Carbon Pricing Deal in 2017?

Just one day after Donald Trump, surrounded by coal miners, signed executive orders to roll back Obama Administration energy and climate rules, the Partnership for Responsible Growth convened a symposium at the conservative Hoover Institution (two blocks from the White House) delving into prospects for carbon pricing. George Shultz, President Reagan’s Secretary of State and professor emeritus at Stanford, opened the event urging swift action to reduce climate risk with a rising tax on carbon emissions.

Joe Aldy, Harvard economics professor

The first panel, discussing revenue, was led by Harvard economics professor and former Obama adviser Joe Aldy, who proposes a carbon tax to replace EPA regulations on coal-fired power plants. Aldy suggested that by funding cuts in business and payroll taxes, a carbon tax could spur economic growth; he also suggests a small fraction of revenue to fund much-needed clean energy research. He pointed out that British Columbia garnered popular support for its revenue-neutral carbon tax by initially sending revenue checks directly to households. Aldy expressed hope that mounting pressure to reform the U.S. tax code after three decades of stasis could offer a unique opportunity to interject carbon taxation.

Thomas F. Stephenson, partner Sequoia Capital

Thomas Stephenson of Sequoia Capital, concurred that a simple upstream carbon tax is the uncontested climate policy of choice. Differences of opinion, he noted, are mostly about revenue options. In addition to replacing regulations, Stephenson suggested that carbon taxes could replace a myriad of costly energy subsidies and mandates. He suggested that many conservative objections to a carbon tax could be overcome if the tax is truly revenue-neutral.

Bob Perkowitz, president ecoAmerica

Bob Perkowitz, president of eco-America, pointed out that states now face a $500 billion revenue shortfall. Consistent with conservative notions of federalism, Perkowitz suggested distributing carbon tax revenue to states via “block grants,” allowing spending decisions to be made on the state level.

Donald Marron, director of economic policy initiatives at the Urban Institute, stressed that a robustly-increasing carbon tax can be designed to meet any climate policy goal.

Donald Marron, Urban Institute

For example, Marron said, a modest tax starting at $25/T CO2, rising just 2% above inflation would easily achieve the Paris climate target while raising over $1 trillion in revenue over a decade. In the current Republican political environment, Marron suggested framing a carbon tax as a replacement for other taxes or as a source of funds to households, not as a source of revenue for government spending. He suggested that Republicans might feel more comfortable supporting proposals that “score” as truly revenue-neutral by the Joint Committee on Taxation and the Congressional Budget Office. Marron noted that block grants could be considered “spending,” but pointed out that the distinction between spending and “negative taxes” can become arbitrary.

Ted Halstead, Climate Leadership Council

During the question and answer period, Ted Halstead, founder of the newly-formed Climate Leadership Council, observed that FDR didn’t sell Social Security as a “payroll tax.” Similarly, he urged carbon tax supporters to emphasize near-term benefits. CLC’s proposal is framed as a “carbon dividend” to every household.

Maya MacGuineas, Committee for Responsible Federal Budget

Maya Macguineas, president of the Committee for a Responsible Federal Budget, opened the second panel on political prospects. She stressed that unlike other policies, carbon taxes address both fiscal and climate problems simultaneously.

Jerry Taylor, director of the libertarian Niskanen Center, is skeptical of the near-term political prospects for carbon taxes. Taylor finds it “unimaginable for Trump or Republicans to promote carbon tax… they will not fly into the teeth of big coal. Until [coal magnate] Bob Murray buys it, no [carbon tax].”

Jerry Taylor, Niskanen Center

Taylor pointed out that Rep. Scalise’s resolution condemning carbon taxes last year (supported by all but one House Republican), was a reaction to lobbying for a carbon tax. In Taylor’s assessment, “Republican leadership is just as adamant as Charles Koch.” Taylor pointed out the stark silence of Senators McCain and Graham, who formerly supported climate policy. Moreover, Taylor noted, “there is no evidence of the needed political capability at the White House. I would be stunned if either tax reform or infrastructure advance.”

Taylor cautioned against reading too much into reports that roughly 40 House Republicans and 10 Senate Republicans are uncomfortable with climate science denial. Taylor suggested that discomfort with denial does not necessarily lead to support for a carbon tax. Instead, Taylor suggested, climate-concerned Republicans might embrace Bill Gates’ “breakthrough” proposal for technology funding or proposals for geoengineering. Taylor concluded, “even if there were a political opening for carbon tax on the Hill this year, we would probably miss it because key advocates are not engaged.” But he offered a ray of hope: Perhaps an opportunity after the 2018 election — if we do the legwork now.

Adele Morris, Brookings Institution

Adele Morris, Climate and Energy Policy Director at the Brookings Institution, articulated three sets of reasons for carbon taxes. First: To slow unchecked climate risk. Second: To avoid a proliferation of complex, inefficient and mismatched state and local programs. And finally: To preempt the lengthy implementation and litigation associated with EPA’s sector-by-sector regulatory approach, which is not globally replicable and which could be revived by the next Democratic administration. Morris lamented the lack of engagement by environmental and climate organizations to support carbon taxes. Their past “distraction” by EPA’s regulatory approach was understandable, but is now moot. “There is no distraction now,” she quipped. Moreover, she pointed out that “any substantial carbon tax would beat the pants off” the climate effectiveness of the Clean Power Plan.

