Three and a half years ago, an open letter eventually signed by more than 3,600 economists declared that “climate change is a serious problem that requires immediate national action.” Signers included 15 former Chairs of the Council of Economic Advisers, more than half of whom have served under Republican presidents — a display of bipartisanship that stands in sharp contrast to Republicans’ consistent opposition in Congress to the national action we’re finally getting take the form of the Anti-Inflation Act (which, despite its name, is primarily a climate law) that President Biden is expected to sign into law today.
However, while we are taking action, those actions will not take the form requested in the letter. This vast group of economists agreed that climate action should come in the form of a carbon tax – a fee levied on companies and individuals that emit greenhouse gases. This, the letter argued, was the remedy recommended by “sound economic principles.” But the IRA does not include a carbon tax, nor does it introduce a system of tradable carbon credits that would offer similar incentives.
Instead, the law relies almost entirely on clean energy subsidies, renewable energy tax credits, grants to operate nuclear power plants, incentives to buy electric vehicles and make homes more energy efficient, and more.
So what happened to the idea of a CO2 tax? Biden administration officials are aware of the Econ 101 case on emissions taxes. In fact, Janet Yellen, the Treasury Secretary, and Cecilia Rouse, the current CEA Chair, were among the signatories to the letter. I understand that logic too – in fact, the introductory economics textbook I wrote with Robin Wells argues at some length. But a few months after the letter was published, I made the case countered being a “carbon tax purist” in a Twitter thread, arguing that an exclusive focus on carbon taxes is “dubious economics and bad political economy.”
And in practice, Democrats ignored the carbon tax route. Why?
One answer is that, as I have suggested, the economic case for the superiority of emissions taxes over other policies is not as sound as it might seem – because it rests on the implicit assumption that the set of available technologies is taken for granted can. When the cost of renewable energy is as high as other approaches to climate change mitigation such as improving building insulation, a carbon tax has the benefit of giving people an incentive to reduce emissions as cheaply as possible.
But a carbon tax may not provide the right incentives for developing new technologies; For this you may need targeted subsidies in promising areas.
Well, that’s an old argument – basically the argument whether we should pursue conscious industrial policy rather than just let the market do its thing. And the technological argument for industrial policy can easily be misused to justify wasteful intervention. But the recent history of energy technology — revolutionary cost-cutting for renewable energy apparently set in motion by state subsidies — suggests that, at least for now, while low-carbon technologies are still in their infancy, there is a strong case for industrial policy to the contrary on top of or in addition to carbon pricing.
And beyond pure economics, there are overwhelming political arguments against making carbon taxes the core of climate policy.
The economists’ letter claimed that the political downsides of a carbon tax – Higher taxes! Great Government! – could be neutralized by a promise to return revenue to taxpayers “to avoid debates about government size”. That was naïve, and even invalidated the certainty that Conservatives would have relentlessly demagogued the tax hike, no matter what the government promised with the proceeds.
Because people are not only consumers and taxpayers, but also employees. And any policy that reduces greenhouse gas emissions will crowd out jobs in the fossil fuel industry; there is simply no way around it. To be politically enforceable, a climate policy must credibly promise the creation of new jobs in other sectors – not with the general assurance that “a market economy will find other things for workers”, but with concrete prospects of new employment in solar installation, Retrofitting existing buildings and so on.
As I wrote in this 2019 thread, “If we’re going to pass something that will help avert disaster, it has to be a Christmas tree” — that is, a bill that offers many specific payoffs for various interests. And if the news about the signing ceremony is correct, today is Christmas.
Because the incredible fact is that after decades of futile calls to action, we have done something big on climate change. Political ideas are useless if they are not translated into actual laws. Yes, the Anti-Inflation Act is a Christmas tree, not the simple clean policy envisioned by carbon tax advocates. But energy experts are still excited about its prospects and believe it will make a big difference in emissions.
Does this mean that we should never levy a carbon tax? No not at all. There is still a good case for giving people a direct financial incentive to limit emissions, and such a thing could become politically possible as the economy decarbonizes and green energy becomes a more powerful interest group.
For now, however, we are fighting climate change with carrots, not sticks, with subsidies, not taxes. And that’s okay.
I’ve never engaged with Beyoncé, but that seems awfully fitting to me.