You Say You Want a Carbon Tax? Prove It.
September 23, 2019
I get asked all the time if the United States will have a federal carbon tax anytime soon. People ask the question for one of a few reasons. Maybe they have heard that oil and gas companies now support a carbon tax. Or perhaps they have spoken with several of the organizations working hard to build support among Republicans in Congress for a carbon tax. Or, more recently, maybe the pure ambition and scope of the Green New Deal lead them to believe that a moderate pathway that includes a carbon tax is surely more palatable. The reality is that a carbon tax is still a long way off and if people want to see it happen, they better push for it harder than they have in the past. Here is a breakdown of the drivers in favor and against a federal carbon tax.
Economist all agree that a carbon price is the most economically efficient way to drive down emissions in much of the economy.
This is an important driver because it happens to be true as long as the tax is structured correctly. Several months ago, an enormous group of leaders in the field of economics signed on to the letter in favor of carbon fee and dividend program. This is not important because economists came out in favor a carbon tax—that’s about as surprising as a snowman’s preference for cold weather—it is important because of the agreement over the use of revenue. Academic research points to several different uses for revenue derived from a carbon price. It can be used to offset another tax, to reinvest in clean energy research and development (R&D), or to pay for adaptation measures. The decision to use the revenue as a dividend to taxpayers shows the growing concern over protecting consumers from the higher costs of energy that are expected to result from a carbon tax and to make the tax as progressive as possible. It also reflects a sort of consensus with conservatives who do not wish to see the revenue from a carbon tax lead to expanded government programs. The negative here is that politicians do not appear to have nearly as much agreement on the use of revenue, a significant amount by the way, which can be a problem since they are the ones that actually pass legislation.
The debate between a carbon tax and a cap and trade program has died down.
This is good news because for a long time the debate has been between these two carbon-pricing mechanisms. Cap and trade got a bad rap around the time of the Great Recession when everything that looked like a Wall Street scheme seemed like a scam. If the pendulum has in fact definitely swung toward a tax, this clears up at least one issue that has taken up decades of debate among the proponents of a carbon price—except for the fact that if you look around the country, at least 11 states already have a cap and trade program in place, and exactly zero have a carbon tax (although a number have legislative proposals at present). When asked about whether they would give up their cap and trade program for a federal carbon tax, the answer given by these cap and trade states is a qualified “maybe.” So, while a carbon tax is in ascendance, its best to remember cap and trade programs are far from dead.
Some Republicans have proposed carbon taxes and so have some Democrats.
The first step in passing legislation in a divided Congress is to make sure members of both parties support the idea. We now have several bone fide examples of carbon tax proposals from Republicans and Democrats (see this great analysis by Resources for the Future). While there are differences in these proposals, if you assumed all the differences could be worked out, you have a grand total of 69 members of Congress supporting a carbon tax enough to propose or sign on to legislation. This is not enough to pass a bill and certainly not enough to override a presidential veto from a climate-unfriendly administration. Supporters of a carbon tax, and other climate policy as well, point to a divide between views in Congress on the issue and the views of the public. Polling does indicate that the public is more unified in its concern over climate change then it would appear based on the views represented in Congress. Unfortunately, this happens to be a feature of modern-day federal policymaking in which Congress has a hard time finding pragmatic paths forward to address issues on which the American public seems to agree. Greater numbers of Republicans and Democrats are comfortable proposing increased support for energy innovation, which is also extremely important. Many of these innovation-only proposals, however, don’t do much to pull new technologies into the market—a carbon tax, as well as other climate policies, could be helpful on that front.
Regulation just isn’t what it used to be.