Bob Inglis, republicEn

Bob Inglis, former Congressman (R-SC) and founder of republicEn, offered assurance that “political orthodoxy is more fluid than it might appear.” As a case-in-point, Inglis recalled that he’d taken a beating from constituents and other Republicans for opposing the 2007 Iraq troop surge. Now, he noted, Trump and many Republicans, including Ron Paul, routinely criticize the entire Iraq war. Inglis urged carbon tax supporters to speak in terms of Republican values. He suggested that Trump could sell a carbon tax with border adjustments as way to “make China pay,” to avoid getting tangled by UN agreements and to “make American win again.”

Walt Minnick, Partnership for Responsible Growth

Walt Minnick, another former congressman (D-Id) and a co-founder of the Partnership for Responsible Growth, urged framing carbon taxes as “carbon-funded tax cuts.” Minnick suggested that the costs of delaying climate policy are large and seem to be growing exponentially. “We cannot afford to wait 4 to 8 more years,” he said. At the same time, he stressed, the U.S. faces growing and unsustainable deficits. In over 100 meetings with members of Congress, he said only two have expressed willingness to continue increasing spending without some means to pay for it. He pointed out that the House’s Border Adjustment Tax is “taking on heavy water,” and noted that there is little stomach in Congress for cutting the business interest deduction or the home mortgage deduction. Other revenue options, such as imposing a new value added tax, are even less palatable. In short: Congress will need ways close budget gaps; a carbon tax offers a way. His focus, Walt said, is on enacting a rising price on carbon; in that effort, all revenue options should be on the table.

Phil Sharp, former Congressman, RFF CEO

Phil Sharp, former Congressman (D-In) and CEO of Resources for the Future, stressed the unique opportunity to interject carbon taxes into tax reform. Sharp is confident that tax reform will (eventually) advance and feels that it offers by far the best vehicle for a carbon tax.

The panel’s moderator, Jessica Tuchman Matthews, whose illustrious career includes directing the Carnegie Endowment for International Peace, serving on the Council on Foreign Relations, as well as a stint on the Washington Post editorial board, succinctly summed up the panel’s comments:

Jessica T. Matthews

1. A carbon tax must be bipartisan.
2. The vehicle is tax reform.
3. Advocates must mobilize.

In response, Jerry Taylor suggested another “vehicle” for a carbon tax could be to fund infrastructure. Ted Halstead also disputed the tax reform “vehicle.” He noted that to be effective, a carbon tax must not only put a substantial price on carbon emissions, it must continue to rise over time. To build ongoing support for that rising price, Halstead urges linking a carbon tax to a “dividend,” distributing revenue directly to each household.

Congratulations and thanks to the Partnership for Responsible Growth, the Hoover Institution, moderator Alice Hill and all the panelists for continuing and advancing this vital policy conversation.

(Link to video, courtesy of  Hoover Institution.)

Economists Unanimously Applaud Bipartisan Carbon Tax Proposal

A modest, steadily-rising carbon tax as proposed a month ago by the Climate Leadership Council would be more effective and globally-replicable than existing greenhouse gas regulations. That was the unanimous conclusion of three energy economists and one oceanographer turned climate lobbyist who spoke at a forum yesterday at the Johns Hopkins School of Advanced International Studies in Washington DC. Moreover, the panel stressed, both climate activists and legislators seeking to improve the efficiency and fairness of the tax code have good reasons to seriously consider such a replacement strategy.

Danny Richter, legislative director of Citizens’ Climate Lobby suggested that a revenue-neutral carbon tax can help depoliticize climate policy. In conversations on Capitol Hill, Richter said some Republicans seem to be looking for issues where they can show independence from the Trump administration and instead align themselves with science. Richter thinks climate policy may be their golden opportunity. Richter pointed out House Resolution 424, sponsored by 16 Republicans, calling for “American ingenuity, innovation and exceptionalism to create and support… to study and address the causes and effects of measured changes to our global and regional climates…” Richter said CCL is seeking support from another two dozen Republicans to create an effective, conservative pro-climate voting bloc in the House.

Marc Hafstead, a research fellow at Resources for the Future, discussed the results of the macro-economic model he developed with pioneering climate economist Lawrence Goulder. The model compares effectiveness and economic effects of climate policies. Hafstead reported that CLC’s proposed tax of $40/T CO2 rising 2% annually would easily surpass the emissions reductions from EPA’s Clean Power Plan. He seemed to prefer a more modest starting price of $20/T CO2 with a more aggressive 4% annual ramp-up, but he concluded that either carbon tax proposal would easily out-perform EPA regulations. CLC’s proposal to return carbon tax revenue as a lump-sum “dividend” is distributionally-progressive (benefitting low income households the most) but Hafstead pointed out that it is more costly in the aggregate (as measured by GDP) than using revenue to cut other taxes that slow economic growth. Hafstead finds that cutting the top corporate income tax rate, a long-standing Republican policy goal, is the most efficient revenue option. Hafstead concluded by underscoring the dual benefits of reducing climate risk by taxing carbon while simultaneously spurring growth by cutting distortionary taxes.

