Litterman said. “The rest of the world knows we have to do this. Most of them have said we’re ready to go. But they’re waiting for the U.S. to provide leadership.”

Hafstead said that other countries are hesitating to set a carbon price or have initiated their own carbon taxes at a very low price because they don’t want to set their international trade at a disadvantage.

“As soon as you start seeing major players like the U.S. put a carbon price in place, that takes away that argument in those countries,” Hafstead said. “I think U.S. leadership will be essential to getting other countries on board.”

Donohue said the Independent Power Producers of New York is working on the social cost of carbon as its first issue. 


Political Feasibility & Complementary Policies

Litterman expressed optimism that carbon pricing legislation will pass, saying major oil companies (including BP, Exxon, and Conoco) and major corporations (including Goldman Sachs, J.P. Morgan, and Unilever) support a carbon tax. He said he is optimistic that more Republicans will come to support it.

“If you look at our list of sponsors [for the Climate Leadership Council], it’s basically across all of corporate America,” Litterman said. “So it’s widespread; everyone gets it…. We’ve got tremendous support, both public and behind the scenes, and so I think we’re going to get there.”

Haftsead said it is important to focus just as hard on keeping a carbon pricing policy as passing it. If there is not enough bipartisan support when the policy is passed, opponents may successfully remove the policy in the future.

“We really do need to look for a bipartisan solution,” he said. “I do think that the strongest argument for a politically viable, sustainable carbon price today is using a fully revenue-neutral policy.”

Stout from BP said there seems to be a widening consensus that a carbon tax will not replace regulations. Litterman and Hafstead both added that other policies can be complementary to a carbon price and are also needed to decarbonize the economy. 

Donohue called the transportation sector the “800-pound gorilla in the room,” that is, an especially large challenge to decarbonization efforts. Hafstead agreed and said the United States will need policies in addition to a carbon tax to decarbonize the transportation sector but that carbon pricing is an important start.

“Transportation is always going to be tough,” Hafstead said. “The beauty of the [carbon] price is that it puts the incentives out there to let the market determine which way we should go, and then we help make that happen faster with more policies.”