Climate policy will fail if we don’t address inequities and today’s energy needs

Rising energy prices are a threat to economic growth and jobs, as well as a vulnerability for political leaders.  President Biden has responded to rising prices at the pump — and a decline in his approval rating — by lobbying OPEC+ countries to accelerate planned production increases and leading an international release of strategic stockpiles.

Most of us want to reduce greenhouse gas emissions and address climate change.  But ALL of us need access to energy today.  Political leaders in our democracy have to answer to voters today, and the vast majority of those voters are still driving internal combustion engine (ICE) vehicles.  With many of those vehicles likely to be on the road for a decade or more, gasoline prices will remain important to voters and politicians, like it or not.  This combination of economic and political vulnerabilities highlights a difficult challenge for political leaders (and all of us):  How to “thread the needle,” incentivizing greener forms of energy at a pace consistent with climate objectives while simultaneously delivering reliable, affordable energy today.

Importantly, the impact of these policy choices does not fall evenly across the population.  Equity issues loomed large at last year’s COP26 in Glasgow — and rightly so.  There’s a moral imperative to expanding access to energy to improve quality of life in developing countries, even while reducing global emissions.

But addressing equity issues is equally imperative at home.  Even with a growing focus on energy and environmental justice, many of the policies advanced in recent years are highly regressive — placing a significant burden on lower-income families, and/or giving benefits to wealthier families.  Many lower-income voters look at these policies and understandably ask, “what’s in it for me and my family?”

For example, aggressive federal, state and local policies (including subsidies/tax credits, preferential highway and parking access, etc.) have helped sales of electric vehicles rise dramatically.  But that benefit accrues predominantly to wealthier households: The most recent National Household Travel Survey (with data from 2017) indicates that the wealthiest U.S. households are 13 times more likely to own an EV than the poorest households.

This is not surprising since poorer households depend primarily on the used vehicle market (and EVs are a relatively new and small share of the fleet).  With the average new vehicle in December 2021 costing over $47,000 (and the average new EV costing over $63,000), only about one quarter of vehicles sold in the US are new; the remaining three-quarters are used vehicles.  The highest income households are 6 times more likely than the poorest ones to own a new vehicle (one year old or less).  As a result, lower-income households tend to drive significantly older vehicles (averaging nearly 13.5 years old) than the wealthiest households (averaging 8 years old).

• “Cash for clunker” policies (like the federal CARS Act of 2009) aim to accelerate fleet turnover and reduce the number of highly-polluting older vehicles. But as a result, such programs reduce the supply of used vehicles, and raise their prices — a burden which falls more heavily on lower income households since they depend more heavily on the used vehicle market.  (With supply chain issues impacting manufacturing and commuters less willing to use public transport, new car prices last year rose by 11%, but used car prices increased by 31%.)
• By the way, this dynamic applies beyond the transport sector. For example, wealthier households are significantly more likely to own a home, and therefore to benefit from roof-top solar tax credits.  Families with incomes above the national median (roughly $80,000 annually) are 50 percent more likely to own a home than families with incomes below the national median.

In addition, lower income households also suffer disproportionally from policies aimed at restricting investment in fossil fuels because they spend a significantly larger share of their income on energy.  For example, in less densely-populated parts of the United States, incomes are generally lower, miles driven are higher, and alternatives to gasoline-powered cars are less numerous.  Thus, climate policies that seek to restrict fossil fuel investment and supply are bound to drive prices higher if demand-side policies are not commensurate (and on the same time frame).  And again, these price increases fall most heavily on lower-income households.

• And last year’s price increases were significant: Official data shows that U.S. retail gasoline prices increased by 84 cents/gallon, the largest one-year increase on record.  (Following a COVID-driven decline in 2020 of 46 cents/gallon.)  With consumption of nearly 9 million b/d, the increase in gasoline prices last year cost American drivers an additional $110 billion — or an extra $900 for every U.S. household — again, a burden which hits lower-income households more severely.

In addition to their importance for consumers (and business), higher energy prices also matter to political leaders’ approval ratings.  Not surprisingly, political leaders are keenly tuned-in to this dynamic; the good news is that we are also beginning to see this realization reflected in energy and climate policymaking.  Energy Secretary Granholm recently has encouraged U.S. oil producers to ramp up investment and drilling.  Moreover, the distributional implications of policy choices is also coming into focus: Recent proposals on Capitol Hill have included income limits for EV subsidies as well as rural EV charging incentives.

And this leads to my guardedly-optimistic bottom line:  In democratic societies, a political leader who is seen as failing to deliver sufficient, affordable energy today will not remain in office long enough to successfully deal with climate change — even if their proposed policies would cut emissions.  And that is especially true if the impact of policy choices falls unevenly across the society, adversely impacting the lowest-income households.  An equitable solution recognizes that the U.S. and global economies require BOTH sufficient investment in fossil fuels for today’s energy system, AND a rapid transition to a lower-carbon future.  Fortunately political leaders have started to recognize that climate policy must approach fossil fuels and energy transition as an “AND,” not an “either/or,” and that the distributional impact of policy must also be addressed.

This post originally appeared in the Forbes blog on January 26, 2022.