Adele Morris is a Senior Fellow at the Brookings Institution who served at the State Department as a climate negotiator in 2000. Morris congratulated the Climate Leadership Council for re-starting and focusing the conversation about how to design and implement a carbon tax which she finds more interesting than tiresome debate about “hoaxes” and whether climate policy is needed at all. Morris stressed that the substantial, growing revenue stream from a modestly-rising carbon tax offers attractive options for embedding it in broader tax reform. And she emphasized that a carbon tax would maximize U.S. leverage in climate negotiations; a price instrument would facilitate transparent comparison of national ambition in those negotiations. She observed that it’s relatively easy to compare prices, but it’s complicated to negotiate and verify achievement of quantity-based targets. Morris responded to critics of carbon taxes who assert that carbon taxes aren’t efficient unless the price is set optimally. She pointed out that because the incremental damage from carbon emissions increases non-linearly over time, the potential cost of excess abatement is likely to be tiny compared to the benefits of getting ahead of that ominous upward-curving climate damage function. Morris’ top-line message: a carbon tax will be much more cost effective, transparent, replicable than regulations.

Noah Kaufman, a climate economist at the World Resources Institute, recently served at the White House Council on Environmental Quality. Kaufman suggested that carbon taxes may not need to rise to the high levels that standard economic modeling predicts. Observing the brisk pace of recent energy technology innovation, Kaufman suggested that even a modest carbon price could spur even more rapid low-carbon energy innovation and implementation. He also pointed out that the carbon tax in British Columbia has been more effective than standard models predicted. He speculated that the high visibility of the carbon tax led to greater behavior change than equivalent price changes normally do. Finally, Kaufman pointed out that a modest carbon tax such as the CLC proposal could obviate the Clean Power Plan. He expects that even a modest federal carbon tax would reduce emissions enough that states would be in compliance with the EPA rule. That suggests a possible compromise, perhaps avoiding a conflict over repealing the CPP that environmental organizations struggled to promulgate.

Recommended Reading:

Climate Solutions Caucus expands to 24, Citizens’ Climate Lobby (February 10, 2017).

Macroeconomic Analysis of Federal Carbon Taxes, Marc Hafstead, Lawrence H. Goulder, Raymond J. Kopp, Roberton C. Williams III (Resources for the Future, June 2016).

Options for Reducing the Deficit (Option 42: Carbon Tax), Congressional Budget Office (December 8, 2016).

Methodology for Analyzing a Carbon Tax, John Horowitz, Julie-Anne Cronin, Hannah Hawkins, Laura Konda, and Alex Yuskavage (Department of the Treasury, January 2017).

How To Use Carbon Tax Revenues, Donald B. Marron, Adele C. Morris (Tax Policy Center, 2016).

Republican-Proposed “Carbon Dividend” Is a Great Sign of Progress, Noah Kaufman (World Resources Institute, February 10, 2017).

Putting a Price on Carbon: Ensuring Equity, ,

Why Trump Should Embrace a Carbon Tax

Brookings Energy Economist Adele C. Morris
Adele Morris, Climate and Energy Economics policy director, Brookings Institution

 

Brookings economist Adele Morris and R St Institute’s Catrina Rorke shined like diamonds as they made the case for truth-in-energy pricing at Cato Institute yesterday. Morris argued that a carbon tax could help Trump and Republicans advance their stated goals of tax & regulatory reform and fund transition assistance to coal country.

catrina
Catrina Rorke, Energy Policy Director, R St. Institute

Rorke pointed out that industrial policy propping up fossil fuels distorts markets and cheats us of technological innovation. Cato hosts Robert Bradley & Peter Russo seemed to inch away from Cato’s longstanding denialist stance, coming out as “lukewarmers” who at least admit global warming, but claim it may be beneficial. Tell that to folks battling scorching heat and raging fires in Australia and Oklahoma.

Yes, Tax Carbon. Ditch “Revenue-Neutral” Shibboleth

My response to “Progressives Need to Get Over Themselves and Support This GOP-Backed Carbon-Tax Plan” by Charles Komanoff (The Nation):

Mr. Komanoff blames environmental and environmental justice advocates for the failure of Washington State’s carbon tax ballot initiative, I-732. But the story is more nuanced.* Advocates of I-732 turned down a late offer from environmental and EJ groups to collaborate if carbon tax revenue were used for forestry management (in a state devastated by wildfires), water projects (to mitigate drought) and assistance for front-line communities. Credible polling showed their proposal was far more popular. But instead of collaborating, I-732 advocates stuck to their revenue-neutral approach intended to win support from Republicans and businesses. That support did not materialize.

