Taxing externalities is a great idea, and taxing greenhouse gas emissions to mitigate climate change is a great example of this great idea.
Unfortunately, it is very unpopular with the mass public. I’ve seen message testing in which it rates below defund the police and contends with reparations as the most unpopular progressive idea. And a recent sting operation by Greenpeace where they secretly recorded an Exxon lobbyist talking about his strategy to not address climate change confirmed what many have long suspected — fossil fuel companies come out in favor of carbon taxation precisely because they know it’s unpopular.
Here’s the NYT writeup:
The Exxon lobbyist also expressed skepticism over the idea of taxing carbon pollution produced by burning fossil fuels — a measure pushed by some Republicans as “a conservative climate solution” based on free-market principles. Mr. Woods, Exxon’s chief executive, has also argued that instead of an “inefficient patchwork of regulations” in the United States, the federal government should instead simply tax carbon.
Mr. McCoy seemed to contradict that position. “Nobody is going to propose a tax on all Americans. And the cynical side of me says yeah, we kind of know that,” he said. “But it gives us a talking point.”
Alex Flint, executive director of the Alliance for Market Solutions, which has led the push for a carbon tax, said his experience with Exxon’s lobbyists was that “they are genuinely committed to a carbon tax and realize that a lot of work needs to be done.”
Contrary to where Flint wants to take this, I don’t think the sincerity of Exxon executives is really the issue. It’s no doubt true that they sincerely believe carbon pricing would be superior to a regulation-centric approach. But it’s also true that they’re confident a high carbon tax will not in practice be implemented. And to the extent they can trick politicians who want to do something about climate change to come out in favor of the most politically toxic possible approach, that simply means such politicians are likely to lose, which is good for Exxon.
Meanwhile, if you’re an Exxon executive and your daughter’s friends come over for dinner and start giving you shit about how your company is wrecking the planet, you can tell them the real solution is a carbon tax and you support it.
I’ve been preaching the doctrine of popularism — that politicians and party-aligned groups should try to emphasize popular rather than unpopular ideas — and it is true that the left is the biggest sinner in this regard. But the carbon tax is an example where it tends to be moderates who have the bigger problem with public opinion. Moderates like that the carbon tax has some right-wing supporters, that it aligns in an abstract way with free-market ideas, and that even fossil fuel company lobbyists will sometimes say they support it. It feels like a comfortable elite consensus kind of space to operate in. But voters really hate it.
Carbon taxation’s fiscal policy problem
One thing that I think carbon tax fans who aren’t just ratfucking lobbyists have never quite reckoned with is the fiscal policy environment that’s prevailed in the United States throughout the 21st century.
If you go all the way back to the Kyoto Protocol in 1992, this was a time when the United States was moving into austerity budgets. The carbon tax isn’t unpopular because people just love carbon dioxide; it’s unpopular because people don’t like raising taxes. But both in the 1990 budget deal between George H.W. Bush and congressional Democrats and then again in the 1993 budget that Bill Clinton and Democrats passed on a party-line vote, the perception (and I think the reality too) was that objectively, the government needed to raise taxes and cut spending.
Those were unpopular measures. The reason they were adopted is that the alternative — soaring interest rates or resurgent inflation — was seen as even more unpalatable than austerity.
And inside that conceptual box, something like a carbon tax makes a lot of sense.
The 1993 bill, for example, include a four-cent hike in the gasoline tax with no inflation adjustment. That was unpopular. If it had instead been a $5/ton CO2 tax, the impact on gasoline prices would have been the same, but it would have raised more revenue (by taxing a wider set of emissions sources). That would have allowed for less in the way of other unpopular tax and spending ideas.
And though a $5/ton carbon tax would not have totally revolutionized climate policy or anything, it would’ve been helpful. But more to the point, if America had continued to face budget crises and continued to use higher carbon taxes as a solution to them, then we could have made even more progress. The hypothesis here isn’t that carbon taxes would have been popular per se. It’s that governments forced to pick from a menu of unpopular options might have done well to choose the unpopular revenue-raiser that also addresses a major non-fiscal problem.
But we haven’t really been in that world. Instead, for 20 years interest rates have been consistently low. “How do you pay for it?” has existed as a question in American politics, but it’s a purely political question. Whenever members of Congress decide they really want to do something, they just go do it, and the economics work out fine.
A world without offsets
Members of the carbon tax community like to argue amongst themselves about why other people’s preferred carbon taxes are bad.
Some will say that we should take carbon tax revenue and use it to cut or eliminate other taxes because that’s the most economically efficient way. But others will say you maximize emissions reduction by investing the carbon tax revenue in clean energy. And others will say that a “tax and dividend” strategy minimizes public backlash and builds legitimacy.
In practice, these all fail, because in a world of persistent near-zero interest rates the carrots aren’t very appealing.
When Republicans wanted to cut the corporate income tax in 2017, they just cut it. No need for a carbon tax. The government mailed everyone pandemic checks, no need for a carbon tax. And in recent years, even though no “climate bill” has passed Congress, we keep getting various pieces of legislation (2018, 2019, 2020) that invest in clean energy. Carbon tax theory is that the revenue would generate more investment in clean energy. Reality is that if you attached a carbon tax to a clean energy bill, people would hate it and it wouldn’t pass. But clean energy is popular and can pass on its own.
