US Climate Action Plan
Carbon pricing and cap-and-trade, in conjunction with mandated emissions cuts and tax incentives for renewables, form the basis of the Plan. Eventually, costly tax incentives will be phased out as carbon taxes rise and do the dirty work of cutting GHG emissions. And, building Republican support for the plan by cutting Build Back Better’s spending programs for the middle class and engaging the private sector is an integral part. These are the broad outlines of the strategy.
The bars in the chart above are appropriately red, reflecting the climate change danger posed by the current stance on emissions cuts around the world.
Even after Glasgow — the Scottish city where the latest climate conference (COP26) was held in November — the world is 17–20 billion tons short of the greenhouse gas (GHG) emissions cuts needed by 2030 in order to achieve the goal of limiting global warming to 1.5◦ C by century’s end.
Without adequate emissions cuts, cumulative global warming by 2100 could be ~2.5◦ C, which would likely cause vast damage to the planet—to ecosystems and human life and livelihood.
This is why the US must lead.
Europe has been a responsible leader — with many countries there achieving best practices in climate policy. Yet America remains the indispensable nation on this challenge.
The US was the primary architect of the post-World War II global order that produced prosperity, peace and national self-determination around the world, but was also heavily dependent on the burning of fossil fuels.
The international institutions launched by the US and its allies resulted in an unprecedented level of global cooperation, which is what is needed today to combat climate change. The major global security and economic institutions we have today (the UN, the WTO, the IMF and World Bank) were of American design.
America remains pre-eminent in technology, innovation, open markets, and military power, even given China’s rise. The US heads history’s most successful collective security alliance (NATO). It possesses arguably the world’s oldest democracy and largest economy, and it supplies the world’s dominant currency — the US dollar.
The US has moral authority, soft power and an impressive track record in world affairs — essential to leadership — notwithstanding the Trump aberration.
President Trump abdicated global leadership on climate change; and subsequently, commitments around the world flagged. He rolled back President Obama’s climate policies and withdrew from the Paris Agreement, squandering US credibility.
But, President Biden has restored America’s climate commitments, including goals to: cut GHG emissions in half by 2030 (from 2005 levels), and achieve a carbon neutral power sector by 2035 and a net zero-carbon economy by 2050 (in line with UN goals). Build Back Better provided the means to get there, but now that plan is in limbo.
The US has a moral obligation to lead, as one of the world’s top emitters.
The US is the largest cumulative carbon emitter since the Industrial Revolution began, responsible for over a quarter of the carbon spewed into the heavens by humanity (just ahead of the EU plus the UK). See chart below. The US possesses one of the most carbon-intensive economies and remains one of the largest per capita annual GHG emitters. China is the largest annual GHG emitter by an overwhelming margin, spewing each year about a quarter of global emissions and more than 2x annual US emissions.
Cumulative CO2 emissions: US is the Number 1 cumulative emitter
A bold low-carbon plan signed into law in the US in early 2022 would send a message to countries around the world. Such a message would energize those countries who are already leading in low-carbon best practices to form plurilateral groups of likeminded nations to take further action. And, it would be a wakeup call to big emitters — like China, India, Russia, Japan, Germany and Korea — so that they reach aggressively for low-carbon solutions.
Carbon pricing and cap-and-trade, in conjunction with mandated emissions cuts and tax incentives for renewables, form the basis of the US Action Plan. Eventually, costly tax incentives will be phased out as carbon taxes rise and do the dirty work of cutting GHG emissions. And, building Republican support for the plan by cutting Build Back Better’s spending programs for the middle class and engaging the private sector is integral to the Plan.
US Action Plan
- Carbon pricing. Putting a price on carbon and other GHGs is key. Theoretically, it should be a price that reflects the cost incurred due to damage to the planet over the long term from GHG emissions. In practice, it would be a price consistent with the emissions reductions needed to cap global warming. Sweden has a high carbon price of $140 a ton, which is reflected in the taxes it assesses. The EU price is ~$77/ton; Canada and California are at $28–31, and a group of eastern US states are at under $10. The IMF has calculated that a $75 carbon price by 2030 is required to have a shot at limiting global warming to 1.5◦ C. The IMF has suggested the US start at $17 nationwide and increase annually by 9%. The Plan in this blog seeks to get the US closer to best practice more quickly, calling for a $25 price (not far from California’s) with 10% annual increases until the price is on par with the EU, likely by the mid-2030s.
