Bloomberg News: This Tax Could Save the Planet From Climate Change

By Eric Roston

Not everything went perfectly for Ted Halstead this week.

When the limousine he shared with James Baker—former secretary of state, Treasury, and two-time presidential chief of staff—pulled up to the White House on Wednesday, an access issue for the driver halted them at the gate. Baker’s party, which included Ronald Reagan’s top economist Martin Feldstein, had to walk up the driveway. A spelling error in Feldstein’s name held them up again at two more checkpoints. 

But for Halstead, this was the only hiccup in an otherwise successful enterprise. With help from Baker, Feldstein, and other figures from the Republican Party establishment, he staged what may be the biggest day for climate policy since the Paris Agreement was signed in 2015. Their much publicized meeting with Gary Cohn, President Donald Trump’s top economic adviser, helped introduce the Climate Leadership Council to a broader audience, and perhaps open a pathway to addressing global warming without compromising the party’s core beliefs.

Trump campaigned in part on rolling back environmental policies put in place by President Barack Obama, having claimed that climate change is a hoax and argued that emission rules are onerous for business. But other opponents of climate regulation have pivoted of late, acknowledging the existence of global warming—if not the role humans play driving it—and thus providing someone like Halstead a way in with something called the carbon tax. 

His tax isn’t really a tax, not in the conventional sense. The receipts wouldn’t flow to the Treasury. They would go into a program administered by the Social Security Administration, paying equal “dividends” back to taxpayers. For all but the richest 30 percent, the money would more than make up for increased energy prices, according to projections. And the bait for skeptics is that the government doesn’t keep a penny.

Even with Halstead’s support among 20th century Republican power brokers, it’s the 21st century kind that need to sign off. Anticipation lingers over how Oklahoma Attorney General Scott Pruitt may oversee the Environmental Protection Agency after his expected confirmation as administrator. The EPA became Obama’s main outlet for cutting pollution once legislation died in 2010. Tea-leaf readers see Pruitt eliminatingpower-plant rules that are the centerpiece of Obama’s work on the issue.

But under Halstead’s proposal, that wouldn’t really matter. His plan would reduce emissions twice as much as Obama-era regulations, say two analysts who helped Exxon Mobil Corp. and the Sierra Club see eye-to-eye on a carbon tax back in 2009. Consumers would be weened off fossil fuel consumption, given the increased expense. In the end, laws mandating pollution cuts could be eliminated anyway, since the market would take hold—or so the theory goes. 

This is Halstead’s plan, hailed in media reports this week as a potential third way in this existential debate. But his strategy is by no means new—it’s been two decades in the making. 

Social entrepreneur

Halstead, 48, calls himself a “social entrepreneur.” His first shop, Redefining Progress, opened its doors in the mid-1990s. It was an attempt by its 25-year-old founder to bring environmental analysis into economics. It developed an alternative GDP measure that incorporates environmental and social measures, called the “Genuine Progress Indicator.” The idea landed Halstead on the cover of the Atlantic and turned him into an overnight think-tank wunderkind.

His group also started investigating how shifting taxation to natural resources would encourage conservation and lower tax burdens on business, the ancestor of the current carbon tax proposal. 

By 1997, global climate change negotiations were coming to a head in Japan. Halstead spearheaded a statement by 2,500 economists acknowledging global warming is real, that it’s man-made, and that market-based policies are the best angle of attack.

The Kyoto Protocol was never ratified by the U.S., helping convince Halstead that “the world was not ready for market-based climate policies.” At that point, he went off to graduate school at Harvard’s Kennedy School of Government. In 1999 he created the New America Foundation, a center-left think tank, and ran it for 10 years. Then he spent five years sailing around the world with his wife.

By 2015, Halstead found his attention drawn again to climate change. The market was still largely unwilling to put a price on the present and future damage done by pollution. For years, more organizations were spending more money but the work wasn’t approaching goals suggested by scientists. “It just didn’t add up,” he said in an interview this week with Bloomberg.

His Genuine Progress Indicator showed “there’s a fundamental disconnect between how we measure the economy and the real state of the economy,” he said. The market failed to account for what are called “externalities,” problems that companies create, have no incentive to solve, and push out to society at large. 