Komanoff chides environmental advocates who don’t fully trust economists who assert that the “almost magic wand” of a rising price on CO2 pollution will transform the global economy from fossil dependence toward renewables and efficiency if only the tax level rises high enough. That’s a big IF. As Mark Jaccard and colleagues at Simon Frazer University in Vancouver have shown, carbon pricing tends to reach a political resistance point at a relatively low price. British Columbia’s revenue-neutral carbon tax rose briskly from $CN10/tonne CO2 to $30 where it is stuck. Yes, the new Baker/Shultz Carbon Leadership Council proposal is a welcome sign. But its proposed tax of $40/T CO2 would rise only 2%/year, nothing like the more aggressive $5/year Mr. Komanoff espouses and nowhere near the trajectory needed to reduce emissions 80% by 2050.

Elected Republicans have shown no interest in carbon taxes, revenue-neutral or otherwise. And even where carbon taxes have been enacted, they have not risen to levels or been comprehensive enough to induce the scale of energy transformation needed. Why blame environmental, EJ and climate activists for pressing to spend carbon revenue in ways that are popular and enhance the effect of its price signal? Let’s ditch the “revenue-neutral” shibboleth and start discussing constructive ways to spend (at least some) carbon tax revenue that can unite the climate, environmental and EJ movements. We don’t need more divisiveness and finger-pointing as we face Republican denialists and “lukewarmers” in all three branches of federal government.

* Both factions seemed to put their revenue preferences ahead of the larger goal: a rising price on CO2 pollution. On that score, I-732 was certainly worth enacting. See analysis by Sightline Institute.

Further Reading:

How To Use Carbon Tax Revenues, Donald B. Marron, Adele C. Morris (Tax Policy Center, 2016).

Putting a Price on Carbon: Ensuring Equity, ,

 

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, 111th 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.

WikiLeaks, Carbon Taxes and 115th Congress

John Podesta (January 2015): Polling on carbon taxes “all sucks.” But revenue options change voters’ minds.

wikileaks

WikiLeaks Reveals “Sanders Effect” on Climate Policy

WikiLeaks released e-mails this week showing that in January 2015, Hillary Clinton’s campaign staff studied carbon taxes, but avoided publicly advocating them because voter surveys indicated weak support.[1] Clinton’s polling confirms what others have found: Standing alone, carbon taxes are not an easy sell. But a more recent survey suggests that when the purpose and effect of carbon taxes are explained and the policy is coupled with a tax credit to offset financial impacts on low- and moderate-income households, plus assistance for displaced coal workers and reduced regulatory burdens, 66% of voters register support,[2] including 44% of Republicans and a whopping 86% of Democrats.[3]

kull-graphic
“Americans on Clean Power,” Steven Kull (U. Md.) Sept. 2016.

During the 2016 presidential primaries, Senator Sanders advocated carbon taxes as a key climate policy. By July, reporters were asking Clinton campaign chairman John Podesta and energy adviser Trevor Hauser about carbon taxes. Both said that a Clinton administration would consider a carbon tax if Congress proposes it.[4] And Senator Schumer, on track to become Majority Leader, predicted that a carbon tax is “likely to pass the Senate” if Democrats regain the majority.[5]

In this context, the next Congress and the next presidential term may offer a long-awaited opportunity to enact carbon taxes, perhaps as part of broader tax and regulatory reform.

Carbon taxes might more fairly be called “carbon pollution fees” because they impose a fee for each ton of carbon dioxide dumped into the atmosphere, thereby creating economic conditions for a rapid, efficient shift to renewable energy and efficiency.[6] Furthermore, carbon taxes can reduce or avoid the need for more costly regulations and subsidies, appealing to libertarians and “free market” conservatives.[7]

And unlike regulations and subsidies, carbon taxes offer a substantial revenue stream that will grow for decades. Starting at $42/T CO2, the current official “Social Cost of Carbon,” a carbon tax would generate roughly $220 billion in its first year, approximately 5% of federal revenue.[8] A carbon price trajectory aggressive enough to drive down U.S. CO2 emissions 80% by 2050 would need to ramp up to about $440/T by 2050,[9] and would generate roughly $440 billion/year by mid-century even with only 20% of today’s carbon emissions. That’s approximately $11 trillion in cumulative revenue over the next 36 years.

