Harvard Business School: Carbon Neutral

Congress is at a standstill over carbon. One side wants to regulate emissions as a pollutant; the other fears that any move to regulate oil and gas will impede growth and cost jobs. A compromise once pushed by the Obama administration five years ago to implement a “cap-and-trade” framework—capping the total amount of emissions and allowing companies to trade permits to pollute on the open market—fell apart in the midst of partisan bickering.

As Washington fiddles, the world suffers under the increasingly undeniable effects of global climate change, says Walt Minnick (MBA 1966), a successful businessman and former Democratic congressman from Idaho. “It’s the most serious problem facing humanity in the 21st century. If we want a future for our kids and grandkids, it’s imperative that our generation does something effective to address it.”

Together with fellow HBS alum Bill Eacho (MBA 1979), Minnick is pressing for a simple solution to curb emissions by putting a tax on carbon that would be assessed where the carbon enters the market, at the mine mouth or oil refinery, and then passed on to the consumer. “You want it to be passed forward, so people will have an economic inducement to drive a cheaper car, or insulate their house and be a little more energy efficient,” says Minnick.

At the same time, however, the plan would use the extra revenues generated from the carbon fee to issue a tax credit to middle-class consumers to compensate them for their increased energy costs, as well as reduce the corporate tax rate, a longtime goal of congressional Republicans. The idea was the brainchild of Eacho and George Frampton, a lawyer who worked on environmental issues at Covington & Burling and former environmental policy advisor to President Bill Clinton. In 2014, Eacho, Frampton, and Minnick created the nonprofit Partnership for Responsible Growth to introduce the concept as a practical alternative to cut through the ideological divide.

“In effect it would become politically acceptable because it would enhance economic growth,” says Eacho, a longtime businessman and former US ambassador to Austria. Unlike cap-and-trade, which depends on the open market to determine costs for carbon emissions, a carbon fee would be transparent and predictable, allowing companies to figure in the cost to their bottom line while providing states an alternative to EPA regulations.

Of course, not everyone would make out under the deal. “The coal industry, which is already losing market share, would go out of business faster,” allows Eacho. That means some coal-producing states would be harder hit than other states—but those side effects, he says, could be dealt with by budgeting some of the revenue for economic assistance and conversion to cleaner energy. While the group hasn’t attached an exact figure to the amount of the tax, they estimate that it should start between $30 and $40 per ton, an amount that reflects the social cost of carbon and that models show would produce more emission reductions than the current regulatory approach.

To keep the United States competitive with other countries, the plan would include a simple provision to impose the fee at the border on any energy intensive goods imported into the U.S.—unless the country has enacted a similar carbon fee. That would not only create a level playing field, but also incentivize other countries to follow suit. “If they are going to pay the fee anyway, why not collect a fee themselves rather than have their exporters pay it to the United States at the border,” says Minnick.

A carbon tax has already worked in British Columbia, where it was implemented in 2008. According to the latest Canadian government figures, the tax was revenue-neutral—in fact, reductions in personal and business taxes exceeded the total raised by the carbon tax by $20 million. Eacho, Frampton, and Minnick have been making the rounds of congressional leaders on the environment and the economy to make their case for the plan—some 175 offices so far and counting—where despite major interest, they’ve hit one roadblock. “What my Republican friends tell me is that in order to get significant Republican support, we are going to have to get businesses and industry to take positions publicly and say this is a better solution than our current state by state, point source by point source regulatory approach,” says Minnick.

The organization has started a new business trade association, the Coalition for Responsible Growth, to convey that message, and is currently in discussion with a number of Fortune 500 companies to sign on publicly. If they can get all the pieces in place, they hope to make a major push in early 2017, during the honeymoon period in a new administration when Congress—no matter who is elected—is often able to cut through partisan gridlock. “Congress has always had show horses and workhorses, and there are many workhorses in both parties looking for pragmatic ways to solve problems,” says Minnick. “In a postelection environment, the show horses are out of wind, and we depend on the workhorses to make progress.”

Alumni business owners interested in joining the Coalition for Responsible Growth can reach out to Eacho and Minnick directly using their contact info in the Alumni Directory listing.