- Carbon taxes. A way to implement carbon pricing is by taxing fuel — suppliers of coal, oil, and natural gas. A carbon tax (and a broader greenhouse gas tax) could be assessed as well on other activities, such as forestry, agriculture, cement, transportation, mining and drilling. Increasing fuel taxes directly — i.e. on gasoline at the pump — is administratively easy and should be done right away. Carbon taxes can form part of a broader plan to mobilize revenues in America’s low-tax economy, without sacrificing competitiveness.
- Cap-and-trade. In cap-and-trade, GHG emissions limits are set by the government and allocated to the power sector, and companies trade them. Cap-and-trade also effectively sets a price for carbon by restricting and decreasing the supply of carbon credits (aka, the government’s authorizations to companies to emit carbon). However, the price obtained in such markets can be volatile. More carbon price stability can be obtained through carbon taxation. Cap-and-trade has the advantage of giving the policymaker visibility into total emissions, which is a key policy objective. The US has an 11-state regional cap-and-trade system among eastern states, while California and Quebec have a similar system together. Both systems are adding members. The eastern consortium, as noted above, has a considerably weaker carbon pricing result, indicating that it is not restrictive enough. The US should use cap-and-trade until the carbon tax system is fully operational and effective at cutting emissions.
- Bold federal action. Build Back Better (BBB) stumbled in Congress. Sen. Manchin objected to its size and to many climate provisions. This Action Plan recommends culling the best climate initiatives from BBB and strengthening them, while cutting back on BBB’s non-climate sections. The latter is done by means-testing the non-climate sections (i.e., focusing them on the poor), as well as by postponing the less-pressing and more political spending initiatives focused on the middle class. To that end, the US should exclude, for the time being, the middle class from BBB’s paid leave, child care and tax credits, Medicaid and Medicare expansion, housing, and college financing. Cut the immigration-related and small business spending as well. Inequality undermines economic performance and incurs a political cost in terms of polarization and alienation. So, don’t skimp on reducing inequality, but do so by providing income support to the poor, not the middle class, at least not until America’s public finances improve. Turn BBB into BBC&S — Build Back Climatier & Slimmer. Sorry about that monstrous acronym, but I am no marketer!
- Value prop to Republicans. Try to peel away 10–15 Republican senators — and the number of Rs you need in the House to offset the loss of “progressives” due to cutting middle-class programs. Then, you may be able to pass a BBC&S (Build Back Climatier and Slimmer), even without Manchin. This strategy has the advantage of including climate legislation that is non-budgetary (because you don’t need Reconciliation). Such non-budgetary items would include emissions & fuel efficiency regulations. If you try to roll out regulations by executive order, then they could fail in the courts, like Obama’s Clean Power Plan (CPP) did. So, how do you convince 10–15 Rs to support the program? You hold out the prospect of reducing the deficit over the medium term. And, you argue that carbon pricing is a market solution, which Rs generally like. You can’t impose very high carbon taxes right away without a revolt. So, you start with a low fuel tax and increase it each year. It’s tricky because you want to get the carbon price up to levels in best practice countries. You ultimately replace BBB’s climate tax credits, which cost money, with carbon taxes (call it carbon pricing), which raise money. This would reduce the federal deficit, rather than increase it, which could make GOP deficit hawks like Sen. Romney happy. You also enact mandated emissions cuts for the power sector, though Rs generally don’t like such regulations. But if you offer them a BBC&S that is much less expensive — well under $1 trillion —and declining in cost annually, you might attract the likes of Romney, who voiced support for the child tax credit for poverty alleviation. And, who knows, Romney might be amenable to GHG cuts too. And, to sweeten the deal, you keep in your plan GOP efforts under Trump, such as reducing emissions through greater efficiency in burning fossil fuels and building resilience against extreme weather. The energy crisis in 2021 showed that building energy buffers and utilizing gas over coal as a transitional source can be important. This approach might attract moderate Republicans. Sadly, much of the GOP is mired in climate change denial, but reaching out to a critical mass that gets you to 60 in the Senate is worth a try.
