Energy and Environmental Policy

by David Montgomery

The choice of Janet Yellen as Secretary of Treasury raises interesting questions about the direction of energy and environmental policy in a future Biden-Harris administration. There are as yet only rumors of possible heads for the Energy and Transportation Departments, Environmental Protection Agency and Council on Environmental Quality, but they are sufficient to foresee the broad outlines of policy.

The big news is that Yellen is a vocal advocate of a carbon tax as a way to reduce greenhouse gas emissions. That is in part encouraging, because it is a far less damaging way to achieve Democrats’ wishes for climate policy than doubling-down on the regulatory approach of the Obama years. It is not the position that, say, an Elizabeth Warren would have taken.

Republican thinkers led by former Secretary of Treasury and Secretary of State George Schultz advocated for a similar carbon tax four years ago, but their support was conditioned on the simultaneous rollback of all current regulations and subsidies directed at greenhouse gas emissions. They correctly argued that the ability of a carbon tax to incentivize the most cost-effective ways to reduce emissions would be vitiated or eliminated if current (or stronger) regulations on emissions were in place.

The role of the carbon tax in overall tax reform and deficit spending is also critical to its economic justification. I and coauthors from MIT argued during the development of the Trump tax reform that a carbon tax could provide sufficient revenue to make its tax reductions permanent and more effective in stimulating economic growth and returning investment to the United States. Our evaluation was that overall the growth benefits of those other tax reductions would exceed the damaging effects of the carbon tax. Today, even using the carbon tax for deficit reduction might provide significant benefits. But using the carbon tax to fund more federal spending on the social objectives of the Democrats would turn it into a highly burdensome way of collecting revenue.

Unfortunately for Dr. Yellen and economists who like the idea of a carbon tax, the rumored candidates for the positions that will control energy and environmental policy are not likely to go along with either of these ways to make a carbon tax beneficial. The top candidates all have records that suggest they will favor returning to and enlarging the regulatory approach of the Obama Administration and/or using carbon tax revenue for social spending of the least desirable sort.

The Secretary of Energy is likely to be kept on the sidelines of climate policy, as he was in the Obama Administration. The two leading candidates, one from Stanford and the other from MIT, are likely to advocate increased funding for development of new energy technology and to favor programs to promote energy conservation and renewable energy. They would find it hard to resist making a claim on carbon tax revenues for those projects and subsidies.

The leading candidate for EPA Administrator is Mary Nichols, head of the California Air Resources Board and designer of California’s disastrous program that combined command and control regulations on almost every source of emissions with a cap and trade program. She was the architect of the unrealistic California motor vehicle fuel economy standards that were adopted nationwide by the Obama Administration (and rolled back in the Trump Administration). She implemented a cap and trade program that would in principle work similarly to a carbon tax, and then eliminated any benefits trading might have had by telling every individual source – especially electric generators — exactly how much each had to do to reduce emissions. Her fuel economy standards went far beyond levels that any rational consumer would choose based on a carbon tax that increased the price of gasoline. Nichols opposes any effort to roll back other regulations when economic incentives are put in place, which would make Yellen’s carbon tax do nothing to reduce emissions while raising energy prices to consumers.

The leading candidate for head of the White House Council of Environmental Quality is an “Environmental Justice (EJ)” advocate. EJ advocates assert that measures to reduce pollution overall always have negative impacts on black communities, and fights against most economically sensible approaches to environmental regulation. It demands as its price of support that increased expenditures on black communities and organizations be included in policies like California’s cap and trade program. EJ demands would also siphon off carbon tax revenues into questionable expenditures.

The Department of Transportation also has a potential role, and the rumored choice of Rahm Emanuel as head suggests that it would could become a siphon for carbon tax revenues into spending on mass transit and other infrastructure projects of questionable economic value. Transportation also plays a key role in potential tightening of fuel economy standards, since the National Highway Traffic Safety Administration has a joint role with EPA in setting those standards. Emanuel would be unlikely to oppose an EPA Administrator’s effort to tighten those standards.

It is likely that with Democrat control of the House of Representatives, Mary Nichols would be able to reinstate or tighten the Obama Administration’s requirements for electric utilities and major industrial sources to reduce emissions. Potentially, EPA has the authority to require nationwide a cap and trade system like that in California, and California’s target for achieving zero greenhouse gas emissions was the model for the Green New Deal. EPA and DOT could also tighten fuel economy standards to or beyond levels chosen by the Obama Administration.

These regulatory proceedings are subject to the Administrative Procedures Act, and given what Trump accomplished that could take two years or more. That would allow a Republican Congress to block the regulations under the Congressional Review Act if Republicans regained the House. A carbon tax, like any other tax or spending change, would require legislative action and Senate approval, further pushing it into the domain of the irrelevant – unless a few Republican senators are converted by the prospect of increased spending on their favorite projects. But if that happens, the carbon tax is just another tax burden.