PRESIDENT-ELECT TRUMP could score a significant win-win in the early days of his administration by coupling climate policy with tax reform. That is the argument offered in a new report authored by Joseph Aldy, associate professor of public policy at Harvard Kennedy School, and published by the Progressive Policy Institute (PPI).
“Climate change is a problem no country can solve by itself,” Aldy writes. He notes that reneging on the promises made in the historic Paris Agreement, developed at last year’s COP21 conference, could make it much harder for the incoming Trump administration to work with other nations on other important issues. Therefore, he argues, the new administration should be incentivized to seek out solutions that would also advance its top domestic priorities.
Joe Aldy describes how a carbon tax could provide the revenues to finance tax reform.
“A smart deal to tackle climate change could abet tax and regulatory reform,” Aldy says, “by swapping a market-based carbon tax for sectoral regulatory policies.” He goes on to describe such a policy, which he calls a “Great Swap,” as a way for the U.S. to garner bipartisan support for climate regulation and break the current stalemate in energy policy.
“The rationale for coupling a carbon tax and tax reform are twofold,” Aldy writes. “First, the climate policy and tax reform benefit from each other in terms of economics. Tax reform lowers the costs to the economy—and potentially eliminates the net costs of a carbon tax—while the carbon tax provides the revenues to finance the tax reform.
“Second, such an approach can neutralize the difficult politics that characterize each issue by broadening the political coalition that would derive a ‘win’ from at least some element of the policy package. Such a broad coalition would ensure the durability of the carbon tax and tax reform, and is consistent with major policy efforts in the past that have coupled policy initiatives to draw broader support, such as under the regular farm bill and transportation bill processes.”
Aldy’s report outlines the advantages of a carbon swap for both major political parties, as well as the benefits for business and labor interests. He lays out the design principles of a carbon tax—including cost effectiveness, transparency, equity and administrative simplicity—and proposes several uses for the tax revenues. Aldy acknowledges that a carbon tax—or any comprehensive climate change policy—may carry high costs in the short term, but has “benefits spread out over decades and centuries.”
The challenge, Aldy concludes, “is that future, unborn generations will enjoy the benefits of climate policy while the current generation, and in particular those reaping substantial returns from a status quo that fails to address climate change, will bear the costs.” While a carbon tax may not be a comprehensive solution to climate change, Aldy argues that it could help provide a bipartisan path forward for U.S. leaders.