- Tax credits for low-carbon activities. During the transition to carbon taxes, use Biden’s tax credits to incentivize decarbonization. Time is a-wasting. Rolling out carbon taxes as high as the IMF’s recommended $75 is unrealistic in the near term. So, the Rs have to be sold on a low carbon price (i.e. a low fuel tax increase) and a federal cap-and-trade system (which had some R support in 2009 —remember John McCain?) Carbon taxes and cap-and-trade would take the place of BBB’s heavy reliance on tax credits for renewables, which are costly. If the Rs balk, then pass the tax credits for renewables, retrofitting, and electrical grid modernization by Reconciliation. Then you only need 1–2 Rs to offset the 1–2 Manchins. You may be able to get them by means-testing Biden’s social programs as described above, or somehow scratch the back of the senator from W. Virginia. Make Biden’s tax credits more symmetrical by using feebates / rebates on carbon-intensive / low, zero or negative carbon activities. Feebates are effectively penalties for carbon-intensive activities. Means-test tax credits for households. For high-income households, consider using feebates to penalize those that don’t implement home energy savings, if this is feasible. Only use tax credits for low income households. Also means-test “environmental justice” spending.
- Government spending. Support (and in some cases increase) BBB’s climate spending initiatives — e.g., for clean government fleets and clean procurement; forestry, conservation, rural electricity’s shift away from coal, and loans for low-carbon agriculture; and, funding for the work of the climate research agencies, including NOAA, NSF, EPA, and DARPA-E. These important federal agencies can undertake basic R&D on low-carbon, carbon capture & storage, and negative emissions technologies, on EVs, battery storage, hydrogen technology, and on biodegradable plastics. Help finance the closing of coal-fired power plants and displacement of workers. Fund clean water and the replacing of lead pipes. Help finance the nation’s EV charging infrastructure, mass transit, and high-speed rail. Roll out mitigation plans for wildfires, floods, droughts, etc. Upgrade resilience in ports and waterways.
- Private sector initiatives. Financial market participants complain about regulatory and legal uncertainties that impede carbon markets. They ask regulators to standardize contracts for carbon credits. US regulators should roll out clear regs. They should clarify requirements regarding climate risk reporting and emissions reduction plans. The government should promote: the development of e-bond markets to facilitate capital-raising for low-carbon projects, and ESG (environmental, social and governance-based) investing. Working closely with the EU to put forth common standards for ESG ratings and reporting makes sense, though this process has been delayed in the EU. The fact that US bank regulators — the Fed and the OCC — are currently working on separate climate risk standards for the banks they regulate is not efficient. Work together. Regulators should get tough on corporates seeking to exploit climate markets, including by countering “greenwashing” (i.e., the promotion of a company’s green profile in spite of its overall poor climate performance). Regulators should monitor that climate credits and “offsets” (such as planting trees or engaging in other carbon-reduction activities) are not deployed by companies to sidestep mandated emissions cuts. The authorities should require corporates to frontload their “net zero” commitments over the next 5–10 years, instead of just by 2050, as many seek to do. That said, the right balance is key. Engaging with private entities that are genuinely pursuing green innovation — in joint R&D efforts, for example — is sound.
- Join plurilateral UN groups. While COP26 demonstrated the difficulty of getting nearly 200 countries to agree on critical climate initiatives: to phase-out coal, cut methane emissions, end deforestation, decarbonize agriculture, finance negatively-impacted developing countries, etc., the US should join the plurilateral initiatives on these issues that involve subsets of countries. The US should attempt to lead these groups forward. US leadership could help maximize membership in these groups, so that eventually outlier countries might feel compelled to join.
