TaxProf Blog

Paul L. Caron
Dean





Friday, March 29, 2024

Weekly SSRN Tax Article Review And Roundup: Roberts Reviews 2025 Climate Policy Reform Options

This week, Tracey M. Roberts (Cumberland; Google Scholar) reviews a new work by John E. Bistline (Stanford; Google Scholar), Kimberly A. Clausing (UCLA; Google Scholar), Neil Mehrotra (Google Scholar), James H. Stock (Harvard; Google Scholar), and Catherine Wolfram (MIT; Google Scholar), Climate Policy Reform Options in 2025.

Roberts (2020)

This week, a cohort of scholars has examined an array of possibilities for bringing the United States into alignment with its promises under the Paris Agreement. The Paris Agreement is the legally binding 2015 international climate change treaty adopted in Paris France by 196 nations at the UN Climate Change Conference. In that agreement, the United States pledged to reduce greenhouse gas emissions to 50% below our 2005 emissions. Because of the thirty-plus-year plus delay in actually taking action after signing the 1992 United Nations Framework Convention on Climate Change, we are not going to meet those goals.

However, Bistline, Clausing, et al. have good news. We can come close, and we can meet that goal by 2035. They use the Electric Power Research Institute’s U.S. Regional Economy Greenhouse Gas and Energy (US-REGEN) model to project emissions reductions, budgetary impacts, and effects on household energy and fuel expenditures.

The researchers focus primarily on fiscal and tax measures. This is smart for two reasons. First, with a divided Congress, the best way to secure climate change legislation is the budget reconciliation process, since this pathway allows the Senate to pass legislation by majority vote rather than the 3/5 supermajority vote needed to get past a filibuster. Only taxing and spending measures may be considered during the budget reconciliation process. Note that the Inflation Reduction Act of 2022 (the “IRA”), the first major effort by the United States to address climate change, was passed through the budget reconciliation process without any support from Republican legislators, though a number of those folks have since sought to take credit for it.

Second, beyond the IRA, other efforts to address climate change on a nationwide basis have come not from the Federal government agencies, whose efforts to regulate have been stymied through litigation and other processes, but from private governance initiatives. Historically, religious and other groups in the U.S. and elsewhere have boycotted companies and products because of moral concerns about human enslavement, human rights abuses, apartheid, discrimination, and other concerns. More recently, investors and consumers have begun to reward with their investment corporations exercising Corporate Social Responsibility. As companies have voluntarily adopted environmental, social, and governance (or “ESG”) criteria to track the effects of pollution, labor violations, and other governance failures in their supply chains as risks to be managed, investors have demanded that their investments be screened according to these criteria. The investment, pension and retirement fund industries have responded by collecting investments into funds marked with the "ESG" umbrella label. Red states have sought to push back against voluntary disclosure of pollution, environmental hazards, unfair labor practices and other activities by enacting anti-ESG legislation to prevent their state pension funds from investing in, and their state contracts from going to, companies that make such disclosures. Because use of these labels has resulted in false, misleading, and fraudulent claims about being green, carbon-neutral, and employing socially responsible and other governance standards, the Securities and Exchange Commission has sought to regulate and has begun enforcing the existing laws in light of these activities. Republican-led groups have also pushed to end such efforts and to weaken any resulting securities regulation. Consequently, taxing and spending remain the few viable pathways for climate (or any other) regulation.

Bistline, Clausing, et al. clarify the principles under which they are evaluating the various policies: (a) emissions reductions, (b) economic efficiency, (c) budgetary impacts, (d) incidence (who enjoys the benefits and who bears the burden), and (e) international impact (given that the US generates about one-eighth of worldwide emissions, currently supports the largest emissions per capita, and remains responsible for one-fourth of the stock of greenhouse gases currently in the atmosphere as a result of historic emissions). They then analyze seven different policies that may plausibly be up for consideration in 2025: (1) continuation of existing policies at the state and federal level (including the Inflation Reduction Act incentives, and the EPA’s proposed tailpipe standards for light, medium and heavy dutiy vehicles, and existing and new source performance standards for power plant emissions under the Clean Air Act), (2) continuation of the IRA (without the new EPA regulations for vehicles and power plants), (3) the repeal of the IRA and the new EPA regulations for vehicles and power plants, (4) an expansion of the IRA to increase the most effective subsidies (those for technology-neutral investment and production tax credits for clean electricity) by 50%, (5) a carbon fee with carveouts for gasoline, (6) a clean energy portfolio standard (which would require utilities to include in their distribution a certain percentage of electricity from clean energy resources, and (7) the repeal of the least effective and most expensive subsidies under the IRA together with the addition of a carbon fee.