Now note again that this would be different if interest rates were high. If the only way to get clean energy money was to cut it from somewhere else, then you’d be looking at a tough fight no matter what you tried to do. And winning a carbon tax fight might be the least bad option.
But that’s not the world that we were in. You could just spend money on anything you wanted, as long as you could convince enough members of Congress to go along.
Bipartisan ice cream
Now, something that progressives neglect but the moderate members on Capitol Hill tend to understand is that bipartisanship per se is popular.
A big bipartisan deal tends to attract favorable coverage because everyone’s sources praise it. Americans also tend to believe that if people of goodwill reason together and put partisanship aside, they will land on good policies, so the outcome of a bipartisan process is probably good stuff.
Unfortunately, the very same moderate members who see the value of bipartisanship spent most of the Bush and Obama years paralyzed by a misguided fear of budget deficits. They were constantly searching for deficit-reducing deals, which made the carbon tax look good.
But this whole style of eat-your-peas austerity politics was a dead-end in terms of creative policymaking. And it was just wrong as a piece of macroeconomic analysis. The real path forward the whole time was the opposite of scolding and vegetables — an ice cream party where everyone gets what they want. A bipartisan climate deal wouldn’t involve compromising on an unpopular regressive tax increase. It would involve providing Democratic votes for the regressive tax cuts that the left despises in exchange for Republicans backing some useful climate stuff.
The good news is that in recent years, the elected officials seem to have more or less landed there. But what’s needed is for sensible, moderate, technocratically inclined people to agree that this is the way to go.
The still-strong case for investment
The American economy has reached a point where I don’t think “stimulus” is warranted any longer. The unemployment rate remains high, but there are lots of job openings and wages seem to be rising, so I think the labor market will sort itself out.
We’re also seeing inflationary pressures that make me leery of pumping much more demand into the economy.
But interest rates remain extraordinarily low. We’re talking about 2% yields on 30-year bonds. That doesn’t mean you should just borrow with no consideration for the future whatsoever. But it does mean that spending on things with long-term payoff is still very sensible. In particular, basically every form of zero-carbon electricity that I’m familiar with (solar and wind, but also hydro and nuclear and geothermal and whatever else) has the property of being expensive to build compared to fossil fuels but cheaper to operate. That means financing new projects with today’s cheap money is a huge economic win.
Huge enough, it seems to me, that people on the left should actually reconsider their aversion to bipartisanship and simply encourage moderates to think bigger. Rather than settling for less spending, give Republicans some of what they want on taxes as long as they’ll give progressives more on clean energy and clean tech. At some point, I assume the cheap money party will be over. But that’s when it’ll be time to talk about carbon taxes.
This post, and most american commentary on carbon taxes, largely misses the point of why they are needed. There is too much focus on renewables vs. fossil fuels. There are many sources of emissions that don't compete in any way shape or form with renewables. One good example is production of cement, which counts for more than 6 percent of global emissions. That's more than the total emissions of Japan or Russia. Any technology to remove those emissions will come at a cost, and without a prices on carbon, it will never make sense to invest in and implement those technologies. Regulations won't work either, since you need to have the technology in order to mandate it.
The same thing applies to other industries such as steel (8 % of world emissions), aluminium production (roughly 3 % of world emissions), and many essential chemicals. Emissions from the energy sources of these industries are only a small part of the total emissions, and the easiest part. The difficult stuff is to decarbonise the actual production process. There are many promissing technologies, from hydrogen as a reduction agent in steel, to non-carbon based anodes in aluminiumproduction, to carbon capture from cementproduction. All of these are costly however, and require a carbon price to be economically viable.
Progressives in the US are still fixated on whether a moderate price on carbon helps decarbonise the power sector. Nevermind that the UK has shown that it is extremly effective at removing coal from the grid (combined of course with support for renewables). Nevermind also that a climate policy structured purely around support for renewables risks increasing energy usage, such that part of the renewable energy comes in addition to, instead of replacing fossil fuel use. More importantly it completly misses the point that decarbonising power production is the eazy part. The world needs to get to net zero ASAP, and the hard parts can't wait.
Thankfully Europe takes climate change seriously in a way that US progressives simply do not. Case in point, the price of carbon in the ETS is currently at 57 € and rising, with more ambitious EU legislation just around the corner. That's at a level where some of the "difficult" low-carbon technologies for heavy industry start to become profitable.
I think Noah Smith nailed this a while back. The fact that fossil fuel consumption isn't taxed for climate externalities is actually the lesser distortion. The greater distortion is that we aren't using renewable energy sources that are even cheaper than •untaxed• coal and oil--because we haven't discovered/invented them yet, because there hasn't been enough government-funded research to discover and invent them. Obama was shrewd enough to let the first problem go and focus on the second one, and thanks to the fall in photovoltaic prices on his watch, the coal industry is dying without any new taxes. Spending on scientific research is the real ice cream party.