Climate

A New Carbon Tax Bill In The Senate Comes With Both Promise And Problems

CREDIT: AP Photo / J. Scott Applewhite

Senator Sheldon Whitehouse (D-RI), center.

In a sense, the problem of climate change is incredibly simple: certain people are dumping carbon into the atmosphere, and in the coming decades we will all suffer from the effects of that pollution. That, in turn, suggests a simple fix: make the emitters pay for that damage in the here and now. If they don’t want to pay, they won’t emit.

That’s the basic theory behind the American Opportunity Carbon Fee Act, which Sen. Sheldon WhiteHouse (D-RI) introduced on Wednesday, along with his co-sponsor Brian Schatz (D-HI).

According to details Whitehouse’s office released to reporters, the bill would impose a fee on all carbon emissions (and other greenhouse gas emissions) beginning in 2015. It would start at $42 per metric ton, and then increase by two percent annually in real terms. The fee would fall on all coal, oil, and natural gas that’s either produced in the United States or imported, and it would cover large emitters from non-fossil-fuel sources as well.

This sort of proposal is also commonly called a “carbon tax,” though politicians tend to avoid that term for obvious reasons. But the idea has wide support from commentators, economists, policymakers, and interest groups across both the left and right, because it’s seen as the most efficient and least intrusive way to cut greenhouse gas emissions. In his speech Wednesday, Whitehouse pointed to this support and previous proposals to put a price on emissions that “were market-based, revenue-neutral tools, aligned with Republican free-market values.”

“We simply need conscientious Republicans and Democrats to work together, in good faith, on a platform of fact and commons sense.”

By placing a cost on emissions, a carbon fee would encourage every company, institution, and individual to find the least expensive and most effective reductions that work for them. And the diversity and extent of these reductions can go far beyond less use of fossil fuels; it can be changes in daily routines, business models, more use of public transportation, changes to infrastructure, new technology innovations, and on and on. No large or expansive regulation is necessary: just track the emissions, charge the emitters, and let the market do the rest. (Whitehouse’s bill is only 29 pages.)

According to E&E News, Whitehouse has previously shown a willingness to use his carbon fee as a replacement for Environmental Protection Agency (EPA) regulations aimed at cutting emissions from the nation’s power plants. Given that Whitehouse’s proposal would cover the electricity sector, there’s certainly a case for scrapping EPA’s rule as a condition for passing it — a political trade that would appeal to Republicans.

In fact, one way negotiations with the GOP could arguably improve Whitehouse’s bill is what to do with the revenue. The proposal offers a menu of options, which range from the very good (return all the revenue with checks to Americans) to the very bad (reduce the debt, which would amount to austerity). The key thing to remember is that the purpose of the fee is not to raise revenue but to put a price on emissions, and both economic modeling and real-world examples suggest that immediately plowing the money back into the economy effectively eliminates any drag on the economy or job growth from the tax.

Republicans would probably balk at returning the revenue in checks. But they are likely to insist on a revenue-neutral bill, which would mean offsetting tax cuts elsewhere. And if properly directed, those tax reductions would work almost as well: there’s some bipartisan support for an expansion of the EITC, a refundable tax credit that operates as an effective wage subsidy for low-income Americans. Or the revenue could simply be used to roll back the payroll tax, which again would benefit the poorest Americans, who are most vulnerable to energy price hikes.

“The way I interpret Senator Whitehouse’s bill is as kind of an opening statement from the Democratic side,” Adele Morris, who has worked on carbon tax proposals for the Brookings Institution, told E&E News. “And then the rejoinder from the Republicans could be a specific proposal on how to use the revenue, maybe a different tax rate, maybe something with regard to EPA’s rulemaking, that kind of thing.”

But there’s another issue with Whitehouse’s bill that Republicans almost certainly won’t improve: the rate at which the fee increases is slow. Whitehouse pegged his fee to the social cost of carbon (SCC) as calculated by various government agencies, which does increase at roughly the same rate. Whitehouse’s material also pointed to a study by Resources for the Future, which found that a carbon tax applied to the electricity sector and pegged to the SCC would cut about half of the emissions from power plants by 2035.

But the scenario that got a 56 percent cumulative reduction used a moderately more aggressive SCC than Whitehorse does. Another recent model of a carbon fee that, like Whitehouse’s proposal, gets its arms around all sectors of the economy, showed that starting at $10 per metric ton and increasing much faster — by another $10 every year — would cut carbon emissions 28 percent by 2020 without harm to the economy. That would outdo the reductions President Obama just pledged in his recent deal with China.

The problem is that there’s no inherently right answer for what the SCC should be. Projecting climate change’s impact on the economy is difficult. Furthermore, it’s not just a matter of paying to avoid the most likely scenarios — it’s how much we want to pay to avoid the worst-case scenarios.

That’s an inescapably subjective question, which is why the government doesn’t actually publish just one SCC. It publishes a range. And that’s why many scientists and researchers recommend much more aggressive carbon fees and rates of increase than Whitehouse does.

What the price of carbon emissions should be is ultimately an ethical question as much as an economic one. And given the scale of world emissions at this point, and how fast they need to drop to keep the world under 2 degrees Celsius of warming, the rate at which Whitehouse’s fee would increase could be egregiously low. With a party that largely denies the reality of climate change taking control of the Senate next year, all the political incentives will be to keep the fee either as as low as possible, or nonexistent. So if this is Whitehouse’s opening bid, he should be going as big as possible.