Paying For Pollution, with Gilbert Metcalf

Notable Quotes

• “With a carbon tax, it gives us time to allow the economy to adjust to the higher price of fossil fuels, and that lowers the overall costs of getting to a zero carbon economy, because transition costs are always expensive, so you want to try to do it smoothly.” (12:00)
• “If you can get a carbon tax in the door, you get the foot in the door. To me, that's 90 percent of the battle. Then you just have to, over time, get the carbon tax up to levels that will help us get to our carbon reduction goals.” (12:22)
• “Winston Churchill said about America that Americans will always do the right thing, after they've tried everything else. And that's kind of where I think we are with carbon policy.” f (24:08)

Top of the Stack

References and recommendations made by Gilbert Metcalf

• The Sixth Extinction: An Unnatural History by Elizabeth Kolbert
• Amity and Prosperity: One Family and the Fracturing of America by Eliza Griswold
• Paying for Pollution: Why a Carbon Tax is Good for America by Gilbert Metcalf

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. This week, we talk with Gilbert Metcalf, the John DiBiaggio Professor of Citizenship and Public Service, a Professor of Economics, and Graduate Program Director at Tufts University's Department of Economics.

I'll talk to Gib about his new book, Paying for Pollution: Why a Carbon Tax is Good for America. We'll learn why he thinks that a carbon tax is the smartest way to deal with the problem of climate change, and why it's preferable to other policy approaches. We'll also talk about some common critiques of carbon pricing, including concerns that these policies can be particularly harmful to low-income populations. Stay with us.

Gilbert Metcalf, thank you so much for joining us today on Resources Radio.

Gilbert Metcalf: It's a pleasure to be here.

Daniel Raimi: So Gib, we're going to talk today about your new book, Paying for Pollution: Why a Carbon Tax is Good for America. But before we do that, we always like to learn a little bit about the background of our guests on the show, so could you tell us a little bit about how you got interested in pursuing research on energy and the environment?

Gilbert Metcalf: Even before I went to graduate school, I was doing energy-related policy work. I actually was doing anti-nuclear work back in the 1970s, around the construction of the Seabrook Nuclear Power Plant. I went and got a master's in environmental and resource economics at the University of Massachusetts in Amherst, which has a very nice program, and that's where I really realized that I wanted to approach policy questions like nuclear power, from the framework of economics.

And so, when I went to Harvard and I studied public finance under Marty Goldstein, I really began to sort of meld my tax interest with my energy interests in a lot of the papers I did after that. And that work eventually morphed into my current work on climate policy.

Daniel Raimi: Great. Are you still out there protesting the construction of nuclear power plants? Did you go to Georgia and get down there with the Vogtle Plant?

Gilbert Metcalf: Well it's actually funny. Obviously, once you start to think about climate change, you realize that we have to rethink our views on nuclear power. And of course like many others who were involved in anti-nuclear activities in the 1970s, I've done that. I still feel that [with] nuclear power we've got real issues around safety, and nuclear proliferation, and cost—but I think you just can't take it off the table as a possible policy solution.

It's very funny, because I teach a class in energy economics at Tufts, and I once took my class up to the Seabrook Nuclear Power Plant. We got a tour, and we had a sit down with one of their environmental education officers, and he's talking about the history of the project, and he says “oh yes, and the Clamshell Alliance was protesting. And I bet,” he says, “I bet your professor was out front on the picket line holding a sign up, protesting the plant.”

And I said, “Well, in fact I was arrested at Seabrook during the Clamshell Alliance occupation, and spent two weeks in the New Hampshire Armory.” You should've seen the looks on my students' faces.

Daniel Raimi: Wow, that's great. What a story, fantastic. So that's definitely the subject of another podcast that we'll have to have you back on [for] in the future, but let's get into this book, Paying for Pollution. As you mentioned, you've published extensively on energy and environmental topics in academic journals, and technical books, and lots of great work on all sorts of topics, but particularly tax policy is certainly what I have known you best for. But, Paying for Pollution (the new book)—it doesn't use technical language, and there aren't equations strewn throughout the book. It's really easy to understand for a nonexpert, I was able to read it last week, and I really enjoyed it. So, why did you want to write this book, and who is your intended audience?

