Three Options for Better Climate Policy

Thanks to a 2007 Supreme Court ruling that greenhouse gases are air pollutants under the Clean Air Act, the Environmental Protection Agency has to do something to control them. But the act is ill-suited to controlling a non-toxic global pollutant. The law requires the EPA to set separate emissions guidelines for each category of existing stationary pollution sources—one for power plants, another for oil refineries and so on—and then each state is supposed to write a compliance plan for every category. This fractured process is likely to lead to large differences in the marginal cost of emissions abatement among states and across industries, which makes no economic sense.

Luckily, there is a better way. In fact, there are three:

One would be a national carbon tax, which could be part of a broader pro-growth, deficit-reduction package. Such a tax is politically impossible for now, but it’s still smart policy, as Aparna Mathur of the American Enterprise Institute and I explain in a new paper. A federal excise tax on carbon would equalize incentives to reduce emissions across all sources and greenhouse gases and provide revenue that can lower the deficit and reduce other tax burdens. It could also substitute for more costly and less effective regulations and subsidies. Policymakers can also target some of the revenue to ensure poor households are not made worse off.

Another alternative that’s getting attention in Congress: Offer states the option of enacting their own sensible carbon tax to avoid the convoluted regulations that otherwise would be required by the Clean Air Act. Legislation drafted by Rep. John Delaney (D., Md.) would offer states just such a powerful choice. The bill would allow any state to sidestep EPA emissions standards, as long as the state adopts a tax on the regulated emissions that starts no lower than $20 per ton of CO₂ and increases at least 4 percent over inflation each year. States can do whatever they want with the revenue, including lowering other state taxes.

Or, the EPA and the states could muddle through under existing law. Stanford scholars and I analyzed how the EPA could allow states to adopt a carbon tax as their Clean Air Act compliance plan if they could show it would satisfactorily reduce emissions. A survey of 40 prominent economists last year found that 90% agree that a carbon tax is the “best system of emission reduction.” The question is: Will the EPA?