One of the main arguments not to pursue a carbon tax is that the trade-off many people are proposing for getting agreement on a carbon tax is to roll back other regulations used to pursue greenhouse gas emissions either directly or as a complementary benefit of a policy designed to address other environmental issues (methane emission, vehicle efficiency standards, etc.). For years, carbon pricing at a federal level has been elusive while regulation has been the main lever through which environmental goals have been pursued and won (in the sense that they cause companies to change behavior). As the last several years have shown, however, the extreme division between Republican and Democratic lawmakers on the use of regulation under authorities like the Clean Air Act as the main vehicle for drastically reducing emissions has only increased regulatory uncertainty. Each change in administration brings about a strengthening or rolling back of regulation based on that last administration’s action. While the so-called “pendulum effect” (coupled with action at the state level) has caused industry to conclude that this ever-present threat of greater regulation means investments in high-carbon assets are risky, it is not enough to drive real and significant emissions reduction. This reality has caused some pro-regulation environmental groups to consider alternatives to the regulatory pathways. On the other hand, proponents of the regulatory pathways see the very same divisive politics as a threat to the stringency of a carbon tax program. Looking around the world, carbon pricing schemes are rife with political interference designed to protect political constituencies or consumers. From an academic standpoint, we know how to mitigate these trade-offs and, through a combination of pricing and regulation, design an optimum climate policy that is both strong and adaptable. How to get from theory to practice is another issue altogether.
Costs and benefits are still not understood by members in a meaningful way.
Finally, members of Congress still have a steep learning curve to understand contemporary carbon pricing proposals, how they stack up relative to other climate policy options, and the impact they will have on their constituencies. Here, there is a gaping hole. First, members of Congress should not be allowed to think about the costs of a carbon price in a vacuum. They must be considered alongside long-term benefits and avoided costs as well. Second, many other climate policies or regulations obscure the costs more effectively, but that doesn’t necessarily mean they are cheaper. If we are being honest, there is an economic benefit to the policy being cheaper and a political benefit to the policy being perceived as lower cost, and those two things are sometimes different. In this debate, familiarity goes a long way. Policymakers might be more in favor of tax incentives, performance standards, regulations, or portfolio standards because they have some experience with those policies, rather than something new and high-profile like a carbon tax. Finally, any serious attempt to get a carbon price in place need to lay out what it means on a household basis across the country. More work is being done to understand the distributional impacts of a carbon price across income groups in the United States along with recommendations for protecting those least able to bear the costs. Much of this work, however, is being done on a national basis. So far, the battle for carbon pricing has been lost and won at the state level, where the cost per household was a material issue. All members of Congress represent a state with distinctly different energy makeup and citizenry, and it is important to communicate the costs and benefits in a way that resonates in a state or district-specific context.
Those who want a carbon tax will need push harder for it.
Many proponents of a carbon tax are not naïve—they know that support in Congress, while growing, is not strong enough to get the job done. This line of thinking leads to the rationale that companies, institutions, and politicians that favor a carbon tax should simply be “preparing for when a window of opportunity opens.” This phrase was once a euphemism for the opportunity a carbon tax could play in a tax reform debate before it came and went. Now the phrase is being used for the election of a Democratic president; an occasion that may not arrive in the next election cycle and, even if it does, does not guarantee a carbon price will be a) more palatable in Congress, b) the preferred climate policy lever of the administration, or c) sufficiently high enough on the policy agenda for an administration to garner enough political capital to get it past (i.e., how will it stack up against health care?). Finally, it needs to be recognized that for many proponents of broad-based social change, like proponents of the Green New Deal, even a very aggressive and progressively structured carbon tax will not be enough. Indeed, a carbon tax (like many other policies) does not, on its own, solve for all the difficulties of a changing climate and will need to be enacted along with other measures as well.
The outlook for a carbon tax looks uncertain enough to conclude that proponents of this policy will need to push harder for it than they have to date to make it a reality. For energy companies or investor groups, this means not simply including support for a carbon tax in corporate talking points but waging a campaign akin to the ones launched to remove the crude oil export ban, in favor of tax reform, or to roll back Dodd-Frank regulation. For all the talk about carbon taxes, the reality is that it will require a massive and well-coordinated effort from a broad range of stakeholders, so all those in support of the policy better start pushing.
Sarah Ladislaw is senior vice president and director and senior fellow of the Energy and National Security Program at the Center for Strategic and International Studies in Washington, D.C.
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