Gilbert Metcalf: I think there's a lot of good technical writing on the problem of climate change, and what the possible solutions are. Just as one example, the recent book by Larry Goulder and Marc Hafstead from RFF, is a terrific book on the technical details of climate modeling. But I wanted to reach a general audience that worries about climate change but doesn't necessarily have a science or economics background.

In fact, I had a reader in my mind as I was writing the book. It was a Capitol Hill staffer, maybe he or she was an English major in college, but no background in economics or science, and their boss comes in the room and says, you know, a Senator or a Congressman says:,What do I need to know about climate change and carbon taxes? And the staffer could just pull my book off the shelf and have everything they needed right there.

Daniel Raimi: Yeah. That makes sense, and I think there definitely is a big audience out there for this book, and I hope our listeners will pick it up after being piqued by this conversation. So let's get into some of the topics that you cover in the book. The subtitle is “Why a Carbon Tax is Good for America”, and it might surprise some listeners to hear an economist say that a tax could be good, but you spend a full chapter describing how a price on pollution, like a carbon tax, can make society better off. Can you give us a little overview on why economists tend to like carbon taxes?

Gilbert Metcalf: Carbon taxes are a simple, elegant solution that goes back, gosh, a hundred years to when Pigou (the British economist) came up with the idea. And what's particularly appealing is that it has tremendous bang for the buck. In other words, if we want to reduce pollution by, whatever your goal is—20 percent reduction, 50 percent , 80 percent—you can do it at much lower cost using a carbon tax than regulations or subsidies for clean energy or any of the other possible options that are out there.

So it's cost-effective, in the jargon of economics. It's also simple to administer because, at least in the United States, you can piggyback on existing fuel excise taxes. On most of our carbon fossil fuels, we have existing excise taxes, so it's easy for Treasury to run this thing. And from the perspective of a business, electric utility, or energy-intensive manufacturer, it is an easy tax to comply with. They may not like paying the tax but it's easy to comply with in the sense that they're already paying excise taxes on fuels, and they're used to paying taxes. So we have a whole structure in place for that.

Daniel Raimi: Right.

Gilbert Metcalf: So, that's a lot of the benefit. The last thing I'll just mention, is that when we say that a carbon tax is good for America, what we're really saying is that if we're going to tackle climate change, we can do it with a tax that will raise revenue that we can use in productive ways, either to help address efficiency concerns, or equity concerns, in a way that you can't do with regulation, and that's why I say it's good for America.

Daniel Raimi: Yeah, and we're gonna come to some of those equity concerns and efficiency issues as we continue our conversation. One substantial part of the book is looking at alternative policies, some of which you've already mentioned. Subsidies for renewable energy, or carbon capture and sequestration regulation on vehicles or power plants, energy efficiency standards. Can you talk a little more about why, in your view, a carbon tax is preferable to those types of existing policies?

Gilbert Metcalf: Sure, so we could sort of go through them but let me just give a couple of examples. I mean, this is a topic of one whole chapter, chapter four in my book. If we look at subsidies, one of the problems with subsidies is that they're wasteful. You're giving money to people to do things that they may already be planning to do, so that's a problem. They can also be regressive, in the sense that with subsidies that technically happen though the tax code, most of these benefits go to higher-income households because these are the people who are paying taxes.

Gilbert Metcalf: So, subsidies aren't a great approach. Regulations can have unintended consequences. For example, I talk about the sport utility vehicle [SUV] loophole, the SUV loophole that's in CAFE, the [corporate average] fuel economy standards. I talk about this in the book, where that whole loophole came about because of the fact that, at the time when CAFE was first put in place, SUVs were really not a big deal in the marketplace. And this loophole was put in place to protect one factory in Detroit, and so that loophole was put in place, and Congress thought “eh, it won't have any real impact on the market,” and all of a sudden the demand for SUVs exploded as the baby boomers began to buy cars.

So, again, unintended consequences is always a problem. You've got information and voluntary programs. They're certainly helpful, but they're not up to the task of really making significant reductions in emissions, so that's why I end up saying that the tax is the best way to go.