The climate benefits of a carbon tax derive from its persistent, ubiquitous and rising price signal, efficiently directing investment and economic activity in all sectors away from fossil fuels and towards renewable energy and efficiency.[10] Furthermore, carbon taxes can reduce or eliminate the need for more costly and intrusive regulations and subsidies that do not produce revenue. From a climate policy perspective, the choice of how to allocate carbon tax revenue is secondary[11] with the caveat that a distributionally-fair design must protect purchasing power of low- and moderate-income households in order to remain politically viable. The Congressional Budget Office has estimated that approximately 27% of net carbon tax revenue would be needed to fully compensate low and moderate-income households;[12] existing mechanisms could efficiently distribute those funds without new programs or payment systems.[13] And that leaves 73% of the revenue from a carbon fee available for other purposes.[14]

Carbon Revenue Options for Congress

Funding sustainable infrastructure[15] or renewable energy with carbon tax revenue could magnify the climate benefits of “internalizing” the cost of climate pollution. In his 2016 State of the Union Address, President Obama proposed a $10 per barrel oil fee to fund infrastructure, a modest first step toward internalizing fossil fuel costs to fund a high priority and potentially transformative investment in public capital. Both major presidential candidates call for drastically increased infrastructure spending to help transform the U.S. economy and spur employment. Hillary Clinton calls for $125 billion/year; Donald Trump has suggested even higher figures.[16] Repair and maintenance of existing transportation infrastructure offers an especially high return on public investment[17] and is broadly supported by voters[18] increasingly irritated at traffic jams, transit and train delays.

Other attractive revenue options include payroll tax relief which would offset regressive impacts while spurring employment and economic growth.[19] Many economists and policymakers, including some conservatives and libertarians,[20] call for comprehensive tax and regulatory reform (a “grand bargain”), which could include carbon taxes to fund reductions in other taxes that inhibit economic growth.[21]

The list of revenue options and combinations is virtually unlimited. A basic tenant of public finance is that appropriations decisions should be based on public priorities. Earmarks and slush funds constrain appropriators, effectively letting special interests cut in line. Similarly, climate policy advocates should not latch on too tightly to their preferred revenue options.[22] Our focus must be on enacting a broad-based, briskly-rising carbon tax to create investor and consumer price expectations that make it pay to start reducing carbon pollution immediately and to continue de-carbonizing for the next half century.[23]

Next year could be our big chance for simple, effective and globally-replicable climate policy. Get ready for carbon taxes in 2017!


Notes:

[1] “We have done extensive polling on carbon tax. It all sucks,” Podesta said in a leaked January 2015 memo. “WIKILEAKS: The carbon tax that Clinton decided not to use: $42,” ClimateWire, 10/21/16.

[2] Steven Kull et al, “Americans on Clean Power,” University of Maryland, 9/12/16, at p. 33-35. (Kull is Senior Research Scholar and director of the Program for Public Consultation. The survey was conducted from April – June 2016.)

[3] Id., at p. 34.

[4] During the Democratic Convention, reporters asked Podesta about Clinton’s views.  Podesta conceded that “if Congress wants to come forward with [a carbon tax proposal], we’ll take a look at it.”  “Carbon tax debate is back,”Politico, 07/27/16.

[5] Timothy Cama,“Clinton walks fine line on carbon tax,The Hill, 7/31/16.

[6] For a clear, balanced overview of recent literature on carbon taxes, see Donald Marron, Eric Toder, and Lydia Austin, “Taxing Carbon: What, Why and How,” Tax Policy Center, June 2015. (Marron has earned impressive conservative credentials, including a stint on George W. Bush’s Council of Economic Advisers.)

[7] Jerry Taylor, “The Conservative Case for a Carbon Tax,” Niskanen Center, March 2015.

[8] Greg Dotson, “Carbon Pricing in a Fiscal Context,” Center for American Progress, 6/29/16.

[9] Alan Fawcett, Leon C. Clarke and John P. Weyant, “Carbon Taxes to Achieve Emissions Targets,” 2014, included in compilation book by Ian Parry, Adele Morris & Roberton C. Williams, “Implementing a U.S. Carbon Tax,” 2015.

[10] British Columbia’s carbon tax, enacted in 2008, covers approximately 2/3 of the province’s emissions. Starting at $10/t CO2, (Cdn) the tax rose in annual $5 increments from to $30/t CO2 by 2012. This relatively modest corrective has reduced emissions about 10%.  See, Brian C. Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest ‘Grand Experiment’ in Environmental Policy,” Nicholas Institute at Duke University, May 2015.

[11] Donald B. Marron and Adele C. Morris, “How to Use Carbon Tax Revenues,” Tax Policy Center, February 2016.

[12] Terry Dinan, “Offsetting a Carbon Tax’s Costs on Low-Income Households,” Congressional Budget Office, November 2012.

[13] Chad Stone, “Designing Rebates to Protect Low-Income Households under a Carbon Tax,” Resources for the Future, 9/24/15.

[14] Adele Morris and Aparna Mathur, “A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues, Center for Climate and Energy Solutions, May 2014.

[15] Zia Qureshi, “Meeting the Challenge of Sustainable Infrastructure,” Brookings, June 2016.  “Seventy nine percent of Americans, including 72% of Republicans  support this idea.”  See also, “Building for the 21st Century: American support for sustainable communities, A national opinion survey,” Smart Growth America, March 2011.

[16] Derek Thompson, “One Issue Clinton and Trump Agree On,The Atlantic, 8/16/16.

