Key Challenges and Remaining Issues
Incorporation of the carbon charge into budget and accounting
To make the carbon charge an integral part of decision-making, it needs to be included as a line item in the budget. According to Tamara Dicaprio, the chief architect of Microsoft’s innovative internal carbon pricing program, “the moment we got the carbon charge on our Profit and Loss (P&L) statement, everything clicked”. It is challenging to determine how the carbon charge should be put in the accounting system of Yale, as the units will pay a monthly carbon fee but will get back the rebates at the end of the fiscal year. There are different views on how this should be done and Yale is going through consultation to develop the appropriate system.
Trade-offs between fairness, efficiency and political feasibility
There are trade-offs between fairness, efficiency and political feasibility among the schemes tested in the initial pilot. The redistributive scheme has high efficiency as it focuses on on-the-margin incentives to reduce carbon emissions. However, this scheme was perceived by some as unfair for two reasons. One, it ignores the different marginal cost of abatement of buildings and penalizes early-adopters while benefiting late-adopters. The School of Forestry and Environmental Studies for instance has a building that is already highly efficient and therefore has less room for improvement than other units. Two, it involves a tension between self-supported and centrally-supported units as described in the pilot report:
Self-support units do not want to pay centrally-supported units if they perform poorly and vice-versa. Moreover, centrally-supported units consider competing with self-supports unfair because self-supports have their own capacity and capital for carbon reduction projects. Conversely, self-supports consider competing with centrally-supported units unfair because centrally-supported units can access the university’s operational resources without footing the bill.
The energy efficiency earmark or subsidy approach is the fairest and most politically feasible, but is highly inefficient. In the middle is the target scheme, which compares each unit to its own baseline. However, to make the target scheme really fair, the baseline would need to be customized to each building, which is overly administratively burdensome.
To increase political feasibility, Yale has designed a carbon charge system with rebates. However, this has compromised efficiency as it results in a less salient price signal. A potential solution being considered is to return the revenues by reducing fixed-rate facilities costs (e.g., custodial services and maintenance) based on a per square-footage basis or a unit’s share of university’s service charges. This is similar to tax shifting as done in British Columbia, where the government uses the carbon tax revenue to reduce income and labor taxes.
The landlord-tenant split incentive
Centrally-supported units at Yale present the classic landlord-tenant split incentive challenges—these units have small incentives to reduce energy use as they do not bear the cost of their energy consumption. Since about 90 percent of energy spending at Yale is by units that do not pay their own energy bill, a priority for the carbon charge is to make energy cost more visible to energy use decision makers, with regards to both day-to-day and longer term decisions.
Implementing a policy with imperfect information
Yale faces the challenge of building the infrastructure of the carbon charge with imperfect information. Yale’s initial pilot ended on May 31, 2016 and the second pilot is scheduled to start in Spring 2017. While there have been lessons learned from the first pilot, there are still many unresolved issues. In addition, the University is always balancing a variety of priorities. This raises a series of questions on how Yale can modify a policy in real time and engage stakeholders with a new idea despite the lack of information.
Impact on capital investments
An important goal of carbon pricing is to influence major capital investments toward lower-carbon options. Yale can do this by using the carbon charge as a shadow price for capital investments such as new constructions and energy-intensive equipment purchase. Impact on investments will also require institutionalization of the carbon charge to provide a strong and clear price signal to decision-makers. A further question is whether decisions on major new facilities and equipment or programmatic expansion should be more centralized or left to individual administrative units. These questions were not studied during the pilot and will need to be investigated in the next phase of the Yale carbon charge.
Discussion questions
- Read Section 5-6 of the Carbon Charge Pilot Report (Laemel, R. & Milikowsky, J., 2016, Yale University’s Carbon Charge: Preliminary Results from Learning by Doing) and watch the 1-hour webinar to understand the key lessons learned from the pilot.
- What are the top 3 recommendations you would suggest to Yale as the University implements the next phase of the carbon charge? Please explain and defend your choices.