Is a US Carbon Tax Hopeless – Forever?

Recently I participated in a roundtable on the future of carbon markets at the Center for American Progress. The discussion, co- sponsored by Climate Advisers, was co-chaired by former U.S. senator Tom Daschle and former EPA administrator Carol Browner, and included CAP chair John Podesta. Jim Kim, the president of the World Bank, made opening remarks.  In other words, the participants included lots of insiders who know a thing or two about how Washington works—and doesn’t.

The discussion was wide-ranging, and because Mr. Kim was there, a good part of it was focused on the World Bank. If you want to know how I think the World Bank could make a world of difference on climate, see this outside-the-box proposal for the bank to lead on creation of a new global climate agency.

What struck me most, however, was the lack of any serious discussion of the sine-qua-non for a real global market: how to get the United States to put a price on carbon emissions. It’s almost impossible to imagine jumpstarting a robust global carbon market when there is still no charge in the United States for pumping heat-trapping gasses into the atmosphere.

Why particularly the United States? It is true that China’s emissions have recently surpassed those of the United States in absolute terms. But the United States runs a close second, is responsible for a much larger share of the excess carbon already heating the planet, and has four-to-five times the per capita emissions of China.

Pricing carbon emissions is not only sound economics but an idea whose political time might just be about to come.  As Eduardo Porter noted his  New York Times this week

…a carbon tax fits conservative orthodoxy. It is a broad and flat tax, whose revenue can be used to do away with the corporate income tax — a favorite target of the right. It provides a market-friendly signal, forcing polluters to bear the cost imposed on the rest of us and encouraging them to pollute less. And it is much preferable to a parade of new regulations from the Environmental Protection Agency.

Porter points to a new libertarian think tank, R Street, created by Republican thought leaders who abandoned the climate skeptic Heartland Institute, that explicitly favors carbon taxes.  Another sign that carbon taxes aren’t necessarily anathema on the right: last November the American Enterprise Institute joined with Brookings, Resources for the Future and the IMF to host a thoughtful discussion on the issue.

Depending on how the revenue is used, a carbon tax could close the U.S. fiscal deficit in a flash. Or it could be revenue-neutral, with the proceeds returned to taxpayers in one form or another, perhaps thus avoiding objections from Grover Norquist and other anti-tax campaigners. Such a rebate, for part of the revenue, is already included in draft legislation by senators Boxer and Sanders.

Given all this, I asked the politicos at CAP: how about it? What are the prospects for the United States to put a price on carbon? No way, they said. Hopeless.  

Meanwhile students at US universities are getting on the Bill McKibben 350.org campaign bandwagon, and pushing the investment committees of their boards to move to fossil free investing.  For investors perhaps that might ultimately be a good push.  Not only is the market failing in the classic sense (because pollution is a public “bad” so no surprise there). Investors in fossil fuel companies may also be mispricing the risk of companies’ reserves of “unburnable fuel” (see this article in the Economist), ie overvaluing the “reserve replacement ratio” .  That could represent another market failure—the market assumes everybody else is overvaluing reserves. . .shades of the housing bubble.

A carbon tax would be far more effective and faster in impact than divestment from fossil fuels.  In the meantime, it’s hard not to applaud the student activism – perhaps the only hope for my children and grandchildren.