As world leaders convene at the Glasgow Climate Summit, the over-riding issue is what can be done to tackle climate change now that the United States has rejoined the Paris Accord. Negotiators are aiming to reach a deal for the world to become carbon neutral by 2050.
“Global historical CO2 emissions from fossil fuels and industry, 1750-2020”
The added challenge policymakers now face is energy prices have soared this year. The underlying forces involve the recovery from the Covid-19 pandemic that has increased demand globally while energy policies in China and Europe have curbed production of coal and other fossil fuels. The Economist calls it the “first big scare in the green era.”
Faced with this predicament, what can be done to ensure that economic growth can be maintained amid efforts to reduce carbon emissions?
My answer is the solution is well known: The U.S, should make a carbon tax an integral part of its climate strategy along with incentives to develop alternatives to fossil fuels.
President Biden will argue that the pending reconciliation bill covering social programs of about $1.75 trillion and the $1 trillion infrastructure bill will create new jobs in clean energy that replace those lost in fossil fuels. However, views on this matter vary considerably.
The Economic Policy Institute, a left-leaning think tank, contends that the original $3.5 trillion Build Back Better (BBB) plan would have created 4 million new jobs per year. By comparison, the Tax Foundation, a conservative think tank, estimates it would reduce economic output by nearly one percent over ten years and eliminate about 300,000 jobs due to the added tax burden involved and lessened incentives for people to work.
My own take is it is difficult to quantify the economic impact, because the reconciliation bill is very complex — more than 1,600 pages long — and it is hard to estimate the returns from investing in human capital,
Meanwhile, President Biden must decide what to do to bolster his climate agenda after the Clean Energy Payment Program (CEPP) in the bill was scrapped to gain Sen. Joe Manchin’s (D-W.VA.) approval. It is a $150 billion program that provided grants to utilities that increase the clean electricity they generate while penalizing companies that don’t meet that standard. The New York Times
According to the Wall Street Journal, Biden’s team is now working on a revamped strategy that will reallocate money to a new program that achieves meaningful emissions reduction. Biden’s climate strategy will also entail increased regulation from the Environmental Protection Agency (EPA) for companies to control methane emissions, along with higher efficiency standards for cars, trucks and heavy-duty vehicles.
The main shortcoming of this approach is that regulations an inefficient way of reducing carbon emissions.
An alternative solution favored by some economists is a “cap and trade system” that has been used to deal with the problem of acid rain since the early 1990s. This approach sets caps on emissions for firms who can trade “allowances” depending on whether they meet the regulatory standards or fall short. As David Schoenbrod points out in his book Breaking the Logjam, it has succeeded in reducing sulfur dioxide emissions while generating considerable cost savings relative to standard regulatory procedures.
However, President Trump rejected the idea because he believed the cost of constraining fossil fuels was too great. Soon after, three prominent Republicans – James Baker, George Shultz and Henry Paulson – put forth an alternative solution to tax carbon emissions as a “conservative climate solution” based on free-market principles. The advantages of this approach are it establishes a price for carbon emissions and generates revenues that can be rebated as dividends for the most vulnerable communities.
A recent Brookings Institution report concurs that the U.S. needs to impose a carbon tax on firms: It is “the most basic and effective tool to reduce carbon emissions, as much of the world has already discovered.” The report cites a finding by Resources for the Future that if Congress levied a $15 per ton tax and allowed it to rise by five percent annually, it would reduce emission levels to nearly 40 percent below 2005 levels by 2030.
Regarding the economic impact, the U.S. Energy Information Administration (EIA) conducted an analysis in which it estimated the effect of a carbon tax ($20 per ton increased by 5% annually) would reduce GDP by 0.2%-0.4% from the baseline by 2040. By comparison, a study by the American Action Forum, a center-right think tank, concludes that a regulatory approach to achieve 80% greenhouse gas reductions would reduce GDP by 0.6% to 2.3% by 2050.
Still, it is unlikely that the carbon tax proposal will garner enough support to be included in the reconciliation bill. One may ask why this is so.
My conclusion is that a carbon tax makes the cost of tackling climate change transparent, which is what makes it efficient but also what garners opposition to it. By comparison, regulations are not transparent, which makes them harder to calculate the costs and the distortions they create. They are preferable to many politicians for this reason.
The predicament is akin to a patient who is worried about an illness but is reluctant to go to a doctor to find out what is wrong. The underlying assumption is what you don’t know about the cost of fighting climate change can’t hurt you.