After 25 Years of Futility, Democrats Finally Jettison Carbon Pricing in Favor of Incentives to Counter Climate Change

The nation’s first comprehensive climate law, expected to be sealed with a vote in the U.S. House of Representatives on Friday, will not look anything like the program imagined by either climate economists or those in Washington and the environmental movement who had faith in bipartisan action.

From the time that the world first agreed to act on climate change 30 years ago at the Earth Summit in Rio de Janeiro, environmentalists talked about putting a “price” on carbon as a core element of any strategy for reducing the fossil fuel pollution that was heating the planet.

Whether imposed by tax, fee or cap-and-trade system—such a price would discourage carbon-based fuel pollution and encourage investment in and deployment of clean alternatives, said advocates of the idea. And because such a scheme would rely on the market, rather than government mandates, to decide the best approach to decarbonize, proponents argued it was an idea both Democrats and Republicans could get behind.

Instead, Democrats are advancing their climate bill with no Republican support, and their program is one of carrots, not sticks. The idea is that an unprecedented $370 billion federal investment in clean energy—largely in the form of tax credits to encourage its development, as opposed to taxes on carbon to discourage use of fossil fuels—will be the push that transforms not only the economy but the politics of climate change.

“I’ve always thought that this gives us a chance to get the greatest possible emission reductions and the largest savings possible and still get the votes,” said Sen. Ron Wyden (D-Ore.),  chairman of the Senate Finance Committee who shepherded through the tax credits at the heart of the Democrats’ climate plan. 

The decision that the United States would spend rather than tax its way to a more sustainable future was in large part driven by political reality—Democrats had to win over the vote of a staunch fossil fuel industry supporter in their own party, Sen. Joe Manchin of West Virginia, who opposed carbon taxes. But the plan also was influenced by a new generation of climate policy thinkers who argued that lawmakers had spent too much time listening to the economists, and as a result, had played into the hands of the powerful foes of climate action. 

Previous climate proposals in Washington focused first on costs, not benefits. That made it easy for the fossil fuel industry and its allies to defeat the Clinton administration’s BTU tax proposal and the cap-and-trade plan that died in Congress under President Barack Obama, whereby carbon emissions would have been capped and polluting industries could have purchased credits from non-polluters.  

In contrast, President Joe Biden is about to put his signature on a climate plan that is entirely focused on benefits—not just cleaner energy, but prevailing wage jobs, relief for disadvantaged neighborhoods overburdened with pollution, and revival of communities left behind by coal.

“You don’t go to these communities with some sort of vague promises that you’re interested in them,” said Wyden. “You show them with concrete actions relating to wages and opportunities, that here’s some of the tools that can help them get through the transition.”

Matto Mildenberger, political scientist at the University of California, Santa Barbara, whose anti-carbon tax writings have been influential among many of those working on the legislation, called the Inflation Reduction Act “serious, transformative industrial policy.”

“It’s about generating the conditions so that it is always the cheapest choice to adopt clean energy, carbon-free technologies, and about helping the public understand that the technology is not only better for climate change, but also for improved quality of life,” Mildenberger said.

But the Inflation Reduction Act—for all its importance as a landmark moment—won’t be the last word on U.S. climate policy or on carbon pricing. Although a number of independent analysts agree the legislation can get the United States within striking distance of Biden’s pledge of a 50 percent cut in greenhouse gas emissions by 2030, more action will be needed to reach that target as well as the much more difficult goal of net zero emissions by 2050. Advocates of carbon pricing say they will continue to make the case that there is no better way to drive greenhouse gas pollution out of the economy than to recognize its true costs.

Republican Votes Never Coalesced Behind Cap-and-Trade

The idea that governments should levy taxes on goods or activities that create adverse side effects for society dates back to the 1920s. British economist Arthur Pigou described these as negative external costs, pointing to the example of an industrialist who builds a factory and “so destroys a great part of the amenities of the neighbouring sites.” By the early 1990s, the consensus of scientists was that such destruction was underway and the neighborhood was the Earth’s atmosphere. The harmful goods—coal, oil and natural gas—were the products that fueled the world economy.