Daniel Raimi: Right, because the tax could cover the broader base of activities that we're interested in, and if designed appropriately would avoid some of these loopholes that might appear in other policies.

Gilbert Metcalf: Exactly.

Daniel Raimi: One prominent focus of environmental advocates over the last several years in particular has been—instead of focusing on a carbon tax or some other type of carbon pricing mechanism, many groups have focused more on an approach that's called “keep it in the ground,” which essentially tries to constrain the production of fossil fuels wherever possible. What are some of the merits of that approach, or problems with that approach, relative to a carbon tax?

Gilbert Metcalf: I think in principle, it's a great idea because that's ultimately what we need to do. We need to keep fossil fuels in the ground, unless we can come up with cost-effective, affordable carbon capture and sequestration [CCS] approaches, and we don't have those at present. So if we ignore that, if we ignore CCS, then keeping it in the ground sounds great. The problem as I see it, is that I would call it a disorderly solution, in the sense that it's really difficult for businesses to do long-range planning when they're looking at a campaign to keep fossil fuels in the ground.

Here's what I mean, if we look at the Keystone XL Pipeline, this is really one effort to try to strand some of the Canadian fossil fuels, not make them available to market.

Daniel Raimi: Right, the oil sands in Alberta in particular.

Gilbert Metcalf: Exactly. So this is a disorderly solution in the sense that, there's a lot of political uncertainty. Will it get built? Maybe it will, maybe it won't. We've already seen a number of reversals with political winds and political administrations.So how do you plan as an energy-intensive industry trying to think about what the cost of fossil fuels is going to be in the future?

The other issue I see, is that the keep-it-in-the-ground approach is going to bring out the owners of these fossil fuel assets who are going to put up a fierce fight, and this is just going to contribute even more to the political uncertainty as to whether that approach is effective or not.

In contrast, if you think about a carbon tax, you can do it more gradually, as opposed to this sort of on-off, we either keep them in the ground or we don't. With a carbon tax, it gives us time to allow the economy to adjust to the higher price of fossil fuels, and that lowers the overall costs of getting to a zero carbon economy, because transition costs are always expensive, so you want to try to do it smoothly.

And it also gives us some time to address the political opposition. If you can get a carbon tax in the door, you get the foot in the door, and then, to me, that's 90 percent of the battle. Then you just have to, over time, get the carbon tax up to levels that will help us get to our carbon reduction goals.

Daniel Raimi: Right.

Gilbert Metcalf: Now, having said that, we're going to need other policies. Just to be clear, we need a lot of R&D [research and development]. We need other things as well, but I think a policy of just saying we're going to keep the stuff in the ground is, I suspect, not going to be successful.

Daniel Raimi: One of the points you raised with the keep-it-in-the-ground approach is the difficulty in planning for the businesses that may or may not be affected by the construction of a particular pipeline or the development of a particular resource—and that that volatility can be a challenge. One of the other points you make in the book is associated with an alternative approach to pricing carbon dioxide and other greenhouse gases, the so called cap-and-trade approach.

And you talk quite a bit about volatility in carbon markets in existing cap-and-trade programs. That was one of the difficulties with cap and trade as you laid it out in the book—can you talk a little more about that, and some other issues with cap and trade, relative to carbon taxes, and how you see the trade-offs between those two approaches?

Gilbert Metcalf: Sure. Just to start, I want to be clear that a cap-and-trade program—like a carbon tax—is a market-based mechanism (in the jargon of economics). It's a way to put a price on pollution. And either of these approaches are far superior to some of the alternatives we just talked about. I would much prefer cap and trade to subsidies or regulation, but if we can get a carbon tax, I think it does have some benefits relative to cap and trade. I talk about price volatility under cap-and-trade systems in the book—that's problematic from the point of view of businesses who are trying to make long-lived investments in inexpensive energy technologies. We've seen that in the acid rain program, and we've seen that in the EU's emissions trading system [ETS], so that's an issue.

The administrative complexity of running what is essentially a financial derivative program and running it through environmental agencies gives me some pause. And the example in the EU ETS, in the early years of the program, where there was some cyber theft in the Czech Republic and some other areas of Europe, where allowances were being stolen electronically—that's a real issue that you have to grapple with.

