Capitol invasion opened the door for sensible climate policy
The recent invasion of the U.S. Capitol has opened an important door for the Republican party: free at last from Donald Trump’s demand for fealty and now-minority leader McConnell’s obstructionism, moderate Republicans in Congress have a once-in-a-decade opportunity to join many of their Democratic colleagues to govern from the center. There is no better place to start than a policy on which so many agree: placing a price on carbon, ideally through a carbon tax.
The virtues of a carbon tax are well known. It encourages energy efficiency and zero-carbon energy use, provides price certainty to firms making long-term investments, and lets consumers and producers choose how best to reduce their emissions. Moreover, it’s the fastest way to hit an aggressive Paris Agreement target.
But despite these virtues, lawmakers and others have legitimate concerns about a carbon tax and its effects. Fortunately, research by economists and others over the past four years has addressed those concerns.
A major concern is the effect of a carbon tax on the economy. A stated reason for the Trump administration’s withdrawal from the Paris climate accord was its impact on jobs. But the data don’t support this. In recent research, we studied the effect of a carbon tax on aggregate employment and GDP growth in the 15 European countries that have adopted one and found no adverse impacts on economic growth or aggregate employment.
Of course, a carbon tax will affect both fossil fuel and green energy industries. Analysis last year by the U.S. Energy Information Administration shows that even a modest carbon tax goes a long ways towards decarbonizing the power sector, especially through large cuts in coal use. Because of cheap natural gas and, recently, low-cost renewables, coal mining employment has fallen by almost half over the past decade, and a carbon tax would continue this decline. Recent research underscores the fiscal vulnerability of coal-reliant communities. Their needs are heightened not just by the loss of jobs, but by the persistent health consequences of coal mining.
With or without a carbon tax, coal is on the decline. For those justifiably worried about the fate of coal communities, a carbon tax generates revenues that could be used to assist impacted individuals and communities.
Progressives have a different concern: that a carbon tax is regressive. A carbon “fee and dividend” approach, in which a substantial portion of the tax is rebated equally to all individuals, however, would be highly progressive. A national carbon tax impacts some states much more heavily than others, because states vary greatly in their legacy electric generator fleets, be they coal, natural gas, or hydro power. This is a solvable problem, for example by indexing the dividend to the state’s legacy carbon intensity of electricity. It is not the fault of current consumers that previous regulators favored coal over gas or hydro; because we need to address climate change nationally, a carbon tax allows us to share the costs of the transition equitably across states.
Some environmentalists are skeptical that a carbon tax will achieve the necessary emissions reductions. Even though we have the opposite view — that a carbon tax is essential for achieving deep decarbonization — recent research addresses their concern. One approach is to include a trigger mechanism, whereby failure to achieve specific emissions target automatically ramps up the carbon price. Alternatively, the trigger could activate new authority to regulate CO2 emissions from the power sector. This trigger approach maintains the virtues of a carbon tax while guaranteeing that we stay on a designated decarbonization path.
Comprehensive climate policy requires regulatory reform, support for green technology, and other measures to complement a carbon tax.
The federal government should support the development of new green technologies, like low-carbon aviation fuel. We’ll need to modernize and expand our national transmission grid to accommodate intermittent renewable power and support new technologies for energy storage, carbon capture and sequestration, and direct air capture, among others. Consider driving an electric car across the country: You’d need assurance that there are enough charging stations and that the plugs work with your car. This is a classic network co-ordination problem best handled by the federal government.
There exists a rare window in which we can join together to tackle this existential challenge. By embracing a smart carbon tax, the United States can reassert leadership in the international climate discussions and set the stage for an orderly, cost-effective, and rapid energy transition.
Gilbert Metcalf is the John DiBiaggio Professor of Economics at Tufts University. He was the Deputy Assistant Secretary for Environment and Energy at the U.S. Department of the Treasury in 2011 and 2012.
James Stock is Harold Hitchings Burbank Professor of Political Economy at Harvard University. He was a Member of President Obama’s Council of Economic Advisers in 2013 and 2014.
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