For a solution, the world looked first to the United States, which over history has released more fossil fuel pollution into the air than any other country—some 20 percent of the total since the Industrial Revolution, by some calculations. But at President George H.W. Bush’s insistence, the 1992 United Nations Framework Agreement on Climate Change contained no targets or timetables for reduction of greenhouse gas pollution. 

Proposals circulated for putting a price on carbon through a “cap-and-trade” system, like the one that Bush had signed into law for control of acid rain pollution in 1990. The cap would grow more stringent each year but polluters would have flexibility to meet their targets. An international agreement based on this approach was reached at Kyoto in 1997, but in his first year in office, President George W. Bush pulled the U.S. out of the deal.

Europe launched its own cap-and-trade system, and it had modest success. One study concluded 4 percent more greenhouse gas emissions reductions than the continent would have achieved otherwise. But the price of carbon on the European market has always been low, in part because national governments handed out too many free pollution permits to its industries. In 2006, economist Nicholas Stern, in an influential report for the British government, wrote that climate change “is the greatest market failure the world has ever seen.”

Congress considered several carbon cap-and-trade proposals, some of them championed by the late Republican Senator John McCain. The one that advanced furthest, the so-called Waxman-Markey cap-and-trade measure passed by the House early in the Obama administration, died in the Senate in 2010. Democrats held 57 seats, a commanding majority compared to the 50 they hold today, but they couldn’t get the 60 votes needed to overcome a filibuster.

“It seemed to me that you had to do a major regrouping and think through how you would be ready for the next opportunity,” Wyden said.

One element of the reappraisal is that Wyden and other Democrats focused on measures that would have a direct impact on the federal budget, which under the Senate’s arcane rules could pass with a simple majority. Another element was to back away from carbon pricing as the primary driver of change.

“Carbon pricing has the politics backward,” wrote Mildenberger and his UCSB colleague, political scientist Leah Stokes, in the Boston Review just before the 2020 election. Policymakers need to disrupt the political power of carbon polluters first, they argued. They should be focused on building coalitions around climate policy that give people something to fight for, instead of serving up an easy target—taxes—for foes of climate policy to rally against.

“We need to be thinking at least as hard about the politics of climate policy as we are about economic efficiency,” they wrote—in essence, the theme of Mildenberg’s book, Carbon Captured, released earlier that year.

Joe Goffman, then a Harvard environmental law professor who later would be appointed to head up air pollution policy in Biden’s Environmental Protection Agency, heard the message. “Do *not* allow your next thought to form about carbon taxes before listening to this brilliant discussion,” tweeted Goffman, linking to a Harvard podcast featuring Mildenberger.

Stokes, for her part, later joined as an adviser to Evergreen Action, the climate advocacy group formed by former staffers to Washington Gov. Jay Inslee, one of the nation’s climate policy leaders. Biden adopted large portions of the elaborate climate action platform that Inslee developed during his short-lived presidential run in 2020. Stokes worked closely with activists and Congressional staff through all the ups and downs of Biden’s Build Back Better proposal, through to the near-death of the scaled down version, and its later resurrection as the Inflation Reduction Act. 

Academics, said Wyden, “made a very significant contribution” on the legislation. “They said the main reason that past proposals went down is that there wasn’t even a coalition within the party that had come together,” he said. Wyden said he worked to build coalitions of support by making the clean energy tax provisions as broad as possible. They’d be available not just for wind and solar development, but for carbon capture and storage, advanced nuclear, clean hydrogen. The tax incentives would be available to nonprofit rural electric cooperatives as well as for-profit companies. And they would be in place for 10 years, long enough that clean energy developers of all sizes would be able to put together projects—not just those with the political savvy and clout to make it through the short window of availability.

“We’re out of the business of picking winners and losers, and just handing out tax breaks like they were practically lollipops,” Wyden said. “Instead, we’re looking to a future built around science-driven approaches.”

‘We Are Going to See the Politics Move in Our Direction’

But there’s one group the Democrats couldn’t bring aboard on their climate plan: Republicans.

