Thursday, June 6, 2019

Joe Biden Commits to Decarbonization but Not To a Carbon Tax

Joe Biden’s climate action plan is a passionate declaration of good intentions. Unfortunately, all the passion is undermined by his failure to openly support a carbon tax, the one policy that would most certainly deliver on his promises.

Politics should be about means, not just about ends. Ends-wise, Biden’s program is a veritable feast. He sets an overall goal of net zero carbon emissions by 2050, matching the goal set by the Green New Deal of his progressive rivals, and he makes a gazillion specific promises along the way:

  • 100% electric cars
  • advanced biofuels
  • carbon free aircraft fuels
  • more compact cities with higher-density affordable housing
  • grid-scale storage at one-tenth the cost of lithium-ion batteries
  • small modular nuclear reactors at half the construction cost of today’s reactors
  • refrigeration and air conditioning using refrigerants with no global warming potential
  • zero net energy buildings at zero net cost
  • using renewables to produce carbon-free hydrogen at the same cost as that from shale gas
  • decarbonizing industrial heat needed to make steel, concrete, and chemicals and reimagining carbon-neutral construction materials
  • decarbonizing the food and agriculture sector, and leveraging agriculture to remove carbon dioxide from the air and store it in the ground
  • capturing carbon dioxide from power plant exhausts followed by sequestering it deep underground or using it make alternative products. 
That’s not even the full list. All those ends are laudable, but the proposed means turn out to be just an ad hoc mix of executive orders, restoration of Obama-era regulations, research subsidies, and tax credits.

The trouble is that such a program lacks any way of balancing the costs of decarbonization among the various possibilities. Maybe there will be breakthrough on advanced biofuels that makes liquid-fueled cars just as clean as electrics, and cheaper to run. Maybe direct air capture of carbon will turn out to be more efficient than carbon capture from industrial smokestacks. Who will choose which paths to pursue and which to abandon?

Economists widely agree that the way to make those choices is through the price system. Putting a price on carbon would mean imposing a carbon tax — or, less likely, a cap-and-trade system for carbon emissions. A price on carbon would put equal pressure across the board on every decarbonization pathway. All polluters, from frackers to cement plants to soy farmers, would face exactly the same incentive to clean up their act. 

It is time to empower people on the ground – the ones with the hands-on knowledge of time and place.

Under a carbon tax, the sectors that can most cheaply clean up using today’s technologies would move first and reap the earliest payoffs, giving decarbonization a head start. Sectors that lack the technology to clean up would get stuck with higher costs, at least in the short run. In the long run, either they would be driven out of business by cleaner substitutes, or they would invest in research to develop the technologies needed to clean up their act.

The alternative is not so attractive. Suppose that on its first day in office, a Biden administration, as promised, puts twenty or fifty or a hundred disjointed proposals on the table. Which ones are going to come out on top? The way Washington works, the ones that come out on top will not be the most cost-effective, but instead, the ones with the best lobbyists.

Coal has great lobbyists. They’ll talk the administration in to spending billions on costly schemes to capture carbon emissions from the smokestacks of electric power plants that would otherwise be slated for closure. Meanwhile, some startup working from a trailer in the Nevada desert may not get the grant it needs for a terrific new idea for storing surplus solar energy to use at night.

But wait — wouldn’t a carbon tax hurt the poor? Isn’t it true that low-income households spend a larger share of their incomes on energy?

Not really. I’ve been through all that before in great detail, but here is a short recap:
  1. Keeping energy prices artificially low a really dumb way to help the poor. Poor people do spend more on energy as a percentage of their very low incomes but rich people use vastly more energy in actual gallons of gas or kWh of electric power. By my estimates, rich people get as much as three-quarters of the benefit of cheap energy while poor people get as little as 10 percent.
  2. The sensible way to shield poor people from the impact of a carbon tax is to give them money. By some plausible calculations, as little as 11 percent of the revenue from a carbon tax would be enough to fully compensate low-income families.

What to do with the rest of the carbon tax revenue? Opinions vary. Some, like the Citizens’ Climate Lobby, advocate a fee-and-dividend approach, under which all carbon tax proceeds are distributed equally to all citizens. Some would prefer to refund the money from a carbon tax by cutting rates on other taxes, starting with those like the payroll tax that hit low-income families the hardest. Still others would use the tax revenue to fund clean energy research and infrastructure.

These are all reasonable ideas. I say, put all of those people in a room and lock the door. Don’t let them out until they agree on a formula for divvying up the carbon tax proceeds. In the end, it doesn’t matter a whole lot. It is the incentive effect of the carbon tax itself that does the heavy lifting in cutting emissions. By comparison, the way you spend the revenue is a secondary issue.

So, does this mean the Biden plan is hopeless? No, not quite. Evidently he has at least one economist on his staff, because buried deep in the middle of his proposal is this cryptic passage:
Establish an enforcement mechanism to achieve net-zero emissions no later than 2050 . . . based on the principles that polluters must bear the full cost of the carbon pollution they are emitting and that our economy must achieve ambitious reductions in emissions economy-wide instead of having just a few sectors carry the burden of change.

What does that mean? Most readers’ eyes would skip right over it, but any economist will immediately see it as a coded call for a carbon tax.

Hey, Joe! Highlight that key passage! Maybe your political advisers are telling you that a carbon tax is poison at the ballot box, but when and if you are actually elected, find out which one of your economists wrote that bit about making the polluters pay. On your first day on the job, invite whoever it was into the oval office for a little chat.

Previously published on Photo credit: Sam Jothan Sutharson via

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