the world must do more to fight climate chage
Soon after world leaders gathered in Paris for the climate change summit, a review of the pledges indicated that the world would achieve only about one third of the greenhouse gas emission reductions necessary to keep average global temperatures to a “safe” level--no more than 1.5 degrees Celsius. The prospect of more extreme weather, wildfires, crop failure and economic dislocation plus sea level increases that could reach 7-10 feet by the end of the century require we do much more now.
U.S. leadership is essential
The global effort to counter climate change is unlikely to succeed without U.S. leadership, and by pricing carbon we would be providing a major impetus to an approach that would soon spread around the world.
Partisan gridlock in Congress has prevented enactment of a strong response to this challenge. President Obama’s Clean Power Plan (CPP), now held up in a court battle, is an important step forward. But independent studies conducted in 2016 by six different independent research organizations agree that even if fully implemented, the CPP together with additional regulations under existing law will be insufficient to meet the U.S. pledge to cut greenhouse gas emissions 26 to 28 percent from our 2005 level by 2025. Thus additional far-reaching action will be necessary lest the U.S. slip from its current position of international leadership on climate policy.
There is a more promising approach. If Congress enlists the power of the free market, our nation can reduce emissions more quickly and at far less cost. To attract support from lawmakers who are not so concerned about climate, a carbon fee could be part of a pro-growth package. If, for example, half the fee’s proceeds were used to reduce the corporate tax rate and the other half returned to low- and middle-income taxpayers through tax credits or other stipends, the fee would be “revenue-neutral:” no new government spending would be involved. Alternatively, some of the proceeds could be used to fund other pro-growth national priorities such as infrastructure investment and assistance to coal communities.
Almost all economists and policy experts agree that the cheapest and most efficient way to reduce emissions of carbon dioxide and other greenhouse gases is to “put a price on carbon.” Doing so would make all business and personal investment and purchase decisions reflect the anticipated costs to society of the emissions resulting from those decisions.
Almost 40 nations and more than 26 subnational jurisdictions (such as British Columbia and Alberta) have adopted carbon pricing, and these programs cover 12 percent of the world’s greenhouse gas emissions. The list includes Sweden, Norway, and New Zealand, and the results are encouraging. Prime Minister Trudeau has announced that by 2025 Canada will have a single national carbon price no less than $50 Canadian.
In June 2015 the CEOs of the six largest European oil companies wrote to the UN requesting a dialogue and negotiation about setting a single European or global price on carbon. The heads of the International Monetary Fund, the World Bank, and a number of countries have joined the call.
One way to price carbon is to create a cap-and-trade system. But this approach could not pass Congress in 2010 and is now widely considered a non-starter. Moreover, cap-and-trade systems put in place in Europe, California and the Northeastern U.S. states have shown that in legislating these systems too many credits tend to be given away to powerful interest groups. Another problem is targets that are not ambitious enough. This has led to wide price instability and eventually to artificially low prices, thus crippling the system’s effectiveness in maximizing emissions reductions. Prices in cap-and-trade systems, at least without a set “floor” price, will inevitably be at least somewhat volatile, robbing the system of the predictability needed for long-term business decision-making.
A New Approach
The Partnership for Responsible Growth was formed to advocate a robust debate about the merits of a simple carbon fee and has offered a pro-growth solution. For example, a significant share of the revenue could be used to reduce the corporate tax rate from 35 percent (the highest in the industrialized world) to as low as 25 percent. Much of the balance could be returned to low- and middle-income families through a lump-sum tax credit, rebate, or other tax reductions to keep these households “even” on their fuel and energy costs. Other potential uses include paying for major infrastructure improvements, workforce retraining, assistance to transition communities such as in coal country, or making higher education more affordable. We call this bipartisan approach “carbon-funded tax cuts.”
If, for example, Congress enacted a fee starting at $35 per metric ton, increasing annually by a few percentage points over the rate of inflation and continuing to rise until we achieve our promised emission reduction goals, it would generate $1.5 to $2 trillion over the next ten years. That’s a lot of money, even in Washington! The fee would be levied “upstream” where carbon enters the economy (e.g., the mine mouth, gas processing plant or oil refinery gate).
An upstream fee is potentially more attractive than one that is imposed directly on all emitters because it can be levied using an existing administrative structure in which carbon fuels are already measured and taxed for other purposes. Therefore, this approach is simple to envision and execute, applying to fewer than 2,400 taxpayers.
To encourage our trading partners to price carbon and to make sure that U.S. companies would not be at a disadvantage, we must impose a border tax adjustment on imports and include a refund for energy-intensive exports - - or similar measures to protect trade-exposed, carbon-intensive industries. Once adopted globally, carbon pricing would further strengthen American manufacturing competitiveness, which is experiencing a renaissance due to our access to low-cost, low-carbon energy.
The average corporate tax rate among OECD countries is 25 percent and, at 35 percent, ours is the highest. In recent years Japan, Canada, and the United Kingdom have reduced their top corporate tax rate to increase their competitiveness.
Our high rate, combined with this nation’s unusual policy of taxing U.S. firms’ overseas profits, drives many American corporations to merge with foreign companies and base their operations outside the United States. By lowering our rate, we would make American companies more competitive in the global marketplace and drive domestic economic growth, creating jobs.
This market-based response to climate change would end the long deadlock over tax reform and would be cheaper, faster, more predictable, and more effective than the regulatory course we are on now. Existing and contemplated new regulations under existing authority, even if the CPP is affirmed by the courts and fully implemented, will leave us at least 40 percent short of the 26 to 28 percent emissions reductions by 2025 (from 2005 levels) we pledged at Paris.
Carbon fees can be enacted
We have held more than 200 meetings on Capitol Hill, focusing on House and Senate members who serve on the five committees that have jurisdiction over tax, environmental, and energy matters. These conversations strongly indicated that there is bipartisan receptiveness to carbon-funded tax cuts, but only if the business interests most affected publicly advocate this solution.
The most logical time for action will be in 2017, once the debate has had time to progress and a new president and Congress have taken their oaths.