[17] Ezra Klein, “The one thing Trump and Clinton agree on is infrastructure. This economist thinks they’re both wrong,Vox.com, 10/4/16. (Quoting Harvard economist Edward Glaeser.)

[18]Poll: Infrastructure Unites Voters in Divisive Election Year — Republicans and Democrats Both Want Federal Government to Improve U.S. Infrastructure,” PR Newswire, 8/6/16.

[19] Gilbert E. Metcalf, “A Green Employment Tax Swap: Using A Carbon Tax to Finance Payroll Tax Relief,” Brookings Institution & World Resources Institute, June 2007. Representatives of both parties: Bob Inglis (R-SC) and John Larson (D-CT) have proposed carbon taxes whose revenue would reduce payroll taxes. (Sadly, after Inglis dared to acknowledge global warming and propose a revenue-neutral carbon tax, the Koch brothers funded challenger Trey Gowdy who defeated Inglis in a 2010 primary. Gowdy’s sponsorship by the Koch brothers is reported in “The Benghazi Committee’s Out of Control Effort to Destroy Hillary Clinton at All Costs,” Huffington Post, 10/22/15.)

[20] See Taylor, The Conservative Case for a Carbon Tax, supra note 7.

[21] Adele Morris and Aparna Mathur, “A Carbon Tax in Broader U.S. Fiscal Reform: Design and Distributional Issues,” Center for Climate and Energy Solutions, May 2014.

[22] For example, Citizen’s Climate Lobby insists, “Any proposal that does not return the proceeds of the tax to citizens through rebates won’t receive the Citizens Climate Lobby’s support.” (Quote from “Why Texas holds the key to carbon taxes,” Houston Chronicle, 9/30/16.) And on the other extreme, in Washington state, the Alliance for Jobs and Clean Energy is opposing I-732, a ballot initiative for a substantial carbon tax whose proceeds would cut the state sales taxes and supplement the Earned Income Tax Credit, out of disagreement with its revenue distribution. (As reported by Dave Roberts in “The left vs. a carbon tax,” Vox.com, 10/18/16.)

[23] See Fawcett et al, supra note 9.

Clinton Silent. Trump in Denial. Scalise Attempts Burial.

But Carbon Taxes Aren’t Dead — Seven Key Reasons

Hillary Clinton has avoided even mentioning carbon taxes.[1] Donald Trump (currently) asserts that global warming is a “chinese hoax.”[2] And all but one House Republican recently voted to condemn carbon taxes.[3] Nevertheless, there are signs that the public and many members of Congress are (excruciatingly slowly) absorbing the economic message that carbon taxes offer superior climate benefits at lower cost than other policies, and the political message that the revenue from a carbon tax will be large and how those funds are spent (or re-distributed) will be vitally important. But unlike regulations and mandates (which generate no revenue) and subsidies (which cost taxpayers dearly), carbon taxes generate substantial revenue, offering them special salience in the context of fiscal policy and tax reform. An oft-repeated Capitol Hill truism is that tax reform “seems impossible until fifteen minutes before it happens.” As pressure mounts to address climate risk, to reform the tax code in order to improve our economy and to close revenue short-falls, carbon taxes are sure to come up again.

Below I sketch seven key reasons why, despite extreme political shenanigans, carbon taxes are “not dead yet.”[4]

  1. Superior Effectiveness:

Carbon taxes are the most potent, straightforward climate policy.[5]  Economists, even conservative economists[6] and some libertarians[7] consistently conclude from both theoretical analysis and from accumulating empirical evidence[8] that carbon taxes reduce climate pollution more broadly and at far lower cost than regulations, mandates and subsidies.[9] And that should matter to anyone concerned about either climate or economy (or both) because the transition to sustainable energy won’t be easy or cheap.[10] Second or third-best policies (and waiting too long to start) are making the transition a lot more costly and dangerous.[11] And despite Donald Trump’s promise to “tear up” the Paris climate accord, the U.S. will need to implement efficient policies to reduce emissions[12] and would benefit by leadership in low-carbon technology.[13]

  1. Prices DO Change Behavior:

Contrary to recent assertions by Mary Nichols of the California Air Resources Board that carbon taxes might not be effective at reducing emissions[14] (echoing similar nonsense by then-Senator John Kerry, seven years ago[15]) we know very well that the demand for energy does decline with price. (In economic parlance: Demand curves slope downward — a principle about as fundamental to economics as gravity is to Newtonian physics.)

