Carbon Tax Sidelined in Biden’s Push on Climate, Taxes

Source: By Greg Ip, Wall Street Journal • Posted: Thursday, March 25, 2021

President, some Democrats fret over inequities from pricing carbon, despite lack of evidence

Emissions from a smoke stack at the Conesville Power Plant in Conesville, Ohio. Photo: Dane Rhys/Bloomberg News

There is no more effective way for President Biden to meet his aggressive climate goals than a carbon tax. The timing seems ripe: his Treasury Secretary, Janet Yellen, has been a prominent advocate. Big business has flipped from opponent to proponent. Republican opposition is no longer monolithic.

But a carbon tax lacks support where it matters most: with Mr. Biden and the Democratic base. Progressive Democrats claim a carbon tax and its close cousin, cap-and-trade, are unfair to the poor and racial minorities. And a carbon tax appears to conflict with Mr. Biden’s promise not to raise taxes on any household earning less than $400,000 a year.

So as Mr. Biden prepares a regulatory and infrastructure package aimed at driving net greenhouse gas emissions to zero in electricity by 2035 and the entire economy by 2050, he is fighting with one hand tied behind his back.

A carbon price incentivizes consumers, producers and investors to substitute low- or no-carbon energy technology for fossil fuels more smoothly and cheaply than subsidies and rules. This has long been self-evident to economists, including Ms. Yellen. She is a founding member of the Climate Leadership Council, a bipartisan group that has put forward a detailed plan for a carbon tax starting at $43 per ton with proceeds rebated to households as a “carbon dividend.”

In response to questions from senators at her confirmation hearing, Ms. Yellen said, “We cannot solve the climate crisis without effective carbon pricing.” While a carbon tax is the most direct way to price carbon, it isn’t the only one. With cap and trade, total greenhouse gas emissions are capped and companies purchase permits to emit one ton of gas. The more expensive the permit, the greater the incentive to reduce emissions. Cap and trade was the centerpiece of the last major effort to price carbon, in 2010. It ultimately failed due to opposition from business, Republicans and some Democrats.

Since then, opposition has softened: the U.S. Chamber of Commerce favors a “market-based” approach to carbon reductions, Business Roundtable now backs a price on carbon, and even the American Petroleum Institute is weighing the same. Most Republicans still oppose aggressive action on climate, but in recent months Sens. Mitt Romney (R., Utah), Lindsey Graham (R., S.C.) and Lisa Murkowski (R., Alaska) have all expressed openness to carbon pricing.

Yet just as others are moving toward a carbon price, progressive Democrats are moving away. They argue that the poor, Blacks and Hispanics are disproportionately harmed by carbon taxes or the pollutants that businesses can release on nearby communities under a cap and trade system. Mary Nichols, who oversaw California’s cap and trade system, was passed over as head of Mr. Biden’s Environmental Protection Agency in the face of activists’ opposition. A coalition of environmental groups accused her of “pushing market-based approaches to the climate crisis at the expense of the health and well-being of California’s communities of color.”

But empirical evidence suggests otherwise. California’s carbon market actually narrowed disparities in exposure to particulates, nitrogen oxides and sulfur oxides, according to a study by economists Danae Hernandez-Cortes and Kyle Meng of the University of California, Santa Barbara. An older federal program that allows higher-polluting plants to buy offsets from less-polluting plants didn’t disproportionately move pollution to lower-income communities or communities of color, according to a separate study by Joseph Shapiro and Reed Walker, economists at the University of California, Berkeley.

Whether carbon taxes hurt the poor depends on what is done with the revenue. The Climate Leadership Council estimates its carbon tax would finance $2,000 in carbon dividends a year for a family of four, and the 80% lowest-income families end up better off. Regulatory alternatives aren’t necessarily better: renewable-fuel requirements can raise electricity prices and disproportionately hurt poor families who devote more of their budget to power.

Many Democratic politicos have concluded a carbon tax is a political loser with voters opposing it. The question is, compared with what? Progressives’ beloved Green New Deal polls no better. Mr. Biden and Congress have floated a range of incentives, tax credits, regulations and investments aimed at driving down emissions, many of which, individually, are quite popular. But they’re not enough. A new study by Rhodium Group estimates all such measures, combined, wouldn’t put the U.S. electricity sector on a path to net zero by 2035.

So if Mr. Biden is serious about his emissions targets, a carbon price may become harder to avoid. His administration is already considering taxing imports for their carbon content. Without a similar levy on domestically-made goods, the U.S. could face retaliation from trading partners. He also plans to raise taxes, in part to pay for a big boost to the child tax credit, which slashes child poverty. If he wants a tax that helps the poor, defrays the deficit and combats climate change, there is one waiting in the wings.

Write to Greg Ip at greg.ip@wsj.com