The once and future carbon tax

The once and future carbon tax

Matthew Yglesias — Read time: 10 minutes

The once and future carbon tax

Enthusiasm for carbon pricing was misguided 15 years ago — but its time will come!

These days I find myself very close, intellectually, to the positions on climate and energy articulated by the Breakthrough Institute. When I had some downtime last fall at their annual Ecomodernism conference and wanted to know more about the group’s history, I found an insightful quote about the group from a review of their 2007 book, “Break Through: From the Death of Environmentalism to the Politics of Possibility.”

It turns out I wrote the review, which I suppose means I’m becoming both senile and egomaniacal.

My argument back in 2007 was that the Breakthrough team was largely correct in their analysis of public opinion and the inevitable failure of doomsday argumentation, but that they were wrong to infer from this that carbon pricing was a dead end. In fact, I argued that carbon pricing was a natural complement to an ecomodernist strategy:

But whatever the shortcomings of their rhetoric, environmentalists have a very good reason to push for some limits, however much of a downer that message might be. Global warming is caused by carbon emissions and can be contained only by reducing them. Nordhaus and Shellenberger’s preferred alternative huge investment in alternative energy doesn’t really stand up to scrutiny. For one thing, without mandatory curbs on emissions, it might not work. For another thing, emissions caps would effectively provide a subsidy to less polluting alternatives, one that would be harder for lobbyists to manipulate and that wouldn’t require lawmakers to pick winners among various possible technologies. Finally, even as a matter of crass politics, Nordhaus and Shellenberger neglect a basic point: the hard part about gaining support for a new initiative isn’t convincing people of its value but finding the money to pay for it. The conventional solutions to global warming posed by the “politics of limits” taxing carbon emissions, or issuing tradeable emissions to carbon-producing firms conveniently raises revenue that could be used to pay for the very projects the authors wish to see.

The past 15 years of political and policy development have obviously not vindicated my view here.

At the time “Break Through” came out, skepticism about carbon pricing was a kind of rightist dissent from the conventional progressive political wisdom, but it’s now become conventional wisdom on the left. There are huge gaps between the ecomodernist view and those of the mainstream environmental movement, but everyone agrees that we need to move beyond the aughts-vintage conversation around carbon pricing.

That being said, I think that why I was wrong is interesting.

In 2007, environmentalists were pushing carbon pricing as the solution to climate change, and the Breakthrough guys were arguing that this politics of limits was doomed, and instead, we needed an ecomodernist politics of abundant and progressively cleaner energy. I argued that the ecomodernist position was largely right about climate change, but that the skepticism of carbon pricing was misguided as a matter of fiscal policy. From the vantage point of the winter of 2007-2008, I saw the country as necessarily entering a “politics of limits” phase with regard to the federal budget and thought that the “it also generates revenue” aspect of carbon taxation was its killer app.

But a few months later, the world experienced a global financial crisis, a prolonged recession, and a spell of super-low interest rates. By the time the labor market had just about recovered, we slammed into a pandemic. “The world is about to see 15 years of low and falling interest rates” was not the actual thesis of “Break Through,” but it is what happened, and that low-interest environment set the stage for a world in which I was totally wrong about carbon pricing. But the fiscal situation is changing again, and I think it’s time to revisit this controversy in light of present-day politics.

With unemployment low and interest rates rising, there is a strong case on the merits for deficit reduction.

Republicans will push for reduction to come exclusively from spending cuts because their party’s top priority is low taxes on the rich.

Democrats will rightly resist this and insist that any serious deficit reduction package must include a revenue component.

Well, guess what raises revenue without really increasing marginal taxes on the rich very much? A consumption tax. But why would Democrats ever agree to a consumption tax rather than a more popular soak-the-rich tax? They might do it because they want a bipartisan deal, but elite Democrats are also highly motivated by climate change. So what’s a regressive (and therefore GOP-friendly) tax that also helps address climate change?

My friends, let me tell you about carbon pricing.

The fiscal crisis that didn’t come

At the time, I was more or less in agreement with the mainstream leaders of the Democratic Party who thought that George W. Bush’s fiscal policies were highly irresponsible.

In the name of “compassionate conservatism,” Bush agreed to modest increases in domestic discretionary spending, notably increasing federal K-12 spending as part of the No Child Left Behind initiative. He also put forth not one but two large regressive tax cuts. He added a new prescription drug benefit to Medicare with no fiscal offset. And he launched two medium-sized wars, undertook a bunch of non-military anti-terrorism spending, and increased the base defense budget. The closest his administration came to trying to confront the problems of this “spend more while taxing less” approach to fiscal policy was the failed 2005 effort to privatize Social Security. But this failed. It failed so badly, in fact, that no specific plan ever emerged. But most of the plans that did get written, like the one Mike Pence put together with Paul Ryan, actually made the deficit much larger because they diverted payroll tax revenues into the new private accounts without cutting benefits for the currently elderly.

Most Democrats were very critical of this, thought it would end in tears, and anticipated that deficit reduction to clean up the mess would be a major theme of the next Democratic administration.