But I think the biggest issue is the fact that you have these adverse policy interactions. And what I mean by that is, one thing we know about politicians is they like to do stuff. So if we look at California, they have a cap-and-trade program. Well, they also have a renewable portfolio standard, and they have low-carbon fuel standards. And the problem with cap and trade is, if you layer these other policies in place, you might think “Oh gosh, this is great because ... we're really tackling this problem.” But the problem with these other approaches—all they'll do is lower the allowance prices without leading to any additional emissions reductions because the cap is the cap.

So if you're trying to incentivize firms to come up with new technologies, new inventions, induced innovation, that low price because of these complementary policies is a real problem with cap and trade. And you don't have that with a carbon tax.

Daniel Raimi: Right. You also talk in the book about how in a number of programs, there are these price floors and price ceilings—sometimes called price collars—and when those come into effect in cap-and-trade programs, basically the allowance price can't go above a certain amount and it can't go below a certain amount. And so the cap ends up turning into more of a carbon tax policy than a cap-and-trade policy, and we see these hybrid approaches in places like California and with the Regional Greenhouse Gas Initiative in the northeastern United States.

Gilbert Metcalf: Well that's right. Dallas Burtraw at RFF has a very nice paper right now about cap-and-trade programs, and what he's pointing out is that, because of a lot of these complementary programs, cap-and-trade programs, typically the prices are bouncing around at the floor level. And so, as you say, the cap-and-trade program is acting like a carbon tax without the benefit of the carbon tax, in the sense that we're not getting a high enough price to really get the kind of responses that we would like to get in terms of reduced emissions.

Daniel Raimi: Right. And then, just briefly on the complexity topic: the first job I had after grad school, I got hired by Richard Newell and Billy Pizer at Duke, and we were working on a paper on cap-and-trade programs. I spent probably the first year of my professional life trying to understand how the EU ETS worked, and it was quite the undertaking. I'm still pretty sure I don't understand about half of it but, yeah, those programs can get really complicated and the administration issue I'm sure is pretty substantial.

Gilbert Metcalf: I think so.

Daniel Raimi: So let's turn to one of the most common critiques of greenhouse gas pricing and carbon taxes in particular, which is the notion of regressivity. A central argument for many who oppose these programs is that, they argue that the policy will be regressive—that it's disproportionately harmful to low-income or other sensitive populations. What's your take on that critique?

Gilbert Metcalf: In terms of low-income populations, I think the issue is overstated—if not simply wrong. There's a lot of good research that's come out in the last few years that shows that even if you ignore the use of revenue, carbon taxes can be progressive. So you've got work by the Department of Treasury: the Office of Tax Analysis did a distributional analysis of carbon taxes in a paper they wrote, looking at a methodology for enacting a carbon tax. You've got work by Larry Goulder and Marc Hafstead that I mentioned before. And what this research shows is that people typically focus on the fact that energy expenditures are a larger share of the income of lower-income households than of higher-income households, and that's where that view that carbon taxes are regressive comes from.

Daniel Raimi: Right.

Gilbert Metcalf: But the reality is that carbon taxes are also going to affect factor incomes. Payments to workers, wages, and payments to owners of capital interest and dividends and so forth. And what the research shows is that impact of how a carbon tax affects the sources of income (your wages or capital income and so forth), that actually is hitting higher-income households through hits on capital income more than it's hitting lower-income households, who rely more on wage income.

And the other factor that makes carbon taxes potentially progressive is that most transfer payments that households receive in transfer payments—whether it be Social Security or other kinds of benefits—these are received by lower-income households disproportionately. And these transfers are either explicitly or implicitly indexed against inflation. So to the extent that prices do go up under a carbon tax, anyone who's receiving Social Security or other transfer payments is going to be insulated against those cost increases.

So we haven't even talked about how we use the revenue when I was talking about the fact that a carbon tax could be progressive. And one thing I've been harping on all the way back to 1999 when I wrote my first paper on this topic, I want to emphasize that we're doing a carbon tax reform, not a carbon tax. And the point here is that we're going to collect a lot of revenue, a hundred billion dollars a year or more, potentially, depending on the tax rate. And you can use that revenue in ways that enhance the progressivity of the reform even more.

