Trump: Deal-maker for a Carbon Tax Swap?

This morning, at the historic Willard Hotel in Washington DC, where on a November morning in 1861 Julia Ward Howe penned the Battle Hymn of the Republic, Harvard economics professor and former Obama climate adviser Joseph Aldy issued a clarion call of his own. At a moment of palpable despair, Aldy urged climate policy analysts, advocates and policymakers to consider “The Great Swap,” a carbon tax to advance Republicans’ especially President-elect Trump’s avowed goals of reducing taxes that hold back U.S. economic growth, while also reducing regulatory burdens. Aldy suggested that if Trump wants to live up to his reputation as a deal-maker, he will not pass up the opportunity for a carbon tax to help fund tax reform and eliminate EPA greenhouse gas regulations, goals that Republicans have long espoused. He noted that a carbon tax would also provide businesses with climate policy certainty while cost-effectively avoiding the international repercussions of U.S. repudiation of the Paris climate agreement.

Aldy opens his glossy 38-page paper,[1] citing the robust economic consensus that a carbon tax would reduce CO2 emissions at far lower cost than the current unstable patchwork of regulations and subsidies. Aldy, who advised President Obama whose signature climate achievement was EPA’s Clean Power Plan, pointedly suggests that EPA’s sector-by-sector approach is grossly inadequate to meet long term climate goals and would achieve its near-term goals at unnecessarily high cost. In his remarks, Aldy went further: He suggested that Congress “repeal and replace” the Clean Power Plan with a carbon tax. Moreover, Aldy noted that a modest carbon tax, starting at $25/T CO2 rising 5% annually in real terms, would generate revenue of $100 – 200 billion that could be used to reduce individual and corporate income taxes without increasing the deficit.

Discussing design options, Aldy’s paper cites the growing body of economics literature showing that a carbon tax “swap” can be distributionally-progressive (e.g., by using revenue to cut payroll taxes[2]) and growth-inducing (e.g., by cutting corporate income taxes[3]) or both (by allocating some revenue for each[4]). He suggests that every five years Congress should adjust the carbon tax rate and its annual percentage increase based on emissions data supplied by EPA, tax revenue and economic data from the Treasury Department and data on other countries’ emissions reductions from the State Department. Aldy concludes by pointing out that a carbon tax with “border tax adjustments” to impose equivalent carbon taxes on imported goods would protect the competitive position of U.S. businesses, even energy-intensive industry.[5] He further notes that border adjustments offer leverage for the U.S. to induce similar policies by our major trading partners.[6]

The economic and political case Aldy presented was hardly new to those who have studied climate policy, but he did manage to articulate a plausible scenario in what appears now to be a dire political situation for climate policy.

Following Aldy’s presentation, Hannah Hess of E & E News moderated a panel discussion featuring John Larsen of Johns Hopkins University and the Rhodium Group, Jerry Taylor of the Libertarian Niskanen Center, Todd Wooten of the Senate Finance Committee and Catrina Rorke of R Street Institute. Taylor registered skepticism, quipping, “Business wants certainty? Here it is: no more federal greenhouse gas involvement.” And Wooton opined that Congress will not “repeal and replace” the Clean Power plan, it will just “repeal, ASAP.” For her part, Rorke called on Republicans not to stand aside on climate policy the way they have left health policy to Democrats. She urged them to enact conservative “free market” climate policy to avoid further alienating young voters who understand and accept climate science.

While Professor Aldy’s proposal assumes a decidedly rosy scenario, maybe it is not beyond the pale to hope that Mr. Trump and at least some Republicans get past their climate science aversion to advance policy that comports with their stated principles, advances their tax reform and regulatory relief goals and could even help the U.S. lead on low-carbon innovation and technology.

[1] Joseph Aldy, “Long Term Carbon Policy: The Great Swap,” Progressive Policy Institute, 2016.

[2] Gilbert Metcalf, “A Green Employment Tax Swap: Using A Carbon Tax to Finance Payroll Tax Relief,” Brookings Institution, 2007. Rep. Bob Inglis (R-SC) proposed a carbon tax for payroll tax swap in his “Raise Wages, Cut Carbon Act of 2009,” HR 2380, 111^th Congress.

[3] Donald Marron and Eric Toder, “Carbon Taxes and Corporate Tax Reform,” 2013.

[4] The “Tax Pollution, Not Profits Act” by Rep. John Delaney, HR 2202 (2015), would apply half of carbon tax revenue to reduce the corporate income tax rate, with the other half returned in lump sum to low and moderate income households and to fund transition assistance and early retirement for displaced coal workers.

[5] Jennifer Hillman, “Changing Climate for Carbon Taxes: Who’s Afraid of the WTO?,” German Marshall Fund, Climate Advisors, American Action Forum, 2013.

[6] Id.

Author: James Handley

James Handley coordinates the Carbon Tax Network. From its inception in 2007 until 2016, James served as policy analyst and Washington representative of the Carbon Tax Center. In that capacity, he attended Congressional hearings, studied and digested climate economics and climate policy literature; providing timely reports, summaries and blog posts for CTC's website while building a network of activists, academics and policymakers to support and advance transparent taxes on carbon pollution. Prior to CTC, James represented environmental and citizen organizations, including Beyond Pesticides and the National Organic Consumers Association in public interest litigation. Prior to private law practice, he served 14 years at EPA, enforcing environmental law, where he also served as an officer in EPA's union, representing science and legal professionals, especially whistleblowers. Before law school, James specialized in environmental and energy-efficient design at Brown & Root, Inc. and Scott Paper Co. James holds degrees in Chemical Engineering (Economics minor), Law (JD), and Environmental Law (LLM, highest honors). View all posts by James Handley