Wyden said that wasn’t for lack of trying. “It was, in my view, literally right in our grasp,” he said. “When I talked to my Republican colleagues, and I said, ‘Do you have any problem with a market-oriented, technology-neutral system that wouldn’t pick winners and losers and would have competition?’ They would all look at their shoes and say, ‘No.'”

Wyden said he also asked them to contribute ideas for cutting carbon, and assured them he would work to include them in the bill. “I think that a lot of them wanted to work on this issue,” he said.  But in Wyden’s view, they wouldn’t cross the line in the sand drawn by Senate Minority Leader Mitch McConnell (R-Ky.), who was determined for the GOP to stick together in opposition to any Democratic climate plan.

“It’s just a catalog of tax hikes and green boondoggles that Democrats have wanted for years, with a false new label slapped on the front,” McConnell said last week on the Senate floor. “The only things their ‘Inflation Reduction Plan’ will reduce is American jobs, wages, after-tax incomes, energy affordability and new life-saving medicines.”

The fact that only one party claims authorship of the nation’s first climate law is troubling to some long-time observers of the battle. If Republicans gain power in Congress, they could take steps to tie up the government pursestrings. If Republicans regain the White House, they could weaken implementation and enforcement, just as President Donald Trump did with the much less sweeping measures to cut carbon emissions instituted by Obama.

But Wyden believes the Inflation Reduction Act will have a positive impact that Republicans will not be able to ignore. “Once we get the system up and running, I expect we will have bipartisan support,” he said. “Legislators will go home, and they will have their companies and their industries saying, ‘Hey, look, I’m using this new system, I can be competitive against anybody. It’s helping us create good paying jobs.’ And I think we are going to see the politics move in our direction.”

Will the Carbon Tax Make a Comeback? 

Environmental analysts at  Energy Innovation, Rhodium Group and Princeton University’s REPEAT Project all have concluded that implementation of the Inflation Reduction Act would help bring U.S. greenhouse gas emissions about 40 percent below 2005 levels by 2030, closing in on Biden’s 50 percent goal.

Environmental numbers-crunchers at another nonpartisan think tank, Resources for the Future, project that far from increasing energy prices, as McConnell claims, the legislation will save households around $200 annually and will reduce electricity price volatility overall. 

But most environmental advocates agree that more policy will be needed to complement the Inflation Reduction Act’s effects in the long-run effort to bring carbon emissions to net zero by mid-century, which climate scientists say is required to fend off the most catastrophic impacts of climate change. The Intergovernmental Panel on Climate Change has called carbon pricing “central” to strategies for keeping warming below 1.5 degrees Celsius, while stressing the importance of a mix of policies.

Charles Komanoff, co-founder of the New York-based Carbon Tax Policy, remains convinced that there is nothing that would be as effective as a price on carbon for meeting the monumental challenge the world faces to halt emissions. “The carbon price–it infiltrates, it puts its tendrils into every single action and decision, billions of which determine every day, every year, every decade how much fuel is burned and how much carbon is emitted,” Komanoff said. He says one problem with an all-carrots, no-sticks approach is that there’s nothing driving consumers to conserve energy—which he argues will be necessary even in a transition to clean fuels, especially given the constraints on siting new transmission lines and mining for raw materials.

“Don’t get me wrong. What [Senate Majority Leader Chuck] Schumer has managed to get Manchin to agree to and that the Democrats are now passing is a small miracle, and it’s a great thing,” Komanoff said. “But once it has been shown to be insufficient, and maybe woefully insufficient, I hope that will spur a reappraisal” of the value of carbon taxing.

Mildenberger is not ready to say that carbon taxing will one day be needed. But he argues that the Inflation Reduction Act will ease that pathway for whatever additional action the nation takes on climate change. “This is a bill whose theory of change is crushing fossil fuel demand,” he said. “And I honestly believe it’s probably the only political pathway that was available in this very tenuous Congress.”

There is, he believes, reason for optimism. “This strategy that was politically possible may also be up to the task of really undermining the ability of the fossil fuel industry,” Mildenberger said, “to mess up all the other efforts we need to make to address climate change over the coming decade.”