I did not personally spend a lot of time in 2007-2008 thinking critically about whether or not this forecast was true. It was simply the case, as a matter of policy reporting, that Democrats wanted to reduce the deficit, so anything they did would have to fit within a deficit-reduction framework. And indeed both the Affordable Care Act (which passed) and the Waxman-Markey cap-and-trade bill (which did not) were structured to reduce the deficit. Within the confines of that deficit reduction mandate, I do think carbon pricing makes a ton of sense. Any amount of money spent on decarbonization will generate more decarbonization if it’s financed by a carbon tax rather than some other way.

And even though Waxman-Markey ultimately failed, that argument was a key reason it was able to pass the House. At the time, a pure investment-and-innovation bill — whether structured as a lefty “Green New Deal” or as an ecomodernist program — would have failed due to the clout of deficit hawks inside the Democratic Party.

Especially after Republicans took the House in the 2010 midterms, it was deficit hawks rather than environmentalists who were imposing a misguided politics of limits on the country. You could imagine a world in which the bipartisan dealmaking of 2011-2013 was focused on something that combined the corporate tax cuts that became the Trump-era Tax Cuts and Jobs Act and the climate-focused tax credits that were the centerpiece of the Biden-era IRA and called it an economic growth package. The deficit would have been much larger, but the economy would have grown faster and unemployment would have been lower, and the country would have been on a larger emissions path. I spent this whole period tearing my hair out — why were Democrats and Republicans at each others’ throats over how to reduce the deficit at a time when there was no need to reduce the deficit? — but the politics were what they were.

Once Trump came around, the politics of all this flipped. Not only did Republicans do their normal thing where they stop caring about fiscal discipline when they’re in the White House, but Democrats decided that Obama-era deficit politics were dumb. Now, mid-Biden, we find ourselves in circumstances that have once again changed.

A new deadlock

The State of the Union moment when Joe Biden called out the Rick Scott plan to phase out Social Security and Medicare was, I think, a triumph for the White House.

Republicans screamed indignantly and heckled, which I think set up a multi-faceted win for Democrats. One part is that it essentially forced Biden to go off-script and ad lib, which would not normally be appropriate at a State of the Union but which wound up demonstrating that he can do it, putting a lot of minds at ease about his age. The other is that it generated several big national news stories focused on Social Security and Medicare.

I think something Democrats need to steel themselves for, psychologically, is that due to the various biases of the mainstream media, the semantic content of news stories focused on Social Security and Medicare is likely to be less favorable to them than the content of news stories that are focused on K-12 curriculum battles. Nevertheless, it’s still the case that “the parties are fighting about Social Security and Medicare” is a better national narrative for Democrats than “the parties are fighting about whether Disney is too woke.” Persuadable voters care a lot about Social Security, health care, and other boring fiscal stuff that are challenging to drive attention to and where elite media doesn’t have strong progressive bias. But that means it’s important and good to find smart, creative ways to highlight the conservative movement’s position on these topics and the awkward contortions Republicans go through to square their ideological commitments with their practical political imperatives.

In terms of substance, though, Biden is also revealing to Republicans something important about themselves. Back when Obama was president, they thought they could safely ignore his entreaties to grand bargain because they would just sweep into power and implement this full Paul Ryan agenda on a party-line basis.

The Trump era showed that’s very unlikely. It’s fine for backbenchers like Ron DeSantis to vote rapid-fire for slashing Pell Grants and privatizing Medicare and throwing millions of people off Medicaid and eliminating federal funding for libraries to carry braille books and a dozen other things. But as a governing agenda, this is tough. If you actually do want to constrain the endless upward pressure on federal spending, you are probably going to need a bipartisan deal. And that would mean coming to the table on taxes. For now, Biden is rightly sticking to poll-tested proposals to tax the rich that violate every conceivable GOP taboo. His partners are never going to agree to any of this, but that’s not the point. The point is to show both the world and congressional Republicans that, unlike the GOP, Democrats actually do have a viable plan to govern the country — pass deficit-reducing bills that heavily feature higher taxes on the wealthy. This plan makes sense on the merits, it’s politically sustainable, and “tax the rich instead of cutting Social Security, Medicare, and Medicaid” is a great issue for Democrats.

Everything old is new again

Of course, positing that a bipartisan deficit reduction deal combining mild cuts in entitlement spending with a big new tax on carbon emissions is likely to happen would be borderline insane. You might as well throw a high-minded revenue-raising income tax reform into the mix while you’re at it. Can you imagine today’s Republican Party agreeing to any of this?

I mean, probably not.

But the fact that this would let the country address its fiscal issues in a way that corresponds to both parties’ elites’ top priorities means that it’s at least a little bit interesting. The key problem in the past is that it turned out there was no actual reason on the merits to address those fiscal issues. Today’s deficit situation still isn’t so dire as to automatically force big painful changes, but a smaller deficit would definitely be helpful. And we are growing closer with every passing year to the moment when existing law will mandate cuts in Social Security benefits to correspond to the exhaustion of the Social Security Trust Fund.

That means over time, big fiscal choices are going to become more and more salient, and we’re going to be stuck dealing with the politics of budgetary limits. That’s a world in which a lot of Obama-era ideas that didn’t pan out are due for a comeback. The fact that we had this huge fake freakout back during his presidency has, I think, bequeathed a bad reputation to all kinds of ideas that were premised on the notion that we’d been in an era where austerity budgeting made sense. But now we really are in an era where austerity budgeting makes sense. So it’s worth thinking about which kinds of austerity measures are most reasonable on the merits, and I’d say a carbon tax belongs high on that list.

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