Democrats Need a Carbon Tax and a Coal Miner Buyout
(Bloomberg Opinion) -- Senator Kyrsten Sinema’s opposition to a corporate income tax increase has Democrats taking another swing at a carbon tax. If they manage to rally around the idea, it could be a milestone in global climate policy and the defining initiative of Joe Biden’s presidency.
Whether Democrats can make this proposal happen is anyone’s guess. But it would have a better chance if they made a slight tweak to their $3.5 trillion spending plan: They should take about 2% of it and buy out America’s coal miners.
In terms of economic efficiency, using revenue from a carbon tax to forestall increases in corporate tax is close to ideal. If done correctly, it achieves a so-called double dividend, in which two distortions — the fact that the harmful effects of carbon are not included in its price, and the fact that physical investments in capital are overtaxed — are eliminated simultaneously.
Despite this theoretical appeal, the tax still faces long odds. Progressives are skeptical that a carbon tax is powerful enough to fully combat climate change. Conservatives worry that giving the government a new revenue tool will open the door to higher taxes overall.
The conservative concern may well be justified, but practically and philosophically, it is hardly a pressing issue. The Democrats are looking to pass a big spending bill on a party-line vote, giving Republicans little say. Meanwhile, Democratic moderates such as Sinema are facing the prospect of higher taxes regardless. A carbon tax may be the most palatable option.
Progressives, on the other hand, should take comfort in the power of a carbon tax to reduce the need for coal, one of the dirtiest fuels on the planet.
The latest assessment report issued by the UN’s Intergovernmental Panel on Climate Change shows why. The assessment includes the long-awaited Shared Socioeconomic Pathways (SSPs) as an update to the Representative Concentration Pathways (RCPs) that had dominated previous research. RCPs are generic emissions scenarios that don’t describe any particular economic or technological future but simply present high-, medium- and low-emissions baselines from which modelers can work.
This is where carbon taxes come in. Progressives are skeptical of them because they have little immediate effect on the use of oil and natural gas. A moderate carbon tax of $28 a ton would raise the price of gasoline by only about 30 cents per gallon. That’s hardly enough to drive consumers to trade in their gas-guzzling cars for electric vehicles.
It is enough, however, to drive the use of coal in the U.S. to zero over the next 15 years. Zero coal sets off a virtuous cycle of increased investment in natural gas, wind and solar. Unlike coal, natural gas can be readily turned on and off to balance energy demands. So whenever enough wind or solar energy is available, less gas can be used. This increases the return to wind and solar development, which decreases their cost, encouraging further development, and so on.
The UN’s research shows the power of this virtuous cycle. Not only does zero-coal rule out the absolute worst scenarios, but the price declines associated with solar are so sharp that natural gas becomes obsolescent.
There are two possible consequences here that progressives should be especially attentive to: One, coal communities will be hard hit, and if they are not amply compensated for their loss, there will be political repercussions. Two, any success in delaying the phase out of coal — through whatever means — will erode the efficacy of a carbon tax.
Thus any serious carbon tax proposal must include compensation for affected communities. There are roughly 42,000 coal mining jobs in the U.S., with West Virginia, Kentucky, Wyoming and Pennsylvania accounting for about three-quarters of them. The most straightforward solution is to offer those workers a buyout based on their years of experience.
A simple payout equal to accrued salary going back 10 years would put the government on the hook for a maximum one-time expense of about $70 billion — roughly 2% of the cost of Biden’s economic agenda. In reality, however, the cost would be far less. The industry has switched to temporary labor in recent years, with far less generous labor contracts.
Meanwhile, the benefits of such a payout, if they make the transition to zero coal politically feasible, would be incalculable. It’s not often that a political party gets the opportunity to make meaningful and worthwhile changes to both climate and economic policy. Democrats should seize it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Karl W. Smith is a Bloomberg Opinion columnist. He was formerly vice president for federal policy at the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also co-founder of the economics blog Modeled Behavior.
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