- States and localities. There is always a silver lining: a positive upshot of Trump’s abdication of climate responsibility has been that US states and localities have become more proactive on climate policy. This includes California, Illinois, Massachusetts, New York and New Jersey, among others. They have established cap-and-trade, mandated power plant emissions cuts, and tightened fuel efficiency standards. Even some red states are joining the effort, such as Texas and Indiana, who are big into wind farms. The federal government should review states’ best practices and adopt them nationally when feasible. The Biden administration has done this with its Clean Energy Performance Program (CEPP) that builds on the Obama-era CPP, but is also based on mandatory clean electricity standards deployed in about half of US states, which have pushed the adoption of renewables forward. CEPP lacks mandatory standards — relying instead on subsidies — in order for it to advance through Reconciliation. If the Biden administration can get the Rs to sign off on some states’ best practices, and if this passes both houses (with 60 in the Senate), a good day’s work will have been done.
- Strategic Planning, led by government and partnering with the private sector, is international best practice. Successful countries from Singapore to Germany deploy it for success. It establishes the country’s priorities for sustainable and equitable growth. The US Strategic Plan that I published last year with a co-author called for the formation of a federal interagency climate change committee that would roll out a low-carbon plan. It called for silo-busting within government, in order to take a whole-of-government approach, and between government and the private sector in order to innovate low-carbon economic activities. Biden’s “Climate Czar” John Kerry should head this effort, but should appoint an industry advisory subcommittee headed by a business leader involved in climate innovation. Or maybe Michael Bloomberg. This subcommittee would make recommendations to the government.
Fact is—the US must act… because this climate thing won’t get done worldwide without US leadership. Full stop.
Happy New Year!
Other Sources: The Economist, Oct.-Dec. 2021; Environmental Performance Index (https://epi.yale.edu/epi-results/2020/component/cch), Climate Change Performance Index (https://ccpi.org/download/climate-change-performance-index-2022-2/), https://www.npr.org/2021/11/01/1050999296/biden-will-announce-a-plan-in-glasgow-to-help-poorer-countries-with-climate-chan, IMF (https://www.imf.org/en/Publications/staff-climate-notes/Issues/2021/06/15/Proposal-for-an-International-Carbon-Price-Floor-Among-Large-Emitters-460468 and https://www.imf.org/en/Publications/CR/Issues/2021/07/22/United-States-2021-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-462540 and other Article IV reports), ISDA (https://www.isda.org/2021/12/01/legal-implications-of-voluntary-carbon-credits/), https://bankingjournal.aba.com/2021/12/powell-supports-consistent-guidance-for-managing-climate-risk/, https://corporatefinanceinstitute.com/resources/knowledge/other/greenwashing/, https://www.traverssmith.com/knowledge/knowledge-container/eu-sustainable-finance-regulatory-technical-standards-delayed-again-to-1-january-2023/, https://www.proskauer.com/alert/european-commission-confirms-further-delay-to-the-regulatory-technical-standards-supplementing-the-sfdr, https://www.esginvestor.net/eu-sustainability-reporting-standards-expected-q3-2022/, EU EBA (https://www.eba.europa.eu/regulation-and-policy/transparency-and-pillar-3/joint-rts-esg-disclosure-standards-financial-market-participants#:~:text=These%20Joint%20Committee%20draft%20Regulatory%20Technical%20Standards%20%28RTS%29,financial%20advisers%2C%20as%20well%20as%20regarding%20financial%20products.), https://www.bbc.com/news/science-environment-59744522, https://www.cnn.com/2021/09/12/politics/house-reconciliation-package-explainer/index.html, https://www.bbc.com/news/world-59137828, https://www.eea.europa.eu/highlights/eu-achieves-20-20-20, https://news.climate.columbia.edu/2021/11/22/build-back-better-and-american-climate-leadership/, https://sustainfi.com/articles/carbon/rggi/, https://www.rggi.org/, “Putting a Price on Carbon Emissions, Frederique Carriere, RBC, Dec. 2021, https://www.climateriskreview.com/p/weekly-round-up-november-29-december
