Why a Carbon Tax Should be the Centerpiece of a Green New Deal

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Photo source: Edward Kimmel https://commons.wikimedia.org/wiki/File:Climate_March_0998_(34210333122).jpg

No Democrat is going to win the 2020 presidential nomination without a strong position on climate change. It is small wonder, then, that all six U.S. Senators seeking the nomination signed on as co-sponsors of the Green New Deal. Yet, when the GND resolution came up for a vote in the last week of March, all six voted “present.”

If even the Green New Deal’s backers won’t vote for it, something is wrong. A quick read through the full text of the resolution is enough to show the problem. As it stands, the GND is nine parts regulation to one part action. It needs a firm anchor in pragmatic policy if it is going to go anywhere. Only one thing can provide that anchor: a carbon tax.

Fortunately, although the GND resolution does not explicitly call for a carbon tax, it does contain a placeholder where one could be inserted. Section 4 of the resolution reads, in part:

(4) . . . a Green  New  Deal will require . . . (B) that the Federal Government takes  into  account  the  complete  environmental  and  social  costs  and  impacts  of  emissions through—  (i)   existing laws (ii)   new policies and programs

Yet many GND supporters, it seems, see a carbon tax as too timid, like trying to fight a forest fire with a garden hose. They have just read the latest U.N. report and the new National Climate Assessment. They see the clock ticking on global catastrophe. A carbon tax may be a nudge in the right direction, they say, but it is still just a nudge. They want to make big changes, and make them fast. My answer to those fears is that a carbon tax can be a lot more than a tweak or a nudge. It can be as powerful a tool as Green New Dealers are willing to make it. In fact, it should be the centerpiece of a GND package. Here are some ideas as to how the too-timid kind of carbon tax you may have been thinking about could be made much bolder.

If you think a carbon tax is not enough, raise it

The most obvious action for those who think that a carbon tax is not enough is to raise the rate. Many proposals envision a carbon tax of $40 or so per ton of CO2, based on estimates of the social cost of carbon conducted during the previous administration. As a rule of thumb, each $1 of tax per ton of CO2 would raise gasoline prices by about one cent per gallon. That means a $40 tax would add 40 cents a gallon to the price of gasoline, with similarly modest effects on other nonrenewable energy prices. Considering that the effective price of gasoline is currently near a historic low, such an increase very well might not have the kind of impact the Green New Deal is calling for.

Backers of doing more and doing it faster can point to estimates that place the social cost of carbon much higher than $40 a ton. For example, a study by Katharine Ricke and colleagues published last year in Nature Climate Change took note of estimates ranging from $10 to $1,000 per ton. Using a variety of socio-economic scenarios, economic damage functions, discount rates, and climate models, they estimated the global social cost of carbon at $417 per ton. A carbon tax of $400 per ton would put U.S. gasoline prices roughly on a par with those in European countries like the Netherlands, Germany, or the U.K. People in those countries already choose more efficient cars and use public transportation a lot more than Americans do.

In short, a carbon tax is a flexible policy instrument that can be set at levels reflecting the goals of those who want to take relatively gradual or more aggressive action against climate change. Furthermore, raising the level of a carbon tax is not the only way it can be made more effective. Here are more ideas.

Broaden the tax

Many proposals limit carbon taxes primarily to fossil fuels. Polluters would pay the tax at the point of extraction and pass it along to consumers through higher prices at the gas pump or the electric meter. Although fossil fuels account for about three-quarters of all human greenhouse gas emissions, emissions from nonfuel industrial sources like cement plants are just as bad, and should also be taxed. So should carbon emitted when goods are produced abroad for consumption in the United States. A border tax could take care of those.

And don’t forget methane, an even nastier greenhouse gas than CO2. About a third of methane emissions come from production and distribution of fossil fuels, especially natural gas but also coal and oil. Taxes on methane should reflecting their CO2 equivalent. In the event that some emission sources, for example, leakages from natural gas pipelines, remain under direct regulation, the EPA should harmonize regulatory standards with the level of the tax.

Even more methane – more than 35 percent of the total – comes from agriculture. Of that, livestock accounts for as much as 80 percent, through enteric fermentation, manure left on pastures, and land cultivated for livestock feed. A really bold version of a carbon tax, then, would extend to agriculture, especially the livestock sector.

Make it a two-way tax to reward carbon removal

Removing carbon from the air and sequestering it or recycling it as fuel could potentially have a huge impact on climate change. It can be done, but with current methods it is costly. Until recently, estimates were running as high as $600 per ton of CO2. However, there are new methods on the horizon that could bring the cost of direct air capture down substantially. Those technologies could get an immediate boost from a carbon tax that worked both ways – you pay the government if you emit, the government pays you if you sequester.

Even if the carbon tax itself were initially below the cost of carbon sequestration, you could jump-start removal by offering a premium rate for removal for a limited period. For example, if we initially set the carbon tax at $400 a ton, but the cost of removal is $600, offer a 2-for-1 bonus for carbon removal and phase it out over a 10-year period. The removal process would be profitable immediately, and as the technology became mature, costs would drop enough to keep it going without the bonus.

The case for tech-neutral solutions

The above proposals have a one key feature in common: They are all tech-neutral. They don’t try to guess in advance whether algae diesel is more deserving of a subsidy than small modular reactors oradvanced energy storage or anything else.

It is easy to underestimate the difficulty of picking winners from among the wide spectrum of new green technologies that are being pursued. When there is no way to know what will work, it makes more sense to offer modest but equal incentives for all alternatives. It would be better to do that through a tech-neutral mechanism like a carbon tax than to guess which competing fix might work best.

A broad, tech-neutral incentive would also help defuse the danger of opening the choice of winners to influence by special interests. At the same time, it would reduce the risk that that dead ends would never be abandoned, even when they are shown to have failed. The Renewable Fuel Standard, which mandates the use of corn-based ethanol as a motor fuel, is a classic case in point. Environmentalists fell out of love with ethanol long ago, but agribusiness has not.

In contrast, putting a price on carbon emissions is the ultimate in tech neutrality. A price signal would provide unbiased, neutral pressure across the full spectrum of potential methods for cutting emissions. You could dial it up or down depending on your assessment of the urgency of the climate threat. You could implement it narrowly to cover fossil fuels only or broadly to encompass industrial sources, farming, carbon removal, and anything else you want to include.

So, Green New Dealers, what’s not to love about a carbon tax?

Based on a version previously published at NiskanenCenter.com