Just Taxes Blog by ITEP

Good Climate Policy Is Good Economic Policy, Too

August 6, 2021

As Congress inches toward a bipartisan infrastructure package—with an anticipated $3.5 trillion follow-up spending bill following on its heels—one demand continues to reverberate around the halls of the Capitol: “No climate, no deal.”

This ultimatum from climate activists recognizes the existential threat that climate change poses, emphasized by recent fires on the West Coast so extreme that they created their own weather and flooding that filled subway stations in New York City. It also recognizes that climate action is long overdue and that the upcoming reconciliation bill—which can pass with the approval of just 50 Senators plus Vice President Kamala Harris—is our best shot to reduce emissions before it is too late, especially considering that the bipartisan package contains no money for clean energy tax credits and just 10 percent of the funding for electric vehicles that President Joe Biden originally proposed. To mitigate climate harm, Congress must act immediately to meet the ambitious but essential goal of achieving net-zero emissions and keeping overall temperatures from increasing more than 1.5°C above pre-industrial levels.

Because Senate rules governing the reconciliation process require measures to have a direct impact on the budget, many of the proposals are structured as changes to the tax code. The centerpiece of these is a federal Clean Energy Standard (CES), which would provide subsidies to utility companies that quickly move away from fossil fuel or gas production to invest in clean technologies—and levy penalties on those that do not.

By subsidizing innovation and investment in clean energy while simultaneously penalizing the status quo, the CES can help the U.S. energy sector rapidly shift away from fossil fuels, coal and gas to avoid the worst effects of the climate crisis. The good news is we know that these policies can work: 31 states plus Washington, D.C., and Puerto Rico already have renewable portfolio standards in place, with 11 of them setting 100 percent clean energy as their future target. Research shows that half of the growth in renewables since 2000 is associated with these state standards.

Supplementing these credits and penalties, Biden and congressional Democrats have proposed ending fossil fuel subsidies, the bare minimum for any climate legislation. It makes no sense to try to decarbonize our grid while still providing at least $20 billion annually in corporate tax giveaways to the worst offenders. More broadly, corporations and the top 1 percent are responsible for a vast majority of global carbon emissions, which means that until Congress ends the dizzying array of tax loopholes for corporations and the rich, the tax code is effectively helping finance carbon-intensive business models and lifestyles.

At the same time, Democrats are considering a Carbon Border Tax, similar to the proposal agreed to by the European Union last month. The tariff would apply to imports of carbon-intensive commodities like aluminum, steel and iron, with the size of the tax corresponding to the added cost of complying with domestic climate policies. The goal is twofold: 1) to encourage companies in other countries with less stringent climate regulations to invest in cleaner production infrastructure and 2) to discourage U.S. companies from moving their production facilities—and jobs—overseas so they can avoid domestic regulations and continue polluting.

While this plan would put real pressure on foreign companies, it would also be administratively difficult to accurately assess these companies’ emissions, let alone figure out the proper adjustment price to put them at parity with the cost of complying with U.S. regulations. This is made more challenging by the fact that the CES would operate on a sliding scale depending on the sector and region, as opposed to a European Union-style cap and trade system which puts an explicit price on carbon—currently set around $60 dollars per ton.

Further steps to address climate change will be needed even if the bill passes with these proposals intact. The basic blueprint for avoiding climate disaster involves heavily regulating current emissions, immediately beginning to decarbonize the energy grid, and rapidly electrifying homes, buildings, vehicles, and appliances. These goals require a direct and sustained effort from the government, similar to the production economy under FDR in the lead-up to World War II that unified public agencies, private firms, and ordinary citizens to collectively tackle the existential threat facing the country and the world at the time.

As with any major piece of legislation, it is crucial to keep in mind the implications for marginalized communities. On this front, the current proposals fare well.

First, the cost of unmitigated climate change is steep. Under a high emissions scenario, climate change could cost the U.S. $500 billion annually by 2090, and low-income communities and communities of color routinely bear the brunt of worsening heat waves and natural disasters, as well as the health complications from polluting factories and power plants.

At the same time, heavy subsidies for clean innovation and technology will lower the cost of clean energy and increase low-income households’ access to energy efficiency improvements. Fossil fuel-based energy will inevitably become more expensive under any meaningful climate policy, but the proposed bill can pave the way to cleaner, affordable alternatives, even before factoring in savings from health benefits and reduced climate damage.

Furthermore, the broader tax policy priorities included in the reconciliation bill—such as major expansion and reform of the Child Tax Credit—will dramatically enhance the economic security of millions of families during this time of transition to a cleaner energy future.

Lastly, by funding a Civilian Climate Core—which would directly employ 1.5 million American workers to help the United States transition to a clean economy—in the reconciliation bill, Congress is proving that there does not need to be a trade-off between good climate policy and good economic policy. Direct hires aside, an even bolder government-backed effort to secure the future of our planet could create as many as 25 million net new jobs at its peak, as well as 5 million permanent jobs, many of which deal directly with domestic infrastructure and cannot be outsourced. With the U.S. economy still down 5.7 million jobs from pre-pandemic levels, climate legislation can be a critical investment for jumpstarting our economic recovery.

Ultimately, the upcoming reconciliation bill represents Congress’s first chance to pass meaningful climate legislation in over a decade. It cannot squander the opportunity through half-measures that fail to prevent climate catastrophe. The benefits of bold climate legislation are profound—and the cost of inaction is unthinkable.


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