Carbon taxes work by explicitly building hidden costs of climate pollution into fossil fuel prices.  Tax rates are set in proportion to the carbon comprising each fuel.[16] Per unit of energy released, coal releases about 30% more CO2 than gasoline, while natural gas releases about 20% less.[17] Carbon taxes transmit that “price signal” to every energy decision-maker, ranging from gasoline buyers to global investors, encouraging all of us to innovate, choose more climate-friendly options, and to plan ahead with climate costs in mind in the most cost-effective ways we can think of. Over time, consumer and industrial decisions are sensitive to price expectations, measured by economists as “price elasticity.”[18] The recent shale gas boom provides a striking example: cheaper natural gas is rapidly displacing coal as the primary fuel to generate electricity.[19] Similarly, a carbon tax will encourage replacement of fossil fuels with low-carbon energy such as wind, solar, hydro, geo-thermal and, for better or worse, nuclear power. Plus, of course, energy efficiency will pay off more handsomely than ever.[20]

  1. We Need The Revenue:

An effective carbon tax would raise substantial revenue. Starting modestly at $42/ton CO2, a U.S. carbon tax would raise about $220 billion per year, about 1/10 of the revenue raised by federal income taxes.[21] Because national level carbon prices will need to keep rising for decades if we are serious about reducing the risk of catastrophic climate outcomes,[22] carbon tax revenue will also keep growing for decades. At some point, one hopes that policymakers will see that large and growing revenue stream as an opportunity.[23] (Of course, as carbon emissions decline, carbon tax revenue will eventually decline even more rapidly than the carbon tax increases.  When that problem actually arises, it will be cause for celebration by our children and grandchildren.)

  1. Tax Reform Can Boost Economic Growth, Carbon Taxes Can Help:

Some analysts and policymakers suggest pairing a carbon tax with tax cuts in other areas, making the net effect “revenue-neutral.”[24] Taxes on wages tend to discourage work[25] and some evidence suggests that the U.S.’s higher-than-average marginal corporate income tax rates discourage investment and deter job growth.[26] Thus, cutting wage and corporate income taxes with the funds from an increasing a tax on carbon pollution offers a potential win-win, spurring economic growth while reducing climate pollution.[27]

  1. Other “Carbon Pricing” And Regulatory Systems Are Clumsy, and They’re Failing:

Theoretically, emissions trading systems (a.k.a., “cap-and-trade”) can “put a price on carbon” to reduce climate pollution in much the same way a carbon tax would.[28] But emissions trading has proven much more complex and less effective than hoped. The European Union’s emissions trading system,[29] California’s AB-32[30] and the Northeastern States’ Regional Greenhouse Gas Initiative[31] are all plagued by anemic and volatile carbon prices. Emissions trading systems have not generated the price expectations needed to guide consumers and investors over the long term. Similarly, regulatory approaches such as EPA’s Clean Power Plan have limited scope, scalability and cannot be expected to continue driving innovation and efficiency in the way a persistent economy-wide price signal will. In contrast, carbon taxes in British Columbia (Canada),[32] as well as Norway and Sweden have proven more effective and durable. The International Monetary Fund is encouraging nations of all sizes and stages of economic development to try carbon taxes both for their climate benefits and as choice fiscal policy.[33]

  1. “We Shall Overcome” (Science Denial and Economics Denial):

Political resistance looks like a huge obstacle to carbon taxes in the U.S. Last month, all but one Republican representative voted for a (non-binding) resolution by Rep. Steve Scalise (R-LA) condemning carbon taxes.[34] Some do not agree that carbon emissions need to be reduced in the first place. Others eschew new taxes, despite the potential to use carbon tax revenue to reduce growth-dampening taxes on work and investment. The vote is a setback for climate policy, but House Republicans’ bluster suggests that maybe they sense momentum.

  1. Regulations Can Work as a “Backstop” To Carbon Taxes:

Some Democrats and environmental groups support carbon taxes, but many do not fully embrace the principle of price elasticity (or even the “rational actor” assumption); they feel more certain about the effectiveness of regulations, subsidies and mandates which have been their primary tools for five decades. After years of arduous struggle to enact regulations, subsidies and mandates, Democrats and environmental groups are reluctant to even discuss replacing them with a more powerful tool, a carbon tax. They fear losing the ground they have gained. But existing programs could be used as a “backstop” that would engage only if carbon taxes do not effectuate sufficient emissions reductions. And that’s a very good bet: rising carbon taxes will continue to be effective at reducing emissions if the price level marches predictably upward.[35] Thus, those who dislike regulatory bureaucracy[36] should prefer carbon taxes which leave energy decisions to those who can best make them. And those who have labored to enact greenhouse gas regulations should be willing to add a new more powerful tool, if they can be assured by a regulatory backstop.

In short: there’s still potential for a “grand bargain” over tax and regulatory reform (perhaps early next year); we should make sure carbon taxes are included.

[1] Coral Davenport, “Hillary Clinton’s Ambitious Climate Change Plan Avoids Carbon Tax,” (New York Times — July 2, 2016); “Clinton climate push will get Sanders voters, define Trump,” (The Hill — June 20, 2016); Anne C. Mulkern, “Hillary Clinton’s Plan to Combat Climate Change,” (ClimateWire – May 9, 2016, reproduced in Scientific American) .

[2] Louis Jacobson, “Yes, Donald Trump did call climate change a Chinese hoax,” (PolitiFact — June 3, 2016).

[3]The Grand Oil Party: House Republicans denounce a carbon tax,” (The Guardian — June 13, 2016).  Rep. David Jolly (R-FL) abstained from the vote.