The researchers examine the economic impacts of the policies across economic sectors, the fiscal impacts to the federal budget, and the impacts on household energy costs. Unsurprisingly, offering only carrots (by expanding the IRA subsidies) is less effective than implementing a stick (carbon fee or portfolio standards or the repeal of certain IRA provisions along with a carbon fee). None of the options allow us to reach the 2030 deadline, but existing policies (Option 1) would allow us to meet our goals by 2035. They conclude that Option 7 (with the addition of a carbon fee and selective repeal of certain expensive IRA provisions) would be our most cost-effective response and it would allow us to meet our greenhouse gas goals by 2032. In contrast, repeal of the IRA and rejection of new regulation would further delay climate resilience and add to the costs we are currently facing from climate-related disasters.

Some are worried about the fiscal impacts of the Inflation Reduction Act. Economists have determined that the cost of the Inflation Reduction Act is higher than previously expected. The costs have been adjusted upward because the credits are popular. Quite simply, more businesses than expected are claiming them. Numerous Republican-led efforts have also sought to repeal the IRA. Note that red states stand to lose a great deal more ($337 billion in investments) than blue states ($183 billion) if the climate action subsidies are repealed, primarily because these states have strong solar and wind resources. They have enjoyed big boosts in solar, electric vehicle and battery manufacturing and job growth in these areas.

The higher cost of the IRA is something to worry about, especially given the hole in the budget that had already been carved out with the TCJA. However, with climate change, we must be concerned about the cost of doing nothing. Economists have dubbed their measure of these costs as "the social cost of carbon." In 2023 alone, the United States saw 28 climate-related disasters, including drought, wildfire, storms, tornadoes, cyclones, flooding, and, as an added bonus, an arctic cold wave from the polar vortex that extended into the deep South! Other parts of the world have been facing similarly harsh climate-related disasters. Consequently, we are seeing an increasing number of climate migrants at the border, and more Americans are moving to safer ground within the US. Personally, I recommend all those Rustbelt cities in the Midwest, previously hollowed out by job losses in the automotive and steel industries - the people are friendly, and the housing was built to last (with big, beautiful bones ready for renovation). Damages from climate change will force the government to spend an extra $1 trillion or more over the course of a decade on flood insurance, disaster relief, health care costs from heat waves, and more. As Bistline, Clausing, et al., point out, the IRA is especially cost-effective when you take seriously the costs of doing nothing.

Some may worry about the regressivity of a carbon fee; carbon taxes and fees (and other sticks) affect lower income households to a greater degree than higher income households because lower income households must use all of their income to meet their needs. However, there are pathways to offset these impacts. For example, some of the revenue from the carbon fee could be rebated to households through a tax credit. The expansion of the Child Tax Credit during the pandemic and its delivery in the form of a pre-bate (a tax refund that is paid in advance of filing taxes for the current year) pulled millions of children out of poverty and reduced the poverty rate by about 40 percent. A similar credit could be used to protect the middle class and lower-income households. In a time of increasing billion dollar disasters from extreme weather events, the vast majority of Americans will take all the help they can get. The IRA was a great step in the right direction. Bistline, Clausing, Mehrotra, Stock, and Wolfram have made an important advance in identifying paths forward for 2025 and beyond.

Here’s the rest of this week’s SSRN Tax Roundup:

https://taxprof.typepad.com/taxprof_blog/2024/03/weekly-ssrn-tax-article-review-and-roundup-roberts-reviews-climate-policy-reform-options-in-2025.html

Scholarship, Tax, Tax Daily, Tax Scholarship, Tracey Roberts, Weekly SSRN Roundup | Permalink