Do We Need a Price On Carbon?

In his January 10 Op-Ed piece in the NY Times,, Tom Friedman makes several points about where things stand in the Energy Technology race and reaches the conclusion that China may be winning and will continue to win unless the US gets serious about energy legislation and carbon pricing. In recent days, starting with the State of the Union address, we have heard a bit more noise from the current administration on the energy front–nuclear power, additional subsidies, no capital gains on start-ups and maybe, a cap-and-trade system or some form of establishing a price on carbon. Maybe it will happen, and, maybe it is necessary for the developed world, where replacement of existing carbon-based energy is the principal requirement. In China, India, and much of Asia, new energy sources can be put in place to meet demand growth—a very different set of economics. And the markets are big enough to drive prices down a volume-related cost curve in addition to cost reductions from new technologies and systems. It allows room for more experimentation. It is a requirement if one really wants to be energy independent. Last year China did import 4.1 million barrels of crude oil a day, a little less than half of what the US imports. But this is likely to grow as auto sales grow, unless… See the April post, “China and Electric Cars—The Stakes Have Been Raised.”
China doesn’t appear to need a price on carbon today to look for alternative energy sources. It understands the relentless energy demand it faces as its economy grows and the pressure that would put on existing energy prices. And it understands, politically,  it cannot continue to pollute its air and water. In my visits there I have even seen some evidence that it understands the Climate Change risks from continuing CO2 emissions.

A brief story: In June, 2008, at a UNEP meeting in New York, I was asked if I could name one thing that one country could do that would accelerate the path toward alternative energy adoption and CO2 reduction. I responded “I guess the expected answer would be that the US should do almost anything. But since I do not think it will, my answer would be for China to institute a $50/Ton Carbon tax. This would accelerate the pace of change in China and would likely shame the rest of the world into responding in kind or with a serious cap-and-trade system.” Immediately the Chinese delegate asked to speak. She started with a very logical argument that China was in the early stages of entering the developed world with a low GDP per capita and such a tax would be a burden on many of the people finding their way into its new economy. However, she closed her statement by saying that China could not institute such a tax unilaterally (my emphasis). An interesting choice of words. The truth is, if China did institute an internal carbon tax, it would dramatically accelerate its alternative energy adoption and innovation. The US would spend way too much time figuring out how to respond and would then be in real trouble in Tom Friedman’s race.

At the moment, it is still a race. We shouldn’t require a price today on carbon to stay in the race. It should be apparent that the present value of tomorrow’s prices for carbon and the cost of climate change would justify alternative energy adoption and innovation today. Unfortunately, our system seems to require that the price be explicit before we really get serious. And, maybe, once the Western World as a whole has an explicit price, Asia will get explicit as well. Then we will see if it stays as a race between countries or simply becomes the race to save the planet.

This entry was posted in General Interest, United States and tagged , , , , by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

2 thoughts on “Do We Need a Price On Carbon?

  1. Jack, you continue to be the lonely voice of reason amidst all the noise on climate change pro and con. I wish they’d appoint you as a czar and see what you’d come up with that can keep us from losing either one of these races.


    • Thanks Andy,
      Unfortunately, these days, you name the race, we certainly aren’t winning it, except for the medal total in Vancouver!

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