Why a Price on Carbon Is Unlikely in the U.S. Anytime Soon

Published in Wall Street Journal

George David Banks cites a number of obstacles, starting with GOP opposition in Congress

The chatter among policy makers and market observers is getting louder: A formal price on carbon is imminent.

Analysts point to the Paris climate agreement as generating momentum for global climate mitigation. They also say that a more-liberal U.S. Supreme Court under a Clinton presidency would uphold the Clean Power Plan, which aims to reduce greenhouse gases and boost the use of renewable energy in the electricity sector. Moreover, a growing number of companies and investors are calling for economic and regulatory certainty, which will pressure Republicans to come to the negotiating table.

Yet this belief in a carbon tailwind is misguided. There are a number of formidable obstacles to setting a formal price on carbon that the experts either don’t recognize or don’t weigh heavily enough in their forecasts.
First, analysts misjudge the level of congressional opposition. Gaining Republican votes for a legislative compromise remains off the table for the foreseeable future. Lawmakers—including some Democrats—fear negative impacts on economic growth, and many have invested a significant amount of political capital over the past decade in fighting the carbon agenda. That sort of opposition can’t be extinguished easily.

Remember that most of President Obama’s successes on the emissions front were low-hanging fruit. The shale revolution’s abundant supplies of cheap natural gas made the Clean Power Plan politically viable. U.S. utilities were already shifting from coal to natural gas, creating market forces that worked in favor of the Environmental Protection Agency’s approach.

As for the prospects of a carbon price under a Clinton presidency, it is unlikely the administration would waste political capital challenging GOP lawmakers on such a futile effort. Mrs. Clinton has signaled that her administration would curb greenhouse-gas emissions across U.S. industrial subsectors—including refining, steel and cement—and other parts of the economy by using regulatory mandates, not seeking legislation.

But regulating U.S. manufacturing is difficult, let alone developing a price on carbon across the economy. Democrats may write off coal, but they care about blue-collar jobs in the Rust Belt. Environmental groups may openly attack fossil fuels, but launching campaigns against U.S. industry is something else altogether. The labels “Dirty Cement” and “Big Steel” simply don’t work politically.

A number of Washington leaders have suggested using Section 115 of the Clean Air Act to accomplish this task. Section 115 offers the flexibility to construct an economywide market mechanism to manage emissions by regulation, not legislation. While this approach offers the most likely pathway to a formal price for carbon, it would stumble politically—once again, because of fears that it would cost jobs, particularly in trade-exposed manufacturing.
This challenge is not insurmountable, but addressing it effectively without sparking a trade war would be difficult. While the Paris agreement provides a framework to bolster cooperation in carbon mitigation, it allows many U.S. competitors to increase their emissions and avoid regulating their energy-intensive industries.

Another idea that’s widely discussed involves a grand compromise—the GOP would accept a carbon tax in exchange for “pre-empting” any new EPA regulation and scrapping existing ones. But that’s an academic fantasy. Democrats and their environmental allies would never give up the leverage of EPA regulation when that strategy poses fewer political risks and is winning in the courts. Meanwhile, supporting a tax on carbon would be the kiss of death for many GOP incumbents. House Republicans have voted to condemn the idea of a carbon tax multiple times.

Tax advocates have been emboldened by statements of support from Exxon Mobil , even though the statements come with serious qualifications. The optimism is premature. Environmentalists would focus on what reductions are required and achievable through the lens of the Paris agreement and longer-term targets. Meeting those emissions-reduction goals with a tax would mean imposing a politically untenable price increase at the gas pump.

What does it all add up to? America is unlikely to adopt a formal price on carbon during the next administration. Washington academics and New York traders should accept the political reality that GOP opposition won’t be overcome by a Clinton presidency. Furthermore, regulation of manufacturing represents the Achilles’ heel of the climate agenda.

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George David Banks is Executive Vice President at the American Council for Capital Formation. He is an economist, political consultant, and policy advocate, focusing on energy, environment, and trade. Banks has published reports and opinion editorials on a variety of policy issues, including climate change, civil nuclear power, and energy markets and trade. He is also a fellow at Columbia University’s Center on Global Energy Policy and a member of the ClearPath Foundation’s advisory board. Most recently, he served as President Donald Trump’s Special Assistant for International Energy and Environment at the National Economic and National Security Councils – a position that required him to manage workstreams related to his portfolio across the federal government.