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The Carbon-Tax Opportunity

Summary:
The pandemic-related collapse in oil prices will likely make renewable energy less competitive, just at a time when the world should be engineering a climate-friendly recovery. In fact, policymakers have an excellent opportunity to advance the transition to a zero-carbon economy. WASHINGTON, DC – The COVID-19 pandemic has brought economic and social activity around the world to a near standstill. As a result, carbon dioxide emissions have declined sharply, and the skies above some large cities are clean and clear for the first time in decades. How Will the Great Cessation End? PS OnPoint Olivier Douliery/AFP via Getty Images

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The pandemic-related collapse in oil prices will likely make renewable energy less competitive, just at a time when the world should be engineering a climate-friendly recovery. In fact, policymakers have an excellent opportunity to advance the transition to a zero-carbon economy.

WASHINGTON, DC – The COVID-19 pandemic has brought economic and social activity around the world to a near standstill. As a result, carbon dioxide emissions have declined sharply, and the skies above some large cities are clean and clear for the first time in decades.

But “degrowth” is not a sustainable strategy for averting environmental disaster. Humanity should protect itself from climate change not by reducing economic activity, but rather by making it more resilient, robust, and sustainable.

The ongoing pandemic has powerfully demonstrated the cost of neglecting catastrophic tail risks. The risks tied to climate change, while unfolding more gradually, are at least as great as those posed by COVID-19. Although the international community is rightly focusing its efforts on the immediate health and economic crisis, it should not lose sight of this threat.

Encouragingly, the rapid reduction in the cost of green technologies in recent years has increased the competitiveness of clean energy generated from sources such as solar and wind. As long as policymakers create a credible expectation of long-term profits by committing to strong environmental standards and providing a long-term framework for eliminating fossil-fuel subsidies, investors will likely be willing to incur the fixed costs of green investments.

Indeed, these technological advances imply that the tradeoff between climate protection and economic progress has become much smaller than we previously thought. Even when the cost-benefit calculus excludes the immediate negative externalities, such as air pollution, that arise from CO2 emissions, green investment has clearly become economically viable even without subsidies. In fact, renewable energy sources like solar and onshore wind power, recently became the cheapest option for much of the world.

But it remains to be seen whether this competitiveness can be sustained in the face of the collapse in fossil-fuel prices caused by the pandemic. US benchmark crude fell below $20 per barrel in late April, its lowest level since 1999. The price of natural gas also is cratering. And although oil prices...

Kemal Derviş
Kemal Derviş, former Minister of Economic Affairs of Turkey and former Administrator for the United Nations Development Program (UNDP), is a vice president of the Brookings Institution.

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