The Great Swap

Does a deal now gaining momentum across the aisle actually have the potential to break the stalemate on climate change?

By Joseph E. Aldy Will Marshall

Tagged Affordable Care Actcarbon taxClimateDemocratsObama AdministrationRepublicans

Is Donald Trump serious about keeping an “open mind” on climate change? Considering the “drill, baby, drill” cheerleaders he’s put in key Cabinet posts, it’s easy to fear the worst. They appear more than eager to roll back the Obama Administration’s energy and climate policies as soon as possible.

So the safest bet is probably to buckle up for four more years of intractable partisan warfare in Washington over dueling fuels and “alternative” climate science. And yet, there is rising interest, on both sides of the political spectrum, for an idea that has the potential to break this impasse in energy and environmental policy: swapping a carbon tax for many existing environmental regulations and using the revenues to support broader tax reform.

Last week, a group of Republican graybeards led by former secretaries of state James Baker and George Schultz called for a $40 per ton carbon tax, with the proceeds being turned into rebates in the form of dividends to all Americans. Senator Bernie Sanders endorsed a carbon tax during his campaign, and Trump and his daughter Ivanka discussed it with climate change crusader Al Gore after the election.

The Baker-Schultz plan also envisions swapping the carbon tax for an array of less comprehensive regulations—including the proposed Clean Power Plan—that most economists believe are less efficient than an economy-wide carbon tax. All this points to an opportunity for a President who calls himself a world-class dealmaker to craft a grand bargain that gets U.S. energy and climate policy unstuck. It’s a long shot, but the alternative is an endless game of political ping pong in which Republicans ram their energy preferences through Congress unilaterally, only to be reversed when Democrats return to power.

The art of this particular deal is a compromise that satisfies the basic requirements of both parties. A carbon tax could abet tax and regulatory reform—which most Republicans support—by swapping sectoral regulatory policies for a market-based carbon tax, which most Republicans oppose. Republicans would tap into new revenues to support a sweeping tax overhaul. Meanwhile, Democrats would get a reliable mechanism for reaching the ambitious greenhouse gas reduction targets America agreed to at the Paris climate talks, as well as our own long-term climate goals.

An economy-wide carbon tax would produce substantial revenues—as much as several hundred billion dollars annually—that could finance significant reductions in existing tax rates. For example, a credible carbon tax could allow for significant cuts to payroll taxes to benefit workers and to reduce corporate income tax rates to promote business investment. It could also finance the infrastructure investment the President-elect has highlighted as part of his incoming Administration’s agenda. A meaningful tax reform package will need to tap new revenue sources to deliver lower tax rates without dramatically increasing federal deficits.

A carbon tax can drive the deployment of technologies and innovation necessary to cut greenhouse gas emissions and combat climate change. And by getting the biggest environmental bang for our buck, a carbon tax makes the politics and economics of driving down emissions easier. By creating a strong profit incentive for businesses to seek out and exploit low-cost ways of cutting emissions, a carbon tax can be quite effective environmentally. As a transparent, administratively simple approach, a carbon tax represents good public policy, particularly within a highly partisan and politically divided democracy.

As mentioned, a carbon tax would also act as a substitute for the rigid and complicated framework of command and control regulations that define the status quo. The absence of a single comprehensive, national climate policy has produced a vacuum, which has been filled by a patchwork of state policies, applications of decades-old statutes to specific sectors and emission sources, and technology-specific subsidies. This complicated suite of policies is not the path to a low-carbon economy; it is a collection of stopgap measures desperately awaiting more comprehensive, durable policy instruments that will truly get us there.

We could say that the rationale for coupling a carbon tax and tax reform is, therefore, twofold. First, climate policy and tax reform benefit from each other in terms of economics. Tax reform would lower the costs to the economy—and potentially eliminates the net costs—of a carbon tax, while the carbon tax provides the revenues to finance the tax reform. Second, such an approach can broaden the political coalition that would derive a “win” from at least some element of the policy package.

In isolation, a carbon tax may not necessarily appear politically appealing. But it may be preferable to a national sales tax, the elimination of the home mortgage interest deduction, or adding trillions of dollars to the national debt as a part of a tax reform (aimed at reducing income and corporate taxes). Building a broad political coalition would ensure the durability of the carbon tax and tax reform.

Implementing a U.S. carbon tax would also highlight American leadership on a globally important issue, while reversing existing climate change policies without a credible alternative raises questions about the U.S. commitment to the Paris Agreement (or simply to any international agreement). The key elements of the Paris Agreement represent long-standing U.S. interests: a respect for sovereignty, by allowing each country to combat climate change as it so chooses, while maintaining a focus on transparency in implementation to assess whether all major partners undertake comparable efforts. Even if global climate policy is not a first-tier priority of the new Administration, the fact that it is a top priority for many countries around the world provides a potential leverage point for the United States in other bilateral or multilateral negotiating contexts. Since the climate agreement is part of a complex web of international relations, U.S. engagement in it can facilitate efforts to secure deals on the incoming Administration’s foreign policy priorities. Walking away from the Paris Agreement, on the other hand, would make it much more difficult for the incoming Administration to work with other countries on issues ranging from terrorism, to trade, to cybersecurity, to public health and pandemics, as well as an array of other bilateral issues.

For all these reasons, a great swap—taxing pollution more and income less, while streamlining environmental regulation and compliance costs, would be good politics and good policy. For President Trump, it presents a Nixon-to-China opportunity, in this case to break the stalemate over energy and climate.

The safest bet is that he won’t seize that opportunity. The smart money in Washington says Republicans will never overcome their allergy to tax hikes of any kind, and Democrats won’t trade the environmental regulations they have on hand for a carbon tax in the bush. Yet the present energy policy deadlock can’t last forever.

One thing we’ve learned over the last decade is that policies that only have the support of one party are subject to swift revision in the wake of dramatic swings in the political control of Congress and the White House. GOP efforts to kill the Affordable Care Act and the Dodd-Frank financial rules are a case in point. And if the Trump Republicans spend the next two years eviscerating environmental regulations, it probably won’t be long before Democrats get their chance to undo the damage.

But this kind of single-party policymaking won’t get us to what our country urgently needs: a durable energy and climate policy that promotes economic growth while still protecting the planet for our children and grandchildren. That will require a revival of political horse-trading in Washington. And this is precisely why the carbon tax swap is an idea that refuses to die.

Read more about Affordable Care Actcarbon taxClimateDemocratsObama AdministrationRepublicans

Joseph E. Aldy is an Associate Professor of Public Policy at the John F. Kennedy School of Government at Harvard University, a Visiting Fellow at Resources for the Future, a Faculty Research Fellow at the National Bureau of Economic Research, and a Senior Adviser at the Center for Strategic and International Studies.

Will Marshall is the president of the Progressive Policy Institute.

Also by this author

Don't Kill Bill

Click to

View Comments

blog comments powered by Disqus