A Glimmer of Hope for a Carbon Tax in the US?

I’ve spent the last year at CGD working with a team of experts to figure out how to encourage more funders to pay tropical forest countries for results in reducing deforestation.  My CGD colleagues Jonah Busch and Frances Seymour have done extensive research that documents that forests are critical for development and to combat climate change. And paying forest countries for performance – actual results in reducing deforestation – can provide an essential incentive and can complement funding for inputs, as reflected in CGD’s Cash-on-Delivery aid research.  

As we analyze the challenge of reducing deforestation for both climate and development benefits, we come back to the fact that the most effective way to encourage actions to halt forest clearing – indeed, the most simple, efficient, and least-cost instrument to mitigate climate change -- would be to set a price on carbon. Without a price on carbon, some industries/people/countries will inevitably do too little to reduce emissions, while other industries/people/countries will reduce emissions too expensively. Indeed, the REDD+ mechanism was designed as an appropriate market-based solution to channel funds from carbon markets to tropical forest countries that decrease forest clearing. But with the political gridlock in the US and the antipathy of Republican lawmakers to any tax, and especially a carbon tax, we need to focus on less direct approaches to reward reduced deforestation, like raising money through a global forest fund.

A week ago at the time of the spring meetings of the IMF and World Bank we had the pleasure of meeting with former CGD colleague Arvind Subramanian who is now Chief Economic Adviser to the Government of India.  When asked about his expectations for the upcoming December climate conference in Paris he reminded us that, as a think tank focused on how the policies of the wealthy countries affect the poor in the developing world, CGD should keep pressure on the US and other rich countries to price carbon. Which brings us back to the seemingly insurmountable obstacle of convincing the US to price carbon.

But this week there is a glimmer of hope.  Researchers at the IMF, Brookings Institution, and Resources for the Future have published a new book, Implementing a US Carbon Tax: Challenges and Debates that makes the case that a carbon tax in the US can be economically and politically feasible.  The book was launched on Earth Day (April 22) at an event at the American Enterprise Institute, a think tank with considerable credibility among tax-averse conservatives.  The book makes the case that a carbon tax could provide much needed revenues that could lower debt-to-GDP levels, ease pressures on social security and medical budgets, and could support calls to reform taxes on personal and corporate income. The IMF says a carbon tax would be easy and practical to implement and notes that currently only 12 percent of global greenhouse gas emissions are subject to a price and that price is usually too low (less than $10/ton of carbon).  Furthermore, an earlier IMF study showed that there are massive subsidies for fossil fuels in many countries, including the US. To remedy the low carbon price there is talk of a global agreement among a coalition of the willing – meaning probably not including the US – on establishing a carbon-price floor in Paris.  

Also on Earth Day Representative John Delaney, a Democrat from Maryland, announced that he will introduce a bill in the US House of Representatives called “The Tax Pollution, Not Profits Act.” The bill would introduce a revenue-neutral $30/ton tax on carbon that would increase in subsequent years at 4 percent above inflation.  The revenue neutrality is designed to make the bill attractive to Republicans in Congress.  What makes it even more appealing is that the bill proposes to use 50 percent of the revenues to reduce the corporate income tax rate from 35 percent to 28 percent, a particular sweet spot for Republicans.  The other 50 percent would be used to provide support for unemployed coal workers (such as those in Senator Mitch McConnell’s home state of Kentucky) and to provide an energy tax credit to people with incomes below 150 percent of the US poverty line who may be negatively affected by rising energy prices.  

In commenting on the proposed bill at the American Enterprise Institute event, former Congressman Bob Inglis (R-SC, whose belief in human-caused climate change helped cost him his seat in Congress) applauded the bill as a formula that can be particularly appealing to Republicans, who strongly favor a cut in corporate income taxes.  He noted that the fact that the bill was proposed by a Democrat makes it politically more likely to pass; it won’t be seen as a Republican-sponsored corporate hand-out.  Inglis suggested that the rising economy makes the proposal more likely to be acceptable and proposed that the White House embrace the bill as a substitute for the regulatory approach to cut emissions using EPA rules on power plants.

It’s not clear whether this bill will find the votes needed to pass the Republican-dominated House of Representatives. But if it does, it can contribute to an increase in the global price on carbon, which could make the challenge of generating funding to provide an incentive to developing tropical forest countries to protect their forests easier. In any case it’s a good thing that there is at least a conversation about carbon pricing in the US Congress.