The 117th Congress is underway. Inauguration Day has come and gone. The carbon tax debate is again in full swing.
January 21, 2021 – Written Questions and Answers
Senator Cantwell: “Do you continue to believe that an economy wide price on carbon, applied upstream where fossil fuels enter the economy, is the most efficient mechanism to decrease carbon emissions at the necessary scale and speed?”
Dr. Yellen: “We cannot solve the climate crisis without effective carbon pricing. The President supports an enforcement mechanism that requires polluters to bear the full cost of the carbon pollution they are emitting. I am deeply engaged on this issue and, if confirmed, will continually discuss my views and thinking with the President and our entire team.”
Cantwell: “Do you believe that concerns over carbon pricing disproportionally harming lower-income households would be addressed if the majority of revenue raised was distributed back to consumers through equal per capita monthly dividends?”
Yellen: “Like you, Senator, it is very important to me that, as we work to solve the climate crisis and move toward a low-carbon future, we ensure that American families—especially the most vulnerable—share in the economic gains that can come from a clean energy economy. The President’s agenda includes investments in clean energy and energy efficiency technologies that create good-paying jobs, and clean electricity standards that will achieve carbon-pollution free electricity by 2035. If confirmed, I will provide advice to the President regarding the best way to achieve his agenda, including his plan to achieve net-zero emissions no later than 2050, based on the principle that that polluters must bear the full cost of the carbon pollution they are emitting.”
And there you have it. According to the recently-confirmed Treasury Secretary, President Biden will support carbon pricing. Because it is difficult to imagine that the president himself has a sophisticated view on this issue, we expect that Yellen’s position and those of economic advisors like Brian Deese will carry much sway. The question at this point is what form(s) of carbon pricing will be implemented. What has emerged as a key Biden administration talking point is the need for climate risk to be assessed and mitigated through what Yellen calls appropriate processes and regulations.
Overlooked by some observers (read: critics), however, was a heartening response from now-Secretary Yellen when asked about financial regulators stepping beyond their mandate. Yellen, without any direct reference to this issue in the question, expressed concern about the recent proposals to impose climate stress tests on banks. Yellen went so far as to offer this trenchant remark: “Thus, climate change regulation is a self-fulfilling prophecy for the government: your oil and gas assets are unprofitable because we have decided to make them so.”
The passage can be found on page 70 of the QFRs.
January 21, 2021
Economists like Janet Yellen recognize that, compared to alternatives such as regulations and mandates, a carbon tax is the most economically efficient policy to combat climate change. Using the regressivity of a carbon tax to criticize the policy without evaluating the revenue recycling options to offset it is misleading. A correct approach to evaluate the overall economic impact of a carbon tax must account for the effects of revenue recycling.
Shuting Pomerleau of the Niskanen Center has emerged as one of the more cogent carbon tax commentators in Washington and this piece, too, delivers. I agree with Pomerleau that it does an injustice to the discourse to present only one side of the carbon tax argument. While tax proponents regularly do so, carbon tax naysayers also err, frequently invoking the inherent regressivity of a carbon tax without acknowledging the focus placed on mitigating that effect by some carbon tax plans.
Pomerleau cites in the piece above a number of studies which evaluate different revenue recycling approaches for a carbon tax. (Allow me here to plug the IER-commissioned study on six different scenarios released in fall 2018.) The first two studies Pomerleau cites are from the Tax Foundation and EY, respectively. Both studies find that there are revenue-recycling strategies that can mitigate the regressive effect of a carbon.
But quite significantly, both the Tax Foundation study and EY study agree with the IER-commissioned study that the lump-sum rebate approach, such as is favored by Janet Yellen’s Climate Leadership Council, is among the poorest-performing revenue recycling strategies available from the standpoint of overall economic performance.
The Tax Foundation study finds that the rebate strategy reduces regressivity but is harmful to overall economic output and harmful to employment. A payroll tax cut strategy, meanwhile, yields output and employment boosts, while also making the tax code slightly less regressive.
The EY study, similarly, reports that both a permanent extension of select Tax Cuts and Jobs Act provisions and investment in public infrastructure would outperform household rebates as carbon tax revenue uses. In the rebate scenario the entirety of the long-run positive change in annual per-household GDP would be attributable to the removal of the existing regulatory approach. In the EY analysis (figure ES-1) the rebate itself would cause losses of 0.4 percent, but be offset by gains of 1.1 percent as a result of ditching regulations.
While it may be the case that some carbon tax revenue strategies could mitigate the tax’s regressivity, the literature does not support a lump-sum rebate strategy. When you encounter the Climate Leadership Council’s claim that they present the “economists’ case” for a carbon tax, it’s important to recognize that their proposal is actually more influenced by political considerations than economics.