Below you’ll find the article I had published last week in National Review describing a methodological shift in carbon pricing that we may see from the Biden administration, you’ll find a discussion of Greg Ip’s call for the “carbon dividends plan” in the Wall Street Journal, and you’ll find an update on Canada’s carbon tax fracas.
In the closing days of February, the Biden administration set its interim social cost of carbon, a metric that aims to capture the aggregate economic harm caused by an additional increment of carbon carbon-dioxide emissions, at $51 per ton. The Biden administration’s $51 estimate will serve as a placeholder as it, in its own words, evaluates and incorporates the latest climate science and economic research. But while the White House has stressed that this exercise will restore policymaking norms, developments behind the scenes suggest that the administration will put its policy cart before the horse of climate economics.
Biden’s climate advisors, far from restoring norms, are crossing a methodological Rubicon. Unable to substantiate its preferred outcome, the Biden administration will scatter the deck and revise the rules to push our economy in a direction climate economics does not justify.
As any Trump White House hire will tell you, lofty titles don’t necessarily come with influence, but the recent addition of Noah Kaufman as a senior economist to the Council of Economic Advisers could signal a shift in how the federal government formulates its social cost of carbon (SCC). As I noted in September 2020, Kaufman advocates a re-thinking of the SCC. He argues that we should work backward from a net-zero goal, rather than base policy on damage estimates. That chimes with Biden’s 2050 goal, so this is something to keep a close eye on over the remainder of the year as the administration works out its plans.
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.”
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.
If [President Biden] wants a tax that helps the poor, defrays the deficit and combats climate change, there is one waiting in the wings.
The Climate Leadership Council (CLC) has skillfully guided the carbon tax debate in its preferred direction. By branding its proposal the “carbon dividends plan,” it has effectively shifted commentary from whether a carbon tax makes sense to how the revenues from one should be used. It’s a masterclass in rhetoric, I must admit.
The CLC claims they have the “economists’ case” for the carbon tax. Ip says economists see it as “self-evident” that we should price carbon dioxide emissions. But the literature—even the pro-tax literature (see, they’re pulling me in)—doesn’t show clear support for the actual CLC strategy.
Many economists support a Pigovian tax—i.e., taxing “bads”. But fewer support the lump-sum rebate revenue-recycling strategy that the CLC cleverly packages with their tax.
As I noted in January 2021, studies from the neutral camps of the Tax Foundation and EY found that the lump-sum rebate revenue-recycling strategy performs poorly relative to alternative revenue-recycling strategies. The studies report that approaches like a payroll tax cut, a permanent extension of select Tax Cuts and Jobs Act provisions, or investment in public infrastructure would outperform the lump-sum rebates that the CLC pushes.
When the CLC and Ip back the “carbon dividends plan” they’re making more of a political argument than an economic one. They like their plan because they think doling out cash is the way to win over the middle class. That may be true, but it’s a separate claim from the fundamental case for a carbon tax, which is to spark behavioral change through pricing.
In a 6-3 decision, the Supreme Court of Canada has ruled the federal Liberal government’s carbon pricing regime is constitutional — a major decision that allows Ottawa to push ahead with its ambitious plan to ensure every province and territory has a price on carbon to curb greenhouse gas emissions.
Some provinces — notably Alberta, Ontario and Saskatchewan — have forcefully opposed the carbon tax, arguing natural resources are in the provinces’ jurisdiction under the Constitution.
Chief Justice Richard Wagner, writing for the majority, said the federal government is free to impose minimum pricing standards because the threat of climate change is so great that it demands a co-ordinated national approach.
He agreed with the federal government’s argument that climate change is a pressing matter of national concern and said it’s constitutionally permissible for Ottawa to take the lead on a threat that crosses provincial boundaries.
An awkward element of the climate change discussion in Canada is that in meaningful ways the country stands to benefit from warming. Research from the University of Guelph published in February 2020 in PLOS One, a peer-reviewed journal, documented that climate change presents new opportunities for food production in Canadian regions that, until now, have been relatively undeveloped. The work suggests, in the words of the researchers, that warming “may reduce poverty and food insecurity in some economically marginal parts of the world, such as northern Canada…”
Nevertheless, Chief Justice Richard Wagner wrote for the majority, “The evidence clearly shows that establishing minimum national standards of GHG price stringency to reduce GHG emissions is of concern for Canada as a whole. This matter is critical to our response to an existential threat to human life.” I have not the relevant knowledge to criticize this decision’s constitutionality, I simply note here that there is an uncomfortable, unaddressed tension between the position of the Liberal government, and now the Supreme Court, and evidence on how warming will actually affect the country.