A Carbon Tax Won’t Kill the Economy

This piece was first published in Forbes on November 19, 2019. It is reprinted with their permission.

Would a national price on carbon emissions, designed to reduce the U.S.’ contribution to global warming, damage the country’s economy?  Answers to this question have been emphatically partisan in Washington D.C. where, at various times over the past two decades, Democratic and Republican lawmakers have spent considerable political capital promoting, or attempting to kill, carbon price legislation.

In 2019 carbon pricing has arisen from the ashes with Democrats’ return to control in the House of Representatives, and today at least six plans to implement a carbon tax or fee are under consideration on Capitol Hill.  New research takes a look at what the most popular of these proposals would in fact mean in terms of climate benefits, impact on the nation’s energy industry and, most crucially for national debate, Americans’ wallets and the economy.

The Energy Innovation and Carbon Dividend Act (EICDA), first proposed by Florida Democratic representative Ted Deutch in 2018 and reintroduced in January of this year, calls for a $15 fee per ton of carbon dioxide equivalent emissions, covering more than 80% of U.S. emissions starting in 2020.  Carbon fees would be focused on the fossil fuel industry, where the carbon price would be levied at the mine, well or refinery, while the agriculture sector would notably be exempt.

The carbon fee, rising $10 per year, would drive up the cost of burning fossil fuels, discouraging their use relative to lower- and no-carbon alternatives like renewables, nuclear and yet-to-be scaled carbon capture and sequestration technologies.  Under EICDA, gasoline and electricity become more expensive, as do products and services that rely heavily on energy.  Deutch and his 73 co-sponsors make the plan palatable to consumers by returning all revenue to Americans via a monthly “dividend” check.

And herein lies the crux of the analysis of EICDA, which was undertaken by researchers at Columbia University and the Rhodium Group, who based their analysis of energy consumption and emissions on a forecasting model developed by the U.S. Energy Information Agency.

The analysis finds that the average American’s yearly energy-related expenditures would grow by about $200 in 2020, the plan’s first year, and by as much as $1,170 in 2030.  Yet yearly dividends paid out by the U.S. Treasury, which would be the same for all Americans regardless of their energy expenditure, would on average exceed these higher costs by an estimated $50 in year one and $300 by the end of the decade.

Thus, as progressive economic legislation, EICDA insulates low-income Americans, whose energy expenditures tend to be relatively modest, from higher costs for gasoline, electricity and home heating.  The $250 dividend that the Treasury would send to all adults in 2020 (plus a half dividend for children under 19) would more than cover this group’s higher energy costs.  Those with higher incomes, who tend to be the heaviest energy consumers, would see their net energy expenditure rise.

The Columbia-Rhodium authors do note that the fee’s impact is likely to be felt unevenly across the country based on local availability of low-carbon energy alternatives and the role that fossil fuel industries play in local employment.  On the flip side, hotbeds of innovation in technologies like grid batteries and carbon capture could see an influx jobs and growth.  To protect American industry’s global competitiveness, imports of energy products and manufactured goods would be hit with a border tax, while American exporters would be refunded their carbon fee.

So, criticism that carbon pricing will undermine the nation’s economy gets it wrong, though certain constituencies, particularly those dependent on oil, gas and coal may have grounds to worry about the local impact of EICDA—or any of the other bills running around Congress this year, all of which share EICDA’s basics.  Those basics include some sort of carrot for the fossil fuel industry, in this case a pledge to suspend Environmental Protection Agency regulation of carbon dioxide emissions from the fossil fuel industry as long as EICDA’s greenhouse gas reduction goals are met.

What becomes clear from the Columbia-Rhodium research is that the idea that a carbon fee will bring hardship to America is better understood as potentially bringing challenges to parts of America, while new opportunity to others.  Here is where the discussion goes all-out partisan.  Of the 73 co-sponsors of Deutch’s carbon fee proposal, only one, Francis Rooney of Florida’s sea-level vulnerable 19th congressional district, is a Republican.

What’s also clear is that the climate benefits of a plan like EICDA are overwhelmingly positive, supporting the view of prominent economists that an economy-wide carbon tax is the most efficient way to lower emissions.  EICDA’s goal is to reduce U.S. greenhouse gas emissions by 90% from 2016 levels by the middle of this century.

In the nearer term, EICDA delivers a 33% reduction in emissions by 2025 compared to 2005, exceeding the U.S. commitment under the Paris Climate Accord.  And by 2030 coal powerplants all but disappear, to be replaced by a combination of  renewables and natural gas plus carbon capture that account for 60% of generation.

Regardless of the clear climate benefit that would come from a nationwide carbon tax, any and all meaningful proposals to cap carbon emissions will for now meet a bitterly partisan dead end in the Senate, and conversation around the merits of the proposals will remain frustratingly academic.  But when the political climate shifts, and meaningful climate legislation becomes plausible, it will be reassuring to know that the inevitable prophesies of apocalypse-by-carbon-tax are unfounded.

Andy Stone

Energy Policy Now Host and Producer

Andy Stone is producer and host of Energy Policy Now, the Kleinman Center’s podcast series. He previously worked in business planning with PJM Interconnection and was a senior energy reporter at Forbes Magazine.