Director of Engagment - Business Climate Leaders at Citizens' Climate Lobby
Originally appeared in LinkedIn
Each episode of the 1950s TV series, "The Millionaire," follows the life of an everyday citizen who receives an anonymous $1,000,000 gift. As kids, we watched and asked each other,"what would you do?" It was fun speculating how to spend the money.
I'm reminded of this as my colleagues and I ask businesses to engage in the federal carbon pricing debate and explain that in addition to catalyzing innovation and a clean energy economy, an effective price on carbon will generate a LOT of revenue. Business leaders pay attention to this because they know that if they’re not at the table, they’ll be on the table and while economists agree that a carbon tax is the most economically efficient way to reduce CO2 emissions, there’s little agreement on what to do with the revenue.
If you think a Trump carbon tax is a pipe dream, consider some of his advisors and likely cabinet appointees. Rex Tillerson first praised a revenue neutral carbon tax years ago[i] and is the front runner for Secretary of State. Then there are those three Goldman Sachs executives. Goldman Sachs was one of 13 companies that were charter signatories of the Obama Administration’s American Business Act on Climate Pledge. One of Trump’s economic advisors, Art Laffer, advised Ronald Reagan, and is also pro-carbon tax. Then there’s Ivanka. In this context, and with Paul Ryan itching to enact tax reform, the time is ripe for a national carbon tax.
Assume a bill passes in 2017 and takes effect in 2018. A carbon tax of $10/ton, increasing $10/ton/year would generate 1.2 trillion dollars over the next seven years (see the figure) by the end of a two-term Trump presidency.[ii] That’s HUUUGE!
The $1.2T "Climate Dividend" would be 32% of the 2015 $3.8T US Federal Budget; it would dwarf the Cold War "Peace Dividend," which Newsweek estimated at $260B [iii].
Before passage, as the legislation winds its way through the sausage-making halls of Congress, the feeding frenzy may be as crazy as the 2016 Presidential campaign. Everyone will clamor for a share, and coming to agreement will be difficult.
In the following, I’ve emphasized three keywords to point out that in principle a good carbon tax needs to be effective in reducing emissions, economically efficient, and equitable in including measures to reduce or eliminate hardships caused by the tax.
There are two main ways to price carbon:
- Put a cap on emissions and create a market for buying and selling permits to create CO2 pollution.
- Add a tax to the price of fossil fuels. This is like the familiar gas tax
A tax levied on all fuels is more efficient for at least a couple of reasons. First, it avoids the inefficiencies of creating and running a market. Second, it captures more emissions throughout the entire economy. A cap can only effect the price of products created by those large entities who purchase permits to pollute.
Whether a cap or a tax is used to reduce emissions, legislators will struggle to agree on what to do with the revenue. A key concept they will discuss is Revenue Neutrality. To be neutral, the government can’t use the revenue. Generally, revenue neutrality is favored by Republicans who don’t want to see government grow, and less favored by Democrats who prefer investing the revenue. There are many flavors of neutrality. Here’s a vanilla version: Give it all back!
Give It All Back!
In this scenario, all revenue from the carbon tax sketched above is rebated to American households. Such a proposal was studied by Regional Economic Modeling, Inc. The study, commissioned by Citizens' Climate Lobby, shows that in year 10, a family of four would receive almost $300/month. That’s good because a carbon tax will raise prices and be otherwise regressive. Estimating that over 50% of households would receive more from the rebate than they would spend due to higher prices, the study shows one way a carbon tax can be Equitable. Another way to address regressivity—perhaps less comprehensively— is a tax swap.
Do A Tax Swap
A carbon tax might be built into a larger, revenue neutral tax bill that would reduce other taxes, exactly offsetting the carbon tax revenues. Mentioned most often are personal, payroll, and corporate taxes.
Reduce The Debt
Another possible use of revenue is reducing our national debt. While it’s not revenue neutral, this appeals to everyone who wants to reduce the debt.
Sound like Xmas? Maybe it’s time to write your wish list.
Other non-neutral uses of carbon tax revenues include:
- Job training for the discarded workers of globalization and a dying coal industry
- Investments in communities who have suffered fossil fuel related environmental degradations
- Climate change adaptation, e.g., helping America’s coastlines adapt to rising sea levels
- CO2 removal and carbon sequestration
- Funding clean energy technology innovation and infrastructure
But infrastructure deserves more than just one word…
During their campaigns, Clinton and Trump proposed massive investment in infrastructure. While Clinton had a proposal to pay for her plan, Trump did not. A Climate Dividend might be just the ticket.
In fact, a lot of Making America Great Again won’t be cheap. Think of the Climate Dividend as a way for Trump to address some of the maladies he trumpeted and vowed to fix. Here’s a homebrew remedy for three of them:
- 1/3 to households. Remember those angry jobless blue collar workers? Let’s send equalized monthly checks to every household as in the Citizens’ Climate Lobby proposal[iv]. Monthly checks will remind people of who to thank and prevent eventual repeal of the tax, which is what happened to Australia’s carbon tax as the result of backlash against rising costs.
- 1/3 to infrastructure. This will create blue collar jobs, and— if it includes creating a smart grid— a smoother transition to a clean energy economy.
- 1/3 to reduce the national debt, corporate, personal, and payroll taxes.
Imagine a Trumpian fireside chat kindling speculations around every hearth. How would you spend the Climate Dividend? Business leaders will want tax cuts. Clean energy advocates will want green infrastructure investment. Blue collar families will remember that Trump need not use the Climate Dividend to pay for walls in the desert because Mexico will pick up that tab.
Our hypothetical carbon tax would reduce US CO2 emissions to 50% below 1990 levels in 20 years, well beyond our COP21 commitment. How supremely ironic that Trump—who proclaimed and then disclaimed his belief that climate change was a Chinese hoax— could become a mega-climate hero while using his Climate Dividend to pay for campaign promises!
For a reality show celebrity like The Donald, remaking the Millionaire and casting himself as the benefactor who funds making America Great Again just might appeal to his sense of career continuity and presidential legacy. A carbon tax might be just the beginning…
For more in depth discussion on general carbon pricing policy, see the World Resource Institute’s Carbon Pricing Handbook for Policy Makers (April_2015), an excellent survey of carbon pricing policy literature.