How to Change U.S. Climate Policy After There Is a Price on Carbon

POLICY PROPOSAL 2019-15 | OCTOBER 2019 How to Change U.S. Climate Policy after There Is a Price on Carbon Roberton C. Williams III The Hamilton Project • Brookings i MISSION STATEMENT The Hamilton Project seeks to advance America’s promise of opportunity, prosperity, and growth. We believe that today’s increasingly competitive global economy demands public policy ideas commensurate with the challenges of the 21st Century. The Project’s economic strategy reflects a judgment that long-term prosperity is best achieved by fostering economic growth and broad participation in that growth, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments. Our strategy calls for combining public investment, a secure social safety net, and fiscal discipline. In that framework, the Project puts forward innovative proposals from leading economic thinkers — based on credible evidence and experience, not ideology or doctrine — to introduce new and effective policy options into the national debate. The Project is named after Alexander Hamilton, the nation’s first Treasury Secretary, who laid the foundation for the modern American economy. Hamilton stood for sound fiscal policy, believed that broad-based opportunity for advancement would drive American economic growth, and recognized that “prudent aids and encouragements on the part of government” are necessary to enhance and guide market forces. The guiding principles of the Project remain consistent with these views. ii How to Change U.S. Climate Policy after There Is a Price on Carbon How to Change U.S. Climate Policy after There Is a Price on Carbon Roberton C. Williams III University of Maryland, Climate Leadership Council, Resources for the Future, and National Bureau of Economic Research OCTOBER 2019 This policy proposal is a proposal from the author(s). As emphasized in The Hamilton Project’s original strategy paper, the Project was designed in part to provide a forum for leading thinkers across the nation to put forward innovative and potentially important economic policy ideas that share the Project’s broad goals of promoting economic growth, broad-based participation in growth, and economic security. The author(s) are invited to express their own ideas in policy papers, whether or not the Project’s staff or advisory council agrees with the specific proposals. This policy paper is offered in that spirit. The Hamilton Project • Brookings 1 Abstract An economy-wide carbon price is a necessary centerpiece of an economically efficient strategy for addressing climate change. Implementing a sufficiently high carbon price will make some other existing policies redundant or inefficient. Removing or modifying those policies as part of carbon-pricing legislation could boost both economic efficiency and political support for the legislation. This paper addresses the question of which existing policies should be removed or modified after there is a carbon price. It first articulates the economic and political arguments for changing other policies, and general principles for which policies should be changed (and how that varies with the level of the carbon price). It then proposes a carbon tax and accompanying changes to existing policies, including suspension of stationary-source CO2 regulations and vehicle fuel-economy standards, elimination of the renewable fuel standard and tax expenditures for the fossil fuel industry, and modification of tax expenditures for renewable energy. Other regulations would be retained, such as limits on methane emissions (until the tax base expands to include methane). The proposal is designed to be “reconciliation proof”: suspended policies will come back into force if subsequent legislation repeals the carbon tax or lowers its rate. 2 How to Change U.S. Climate Policy after There Is a Price on Carbon Table of Contents ABSTRACT 2 INTRODUCTION 4 THE CHALLENGE 5 THE PROPOSAL 11 QUESTIONS AND CONCERNS 17 CONCLUSION 19 AUTHOR AND ACKNOWLEDGMENTS 20 ENDNOTES 21 REFERENCES 22 The Hamilton Project • Brookings 3 Introduction n economy-wide carbon price is a necessary centerpiece carbon regulations. As a result, a policy proposal that swaps of an economically efficient strategy for addressing a carbon price for regulations (i.e., implementing a carbon climate change.1 The broad-based incentive created by price and simultaneously removing, suspending, and/or Athat price will cost-effectively reduce greenhouse gas (GHG) relaxing regulations) could win the support of a substantially emissions, forcing market participants to take into account the broader political coalition than a carbon price by itself and negative externality from (i.e., the damage caused by) those in the process reduce emissions by more than the current emissions. But implementing that carbon price is not the only regulatory regime and at a lower cost. But for such a swap to change necessary to get from today’s policies to that efficient work, it must be designed so that it is relatively resistant to strategy. We also need policy to address other