[4] Pace, “Monty Python and the Holy Grail” (1975).

[5] Joseph E. Aldy, “The Case for a U.S. Carbon Tax,” (Oxford Energy Forum, 2013).

[6] Greg Mankiw, “The Key Role of Conservatives in Taxing Carbon” (New York Times – September 4, 2015).

[7] Jerry Taylor, “The Conservative Case for a Carbon Tax,” (Niskanen Center, 2015).

[8] Brian C. Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review,” (Nicholas Institute, 2015).

[9] Roberton C. Williams, “Environmental Taxation,” (Resources for the Future, 2016).

[10] David Timmons, Jonathan M. Harris and Brian Roach, “The Economics of Renewable Energy,” (Tufts University, 2014).

[11] Warwick J. McKibbin, Adele Morris and Peter J. Wilcoxen, “The Economic Consequences of Delay in U.S. Climate Policy,” (Brookings, 2014).

[12]What it will take to deliver on the Paris climate agreement” (Brookings, 2016).

[13]The Benefits of a Low-Carbon Future,” (WorldWatch Institute, 2013).

[14] Ben Adler,”Sanders and Clinton teams fight over climate language in Democratic platform” (Grist, June 2016).

[15] James Handley, “Memo to Sen. Kerry: Climate Science Includes Economics” (Carbon Tax Center, 2009).

[16] Gilbert E. Metcalf and David Weisbach, “The Design of a Carbon Tax,” (Harvard Environmental Law Review, 2009).

[17] U.S. Energy Information Agency, “How much carbon dioxide is produced when different fuels are burned?” (FAQ’s 2016).

[18] Congressional Budget Office, “Gasoline Prices and Vehicle Markets” (2007); Houston Chronicle, “Falling gas prices are driving consumers back to bigger vehicles” (June 2016).

[19] Energy Information Agency, “Natural gas expected to surpass coal in mix of fuel used for U.S. power generation in 2016” (March 2016).

[20] International Energy Agency, “Energy Efficiency Policy and Carbon Pricing,” (2011).

[21] Greg Dotson and Ben Bovarnick, “Carbon Pricing in a Fiscal Context,” (Center for American Progress, 2016).

[22] Alan Fawcett, Leon C. Clarke and John P. Weyant, “Carbon Taxes to Achieve Emissions Targets” (2014), included in compilation book by Ian Parry, Adele Morris & Roberton C. Williams, “Implementing a U.S. Carbon Tax” (2015).

[23] One such opportunity is the potential for a carbon tax to partially fund a “Universal Basic Income.” See, Judith Shulevitz “It’s Payback Time for Women” (New York Times – January 8, 2016).  In some ways, UBI would be a grander version of the proposal by Citizens’ Climate Lobby for a “carbon fee and dividend.” In his State of the Union address, President Obama raised another potentially popular revenue opportunity when he proposed an “oil fee” to fund sustainable infrastructure.

[24] Donald Marron and Adele Morris, “How To Use Carbon Tax Revenues,” (Brookings, 2016).

[25] Douglas Elmendorf (Testimony), “Policies for Increasing Economic Growth and Employment in the Short Term,” Congressional Budget Office (2010).

[26] Alexander Ljungqvist and Michael Smolyansky, “To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income,” (National Bureau of Economic Research, 2014).

[27] Lawrence H. Goulder, “Environmental Taxation and the Double Dividend: A Reader’s Guide,” (International Tax Public Finance, 1995).

[28] Kevin Kennedy, Michael Obeiter and Noah Kaufman, Getting Serious About Carbon Pricing, (World Resources Institute, 2016).

[29] Dallas Burtraw, Åsa Löfgren and Lars Zetterberg, “A Price Floor Solution to the Allowance Surplus in the EU Emissions Trading System” (Resources for the Future, 2015).

[30] Rory Carroll, “California’s landmark cap and trade program faces uncertain future,” (Reuters – June 15, 2016).

[31] Jonathan L. Ramseur, “The Regional Greenhouse Gas Initiative: Lessons Learned and Issues for Congress” (Congressional Research Service, 2015).

[32] Brian C. Murray and Nicholas Rivers, “British Columbia’s Revenue-Neutral Carbon Tax: A Review…” (Nicholas Institute, 2015).

[33]Fiscal Policy to Address Energy’s Environmental Impacts” (International Monetary Fund, 2014).

[34]House votes to condemn carbon tax,” (The Hill — June 10, 2016).

[35] James Handley, “Don’t Anchor a Carbon Tax to the Social Cost of Carbon” (Carbon Tax Center, 2015).  British Columbia’s carbon tax success story is tainted by its “frozen” price level that prevents the tax from continuing to reduce emissions as it did when the tax was rising by $5 every year.  See “B.C. businesses call on Clark to lift carbon tax freeze,” (Globe and Mail — March 31, 2016).

[36] Kelsey Snell, “Ryan releases plan to roll back Obama regulations,” (Washington Post — June 14, 2016).