The Bipartisan Climate Solution: A Tax Swap

A Changing Climate Means A Changing Society. The Island Press Urban Resilience Project, Supported By The Kresge Foundation And The JPB Foundation, Is Committed To A Greener, Fairer Future For All.​ This Post Was Originally Published On TheHill.com

You wouldn’t know it from today’s polarized politics, but protecting the environment used to be a bipartisan effort.  There were, of course, the path-breaking conservation achievements of Theodore Roosevelt, a Republican.  And, in the 1970s through the 1990s major federal environmental legislation – the National Environmental Policy Act, the establishment of the Environmental Protection Agency and the Council on Environmental Quality, the Clean Air Act  and Clean Water Act  – occurred under Republican administrations in cooperation with Democratic Congressional leadership. 

Even climate change was once a concern of Republicans and Democrats alike. In the late 1980s, President George H.W. Bush and his cabinet recognized the need for leadership and coordinated international action against a threat seen as “the most far reaching environmental issue of our time.”

Regrettably, that century-old tradition of bipartisanship has broken down, with wide differences between the two parties over climate science and policy.  But one solution could rally support on both sides of the aisle: a tax swap that lowers corporate income taxes while placing a tax on carbon.

Discussions about a swap could begin this year.  House Ways and Means Chairman Kevin Bradyrecently pledged to introduce a tax reform package that would lower the corporate income tax rate. Brady and others note that the 35 percent marginal statutory rate in the U.S. is significantly higher than among other OECD countries, which average about 25 percent.  However, reducing the U.S. rate to 25 percent could lead to an estimated revenue loss of $1.2 trillion over ten years.  Democrats are unlikely to support tax reform without new revenues to make up this shortfall.

A tax on carbon – which levies a fee on fossil fuels – is an appropriate way to make up this revenue loss. A carbon tax would create incentives to limit greenhouse gas emissions and stimulate investment in low-carbon energy.  It is a market-based approach, similar to those used under Presidents Reagan and George H.W. Bush to control acid rain and to phase out ozone-depleting chemicals. In those cases, environmental goals were achieved at lower costs than initially predicted.  Carbon taxes are just as effective: in British Columbia, a revenue-neutral carbon taxreduced fossil-fuel use by 16% while spurring brisk economic growth.

A carbon tax would make markets more rational. When production or consumption imposes a social cost that is not reflected in the market price of goods or services, economic decisions become distorted.  That is one reason that major energy companies are calling governments to put a price on carbon Exxon Mobil has come out in favor of a revenue-neutral carbon tax.  

A woman speaks at the Maryland Climate Change Summit. Photo Credit: Jay Baker via Flickr

A legislative package that adopts a carbon tax while reducing the statutory corporate tax rate would address concerns raised in the anti-carbon tax resolution recently passed in Congress. It would support: 

Economic growth: Setting a carbon price would unleash American ingenuity and investment, just as energy market fluctuations and trends have always done.  Most of our primary global competitors face energy prices much higher than those paid in the U.S.  Separate research projects find the reduction in economic activity resulting from a carbon tax could be offset by recycling the revenue to reduce corporate income taxes, even without considering benefits from climate stabilization and pollution reduction.  And phasing in a carbon tax would provide time for business and industry to adjust to higher fossil fuel prices.

Environmental integrity: The carbon price can be adjusted over time to achieve a specific environmental objective, including those related to U.S. commitments under the 2015 Paris Agreement.  By demonstrating leadership in fulfilling its commitments, the U.S. will have more leverage in asking other countries to fulfill theirs.

Fiscal responsibility:  By maintaining revenue neutrality, the tax swap package would neither grow nor shrink the federal budget.  Administrative costs will be modest because the tax would be collected from less than three thousand fossil fuel producers, and passed down to utilities, businesses, and households.

Economic fairness: The status quo – allowing carbon pollution at no cost -- is unfair.  Climate change-related costs fall hardest on the poor, the elderly and those on fixed incomes. These groups are most vulnerable to elevated heat levels, disease, and other climate-related impacts.  They have the least ability to move to safer locations or otherwise adapt.  Some carbon revenues could be used to prevent the tax from burdening low income households, as well as to address the economic dislocation that coal regions are now experiencing from market forces.   A tax swap would serve intergenerational fairness because we would no longer shift the costs of climate disruption onto our childrens’ children.  

And finally, a tax swap sidesteps endless debates around climate science. Many Republicans are unwilling to pay for carbon reductions, because they believe the science around climate change remains unsettled.  But a tax swap means that we can achieve substantial greenhouse gas reductions at minimal cost. Think of it as low-cost insurance against the future risks of a disrupted climate.

It’s a prudent approach that could work on both sides of aisle. As then-Secretary of State James Baker III declared back in 1989, “We cannot wait until all the uncertainties have been resolved before we act to limit greenhouse gas emissions and to prepare for whatever climate change we are already committed to.” We’ve waited long enough.