Carbon Fees and Legislative Action

For the past year or so, I have been working with the Citizens Climate Lobby (CCL) to attempt to convince Wisconsin Congressmen to support The Energy Innovation and Carbon Dividend Act (HR 763 of 2020) or other policies that employ significant carbon fees for those who produce and consume green house gases. In that spirit, I drafted a letter from economists who have signed the Economists’ Statement on Carbon Dividends. The initial focus was Wisconsin’s 8th Congressional District representative Michael Gallagher; however, I do not live in the 8th district, and I have not been able to get other economists to send the letter. Nevertheless, a Wisconsin CCL representative encouraged me to send my letter to CCL’s Economics Policy Action Team for posting on its blog. The editors have approved and published the below letter; so that other districts across the US might take advantage. I don’t know whether such actions will matter, but, they can’t hurt.

As economists who have signed the Economists’ Statement on Carbon Dividends published in the Wall Street Journal on January 17, 2019, we strongly urge you to support Congressional legislation, such as the Energy Innovation and Carbon Dividend Act (HR 763). HR 763 uses carbon pricing to help stabilize the risk of severe climate change and its resultant damages to the health and well-being of the population of the United States. Without an effective carbon pricing policy, 1) many U.S. companies will remain at a competitive disadvantage, 2) less efficient and equitable policies will be proposed and possibly legislated, 3) global leadership on climate change will migrate to countries such as China, and 4) the health of our residents will continue to deteriorate.

In the absence of well-structured climate policy, based on the model developed at Resources for the Future, the U.S. is projected to experience annual emissions of roughly 5 billion metric tons of CO2 for the foreseeable future which would bring the cumulative additional emissions to over 79 billion metric tons by 2035.  Based on the policies reflected in three bills proposed this year, carbon pricing policies will reduce such CO2 emissions by 25 to 30 billion metric tons by 2035.  Such action will help the US to pursue a sustainable path. Steeper pricing increases would accomplish greater reductions.

Under current policy, U.S. businesses, which tend to produce goods with fewer emissions than many of our foreign competitors, will continue to operate at a competitive disadvantage to those competitors. Border adjustment fees embedded in bills such as in HR 763 would not only help the producers of U.S. goods, it would also put pressure on producers in countries such as China and India to reduce the pollution content of their production. 

Carbon pricing is an efficient way to reduce carbon emissions because it can be levied at the source and be borne by its users.  Market pricing allows businesses to choose the least costly ways for them to produce desirable goods and services while preserving the regulatory authority granted to the EPA under the Clean Air Act.  Furthermore, a recent article in Resources presents evidence, based on European experience, that carbon fees have had a negligible impact on both economic growth and employment.  

In a September 2020 report entitled Managing Climate Risk in the U.S. Financial System, the Commodity Futures Trading Commission (CFTC) highlights the potential economic damages that could result from climate change and the potential risk management strategies available to financial institutions, regulatory agencies, and business managers.  The central message of the report “is that U.S. financial regulators must recognize that climate change poses serious emerging risks to the U.S. financial system, and they should move urgently and decisively to measure, understand, and address these risks.” Furthermore, Matt Dallman, Deputy State Director of the Nature Conservancy in Wisconsin, emphasizes that private forestry managers have already begun to take advantage of the business opportunities provided by the climate benefits of sustainable forestry.

Despite these ongoing market forces and forestry management initiatives, public policy at the state and federal levels has yet to recognize and respond to the potential damages to the health and well-being of Americans that climate change will generate.  In an RFF conference on October 20th, several panelists cited how carbon fee legislation could be adopted by majority vote under the U.S. Senate’s budget reconciliation process, which improves its political feasibility.  Furthermore, since carbon pricing would internalize the cost of the health and climate effects of rising greenhouse gases, it would raise revenue without distorting incentives for economic activity.

To ensure budget neutrality, the revenue raised by carbon fees could be redistributed as a dividend to U.S. households (such as proposed by HR 763.) Alternatively, a portion of the revenues could be spent on infrastructure such as repairing leaks and replacing deteriorating structures.  The RFF model indicates that the distribution of the revenues on a per household basis, after paying the carbon fee for CO2 consumption, would increase the net income of the lowest 60% of households while raising it for the richest 40%.  Furthermore, most of the burden would be borne by well-off families since they generate the largest amount of CO2 emissions.

Support for carbon pricing of CO2 emissions does not just depend upon one’s view of climate change.  For HR 763, the RFF model indicates the health benefits of reduced air pollution (roughly $9.4 trillion cumulative to 2035) more than make up for the costs imposed by the carbon fee (roughly $7.5 trillion.)  When climate benefits ($2.4 trillion) are added, the carbon pricing approach becomes even more attractive.

America can implement a carbon fee policy on its own and begin to demonstrate a leadership role on climate change.  If we fail to act, we not only will suffer the health effects that particularly burden low income households; our businesses will continue to lose further competitive ground to those who produce in countries that place exporting goods above the health of their own population and the world at large. 

Bob Litterman, chair of the committee that issued the CFTC report, observes that the longer we wait to put a price on carbon, the higher the economic and human costs will be. The pervasive effects of the financial crisis of 2007-2010 and the current pandemic should encourage us to prepare for known risks rather than wait to clean up the damage afterward.

If not now, when?

Merton D. Finkler

John R. Kimberly Distinguished Emeritus Professor in the American Economic System

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