“If you had to point to a single underlying cause of the climate problem, that is it,” he said. Carbon dioxide imposes costs on society, and yet pumping it into the atmosphere is free. “All price signals are wrong.” If climate change is to be slowed, he said, this would need to be rectified.

Thank Canada—for your dividend

Halstead dived back in to refine his arguments, penning a new essay in the Atlantic analyzing what became a key precedent for the Climate Leadership Council’s work: British Columbia’s revenue-neutral carbon tax. That experiment showed how the basic scheme works—emissions went down as the economy grew. To continue working, the carbon price had to rise regularly—the program lost steam when it didn’t.

Halstead then added an idea he’d worked on two decades earlier, the notion of cutting checks to taxpayers—the “dividend.” From there, it was easy to identify the optimal vessel for his ideas.

“The road to success on this runs through the Republican Party,” he said.

In May, Halstead flew to California to meet with former Secretary of State George Shultz and Sequoia Capital Ltd. venture capitalist Thomas Stephenson. Both men are affiliated with an energy policy center at Stanford University and were active in clean energy and climate issues. Halstead described his strategy—to build a League of Extraordinary Gentlemen for climate policy—helping usher Republicans in Washington into the modern, warming world.

Shultz, with Halstead, wrote letters to likely candidates, inviting them to help build the Climate Leadership Council. Joining up were former Treasury Secretary and ex-Goldman Sachs Group Inc. Chairman Henry Paulson and Harvard University economist and former Council of Economic Advisers Chairman Greg Mankiw. Both have supported a carbon tax in principle, and were persuaded to narrow their focus to Halstead’s tax-and-dividend policy. Rob Walton, a former Wal-Mart Stores Inc. chairman and current head of the executive committee of Conservation International, also signed on. Before long, Halstead flew to Houston to meet Baker. 

Republican leadership

Baker, 86, has never made climate change one of his central issues. But he recognized Shultz’s logic when the two spoke last year and Shultz argued for Republican leadership on the issue.

Baker’s instincts became clear at the White House meeting. Once the visitors made it through White House security, he guided them to the Roosevelt Room, just across from the Oval Office, and waited. 

“My temptation was ‘OK, while we’re waiting for them, let’s sit,’ ” Halstead said. “And Baker—in something like this you want to follow Baker’s lead—Baker said, ‘I’m going to stand until they get here.’ ”

So they stood.

Once Cohn arrived, Baker started right in. “They really understood the policy,” Halstead said of Trump’s aides, without getting into details. “They gave some favorable comments about it. We were quite pleased.” The White House didn’t return a request for comment.

That meeting may be the opening lines of a new chapter in Halstead’s 20-year carbon tax odyssey. “In a very short amount of time, we’ve taken our solution and made it the default conservative climate plan, if and when the administration and Congress want to move forward,” he said. But he’s also realistic, and recognizes there are powerful forces vehemently opposed to any new taxes.

One of them is Grover Norquist. In 1985 he founded Americans for Tax Reform, in part at the bidding of then President Reagan. The group has devoted itself to limiting taxes and regulations ever since. Norquist belittled Halstead’s initiative for having to tap Reagan-era officials to help sell the program. “They really had to go back that far?” he said.

“How on earth does he say that Baker, Shultz, Mankiw, Feldstein, and Paulson are ‘the Left’?” Halstead said. “This is not creating a tax. This is a dividend back to the American people.” But Norquist isn’t alone: At a weekly lunch Norquist holds, Representative Peter Roskam, an Illinois Republican who chairs the House Ways and Means tax policy subcommittee, said of the climate council plan’s viability: “Absolutely not. Not even a topic of conversation.”

Against such strident opposition, Halstead remains sanguine. By the end of the White House visit, Baker's driver had finally made it through security to pick them up. And by the spring Halstead expects the council will be able to announce a complete group of 20 founding members.

Halstead holds close what motivates his pursuit of a carbon tax in the first place. “Having children really just changes your outlook on life,” he explained. “You think of their future. So the simplest example of that is on climate change.”