Low-Energy Fridays: Does climate policy matter?

Today’s headline question is a throwback to one of my favorite analyses on the overall effect of explicitly climate-focused policies, written by the Breakthrough Institute. That piece took a simple but novel approach by examining how much CO₂ major economies were emitting relative to their size—their “carbon intensity”—before and after committing to the Kyoto Protocol, the global climate agreement of 1997. Their finding was controversial but plain to see: Most countries showed no gain in their rates of carbon intensity improvement after joining the agreement, and the rates actually worsened in most cases. This led to a broader question: Are explicit climate policies really delivering on their promises? Today’s Low-Energy Fridays tackles that question with some new data.

To offer important context, an economy’s carbon intensity is always improving because investors have a profit motivation to produce more goods with fewer inputs. Energy inputs, the primary source of CO₂ emissions, are no exception since they carry a cost and producers can make more money by producing more with less energy. Carbon intensity is an important window into the effectiveness of climate policy because it can tell us if a policy is really making the economy cleaner (i.e., more economic output with less pollution) or if it’s resulting in a smaller, but not much cleaner, economy.

This week, R Street released a new piece looking at emissions and, importantly, carbon intensity improvement in the United States under various presidential administrations. To summarize, regardless of who sat in the Oval Office, the number of climate regulations, the level of subsidies, or other explicit climate policies, the rate of carbon intensity improvement in the nation was largely consistent across the past three presidential terms. A reasonable finding from that data is that despite all the attention, controversy, and cost of various climate policies, the rate at which the economy got cleaner was relatively constant. There are two reasonable explanations for this.

First, despite the amount of attention paid to it, climate policy often only affects a small fraction of economic decisions that could change climate outcomes. For example, electric vehicle (EV) subsidies, which were about $17 billion last year, barely made a change in transportation emissions because EVs only comprise about one percent of registered vehicles. Even if the subsidies and other policies succeed in shifting consumer purchases to EVs, it would still take a long time before that 1 percent could increase to the 30 or 50 percent mark, which would yield major emission changes. Simply, the reason these policies may not have much impact on carbon intensity is that the overall state of the economy and its demand for energy matter a lot more to emissions than policies that promise to affect only a very small fraction of consumer decisions related to emissions.

There is also a second explanation to consider. While climate policy steers capital toward emission-improving activities, it also steers capital away from activities that would have improved economic productivity relative to emissions.

For example, if I’m building an AI data center, I’ll be very concerned about the cost of electricity and will try to find ways to reduce consumption even without a climate policy or subsidy. My ability to do so will depend upon the capital available to me. If I’m taxed heavily to pay for an alternative policy (e.g., an EV subsidy), then I have fewer resources available to invest in equipment that would improve my data center’s efficiency. As a result, a climate benefit from natural economic productivity improvements is lost because of the costs levied by the climate policy.

Put another way, while productivity gains in the economy reduce emissions by letting us consume more with fewer inputs, the taxes and regulations that accompany climate policies carry a “deadweight loss” that trades productivity improvement for direct emission abatement. This creates a tradeoff typically not included in analysis and potentially explains why having many regulations or subsidies does not deliver commensurate improvements to carbon intensity.

We see support for this in the data analysis of carbon intensity. Even as emissions fluctuated across presidencies, they all had comparable carbon intensity gains. A caveat is that more variables explain the economic side of the carbon intensity equation than just climate policy. A president who is more likely to adopt climate policies may also be more likely to adopt other economic policies that drag on economic growth and diminish the potential carbon intensity gains of their climate policies.

But the idea that the broader economy matters more than climate policy is not new, and a good analysis on the topic can be found in the Conservative Coalition for Climate (C3) Solutions report Free Economies are Clean Economies. C3 Solutions highlights the significant correlation between open market conditions and environmental quality in an economy. This is likely because wealthier economies place greater value on environmental quality (covered in a past Low-Energy Fridays post). But even if one rejects that notion, the phenomenon of countries emitting less as they get richer has been academically analyzed since 1995, when it was noted that a nation’s emissions level naturally increases, peaks, and falls in accordance with its wealth.

The broad takeaway is that while we can determine that an individual climate policy likely works, the more climate policies enacted, the more one must consider the tradeoffs from their costs, and how the economy would have otherwise improved its productivity. This also means that for a climate policy to be effective relative to the do-nothing approach, it must be exceptionally efficient. Just how efficient a policy must be is hard to measure—but this is one reason why R Street emphasizes that inefficient policies can do more harm than good.