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The dream of a conservative carbon tax will never die

James Baker says get excited about a carbon tax — uh, or rather a “conservative climate dividend.”

Every few years, various economists and wonks will try to sell the Republican Party on a carbon tax as a conservative solution to climate change. And so far, these campaigns have attracted public support from … exactly zero elected Republicans in Washington.

But the dream refuses to die. On Wednesday, a handful of GOP elder statesmen — including Reagan-era officials James Baker III and George Shultz — unveiled their own big proposal for a conservative carbon tax at the National Press Club in Washington. You can read the plan here, or their op-ed in the New York Times: “A Conservative Case for Climate Action.” They’re also pitching the idea to the White House.

The policy itself sounds simple: Slap a tax on all US oil, coal, and natural gas use, starting at $40 per ton of CO2 emitted and rising over time. All revenue from the tax would be completely refunded to Americans in the form of quarterly dividend checks. This tax would be imposed on all imports and lifted for all exports, to protect US trade competitiveness. And in exchange, many of the Environmental Protection Agency’s regulations on carbon dioxide would be repealed, including the Clean Power Plan.

Except, as you’ve probably guessed, nothing’s ever that simple. So a couple of broad thoughts on this proposal and the tricky politics around it:

1) If you’re a conservative free market type who also thinks global warming is a serious problem, this proposal is rather elegant. The US would get rid of heavy-handed EPA regulations telling utilities and businesses how to reduce CO2 pollution. Instead, companies and consumers would be given clear market signals in the form of higher fossil fuel prices — to compensate for the damage caused by emissions — and can then figure out on their own how best to respond. Unleash the market and whatnot.

2) As a climate proposal, it’s promising. Economists tend to think a nationwide carbon tax really would reduce emissions significantly — the only question is how much. This issue brief, from Noah Kaufman, Michael Obeiter, and Eleanor Krause of the World Resources Institute (WRI), lays out a few recent estimates:

(World Resources Institute)

So a $25 per ton carbon tax that rose over time might cut emissions 20 to 30 percent below 2005 levels by 2030 (which is close to the US pledge under the Paris agreement). A higher tax, like Baker and Shultz suggested, would cut even more.

3) In fact, the WRI economists think these estimates might even be too pessimistic. Most carbon tax models project huge CO2 reductions in the electricity sector (where, from past experience, we can see that utilities are very sensitive to price) but scant reductions from transportation and industry. Except this might be wrong. The authors amass some suggestive historical evidence that drivers and automakers and refineries and a bunch of other businesses would react to a carbon tax in all sorts of hard-to-predict ways that would lead to even bigger cuts:

(World Resources Institute)

4) That said, as plenty of energy experts have noted, a carbon tax can’t be the only policy to address climate change. For one, it only applies to CO2 from oil, gas, and coal use, which accounts for just four-fifths of total US greenhouse gas emissions. The carbon tax wouldn’t affect methane leaks from landfills, or forestry, or agriculture, or hydrofluorocarbons from air conditioners. You’d need to deal with those separately, either through pricing or regulation.

The Baker/Shultz proposal talks vaguely about rolling back current EPA climate regulations. But some of these regulations tackle those other sources of greenhouse gases, like rules on methane leaks from oil and gas drilling. There’s an argument that carbon pricing would work better together in conjunction with certain regulations — rather than simply being traded for each other.

Meanwhile, there’s a strong economic case for complementary policies like increased government spending on energy R&D to develop new low-carbon technologies (which the private sector underinvests in) or efficiency standards for when incentives to save energy are misaligned (for instance, landlords have less incentive to invest in efficient appliances if their renters are paying the bills). The energy world is very, very far from a perfect market, which means a carbon tax can’t solve the climate problem alone. It’s a start, not the last word. But the Baker/Shultz proposal is silent on this issue.

5) So far, we’ve been stuck in the airy world of economics. It’s time to talk politics! Taxes tend to be unpopular. Big taxes that hike the price of gasoline, electricity, and other goods can be especially unpopular — and that’s exactly what a carbon tax would do. Opponents are sure to play this up, noting that the tax hits the poor the hardest.

In theory, you could try to blunt this line of attack by refunding the revenue to consumers, as Baker and Shultz want to do. You could even structure the rebates so that the tax is progressive overall. Other places like British Columbia have tried to do just that.

And yet ... there seem to be real political constraints on how high carbon taxes can go, even with refunds. As MIT’s Jesse Jenkins has pointed out, it’s probably not a coincidence that most carbon pricing schemes around the world are stuck at around $15 per ton. It’s politically just very, very difficult to go much higher. That’s why countries typically resort to industrial policies, renewable subsidies, hidden regulations, or other far less contentious policies. Economists may not love them, but voters get the last word.

(Jenkins and Karplus, 2016)

Note that some of the most successful decarbonization efforts in history — like France’s nuclear-power build-up in the 1980s — involved the heavy hand of industrial policy rather than the gentle nudge of carbon pricing. There are probably good political reasons for that, and they shouldn’t just be dismissed out of hand.

6) A carbon tax won’t get enacted over the next four years unless Republicans get on board. But most of the Republicans currently in Congress loathe new taxes. Many of them also don’t believe global warming is real. Under the circumstances, it’s hard to see why they’d sign up for a big carbon tax, no matter how many times you write “conservative” on the packaging.

Some numbers: To date, exactly zero Republicans currently in Congress have publicly endorsed a carbon tax. On the contrary, last June, every single member of the House GOP voted for a resolution saying a carbon tax “would be detrimental to American families and businesses, and is not in the best interest of the United States.”

A year ago, carbon tax supporters did have one bit of leverage. Republicans also really dislike President Obama’s climate policies, which involved intricate EPA regulations like the Clean Power Plan. It’s entirely possible that some conservatives could’ve been sold on adopting a carbon tax in exchange for curtailing EPA power. Except then Donald Trump got elected and promised to scale back those rules anyway. Today, as Grover Norquist points out, Republicans have little incentive to sign up for a carbon tax trade:

But who knows? Maybe this dynamic can change. Sen. Sheldon Whitehouse (D-RI) has said before that there are Republicans in Congress who really might be interested in getting on board with climate action — if only they had political cover. Maybe Shultz and Baker can help draw out those timid conservatives. But for now, this idea has zero public support from the people in control of Congress and the White House. And you need more than zero support.

Further reading:

  • For more on why a carbon tax isn’t the end-all be-all of climate policy, check out this earlier David Roberts post. And here are some thoughts on how to overcome the political hurdles facing carbon pricing.
  • If you really want to dig into the guts of carbon tax economics, the Treasury Department released a working paper on this just before President Obama left office. Or see this 2013 paper from the Congressional Budget Office.

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