externalities, future change, to avoid cases in which one half of the swap most notably the positive externality from technology (the carbon price) could easily be repealed while leaving the spillovers. And after we have a sufficiently high carbon price, other half (removal of non-price regulations) in place. it will be efficient to remove, suspend, or modify many other existing policies targeting GHG emissions, which will become All of these arguments are predicated on the carbon price unnecessary and/or inefficient after the carbon price is in place. being sufficiently high. Exactly what “sufficiently high” means varies depending on the argument for the swap. From a cost- This paper addresses that last piece: Which existing policies benefit perspective, the higher the carbon price, the stronger could or should be removed, suspended, or modified once a the argument for removing other regulations targeting carbon price is in place? It focuses primarily on the economic emissions covered by the price. In the absence of other market rationale for such changes and what economic measures (e.g., failures, a carbon price in the neighborhood of the marginal efficiency and cost-effectiveness) tell us about which policies damage from carbon emissions (i.e., the optimal carbon price) could be changed. But it also provides some analysis and will be sufficient to justify removing other regulations.2 From discussion of the political aspects of the issue. a political perspective, a carbon price high enough to reduce emissions by more than the existing regulations should The economic argument for changing other policies once be sufficient; studies suggest that this reduction could be a carbon price is in place is that because the carbon price accomplished with a carbon price well below most estimates provides a broad-based incentive for relatively low-cost of marginal damage.3 The proposal in this paper is intended to emissions reductions, non-price policies targeting emissions accompany a carbon price roughly equal to marginal damage. covered by the price will generally become redundant, or See the next section of this paper for a discussion of what that simultaneously both less effective (e.g., reducing emissions means in terms of dollars per ton. by less) and more costly (e.g., cost per ton of emissions reductions) after the carbon price is in place. In either case, The first section of this paper begins by briefly articulating it makes sense to suspend or eliminate the policy, possibly why we need a carbon price, and then presents a framework also increasing the carbon price slightly to make up for any for evaluating existing policies, such as which to keep, lost emissions reductions. The key exception is if the policy which to modify, and which to eliminate or suspend in the in question addresses another market failure in addition to presence of a carbon price. It then discusses useful metrics for the climate-change externality. Even in that case, though, it evaluating policies, key concepts, and important principles. probably makes sense to revise that policy to better target that The second section presents a proposal for a carbon tax and other market failure. accompanying changes to existing policies, drawing on the metrics, concepts, and principles discussed in the previous There is also a strong political argument for changing other section. The third section addresses possible questions and policies when a carbon price is implemented. Many of those concerns about the proposal. The paper closes with some who oppose a price on carbon are even more opposed to conclusions. 4 How to Change U.S. Climate Policy after There Is a Price on Carbon The Challenge WHY WE NEED A CARBON PRICE for pricing carbon, but also for those policymakers who As is by now well known, rising concentrations of GHGs in the are contemplating a new carbon price and would like to atmosphere trap heat, warming the planet and causing other understand how to change other climate policies and what the costs and benefits of such changes would be. related changes in climate. Carbon dioxide (CO2) accounts for the majority of human-caused GHG emissions. These This section begins by discussing a set of metrics for CO emissions are primarily the result of the combustion 2 evaluating policies. It then looks at economic arguments for of fossil fuels, but process emissions (e.g., from cement changing (i.e., eliminating, suspending, or modifying) GHG manufacturing) are also substantial. Emissions of other policies after imposing a carbon price, before going on to GHGs, such as methane and nitrous oxides, play a smaller briefly discuss political arguments for such changes. Finally, but still significant role. In order to limit climate change it it provides a brief review of estimates of the marginal damage is necessary to reduce GHG emissions. And although many from carbon emissions. policies could reduce GHG emissions, a carbon price—or, more precisely, a price on GHG emissions—is the most cost- Metrics effective way to reduce emissions.

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