So if you look at the Climate Leadership Council's proposal, to give household dividends to everyone in America, that would be extremely progressive. But even if you didn't do that, you could do reductions in taxes on wages or other things that would, if not be progressive, at least be distributionally neutral. So really it becomes a lever that policymakers can tweak to get whatever level of progressivity they want.

Daniel Raimi: Yeah, that makes sense. So, separate from the progressivity or regressivity of a carbon tax is a concern that some policymakers have expressed: that a carbon tax or any type of substantial carbon pricing policy would be really harmful to the US economy. You overview some examples of jurisdictions internationally that do have substantial carbon prices, and what do you find about the broader economic impacts of those types of policies?

Gilbert Metcalf: All the evidence shows that—whether we look at Sweden's carbon tax, which is on the order of $135 a ton right now, or the British Columbia carbon tax, which is in the $30 range currently—they have not wrecked the economy. Now, you could argue that economic growth hasn't gone up but you can't find really any evidence that it's gone down. The biggest impacts you find are in the composition of the workforce. It's true that carbon-intensive industries are going to hire fewer workers; so, coal miners, those jobs are going to go away with a serious carbon tax. That's 50,000 jobs in the United States currently.

But on the other hand, you've got a lot of green jobs that will be incentivized by a carbon tax—in solar installation [and] wind farm production manufacture. And the Department of Energy employment reports that they put out in 2015 and 2017 (I think the years were) show that you got hundreds of thousands of jobs that have been created. So you do get a change in the composition of the workforce but, in terms of overall impacts, it's not a big deal.

Daniel Raimi: Right. Okay, so we've touched a little bit on some of the merits, some of the critiques of carbon taxes—let's turn now to the politics of it and the prospects for a policy like this being implemented in the United States. What do you think about the likelihood of any type of meaningful carbon tax being implemented at the federal level anytime soon? And you also mentioned earlier that once the foot was in the door with the carbon tax, then it could be raised further in the future. So, can you talk a little about what gives you confidence that once a tax like this is in place, it could be increased over time to deal with the problem as it evolved?

Gilbert Metcalf: I've learned never to predict when something will happen, but what comes to my mind when I'm asked that question is the statement by Winston Churchill in the run-up to World War II. Winston Churchill said about America—that Americans will always do the right thing, after they've tried everything else. And that's kind of where I think we are with carbon policy. We've done lots of tax credits and other subsidies. We've done lots of regulation, we've done lots of information programs. The one thing we haven't done is to put a price on carbon, and I think we're seeing a greater interest. We're seeing more Republicans that are actually in Congress talking about it, so I think it's just a matter of time.

But the most recent National Assessment Report really brought home, starkly, how important it is for us to come up with federal policy on this. And the carbon tax is just the best way to do it.

Daniel Raimi: Right. And that's volume two of the most recent National Climate Assessment I think you're referring to.

Gilbert Metcalf: Yes.

Daniel Raimi: How about the idea that once the foot is in the door, that raising the price over time would be something that you would have some hope for?

Gilbert Metcalf: I think the one thing about a tax is that you have a constituency to support the tax, which is whoever is getting the revenue from that tax. And the Joint Committee on Taxation is always very careful to protect revenue sources as they're thinking about new policies, so I think right there, that's a built-in constituency. This is one area where I think economists have not thought about this carefully enough, in the following sense. So Ted Halstead, who leads up the Climate Leadership Council, is arguing for a carbon tax with revenues returned to households. Part of the appeal is that it's revenue neutral, so opponents of big government don't tangle up the question of how big government should be with the question of climate policy—that's appealing.

But more than that, Halstead makes the argument that the only way we're going to get to carbon tax rates that are high enough to really make a difference is if households are getting this money back and can see a direct link to the carbon tax. And I think there's a lot of merit to that argument. You build a pretty strong constituency to support increasing the carbon tax rate if you know that's going to lead to a 10 percent increase (or whatever) in the dividend check that you're getting on a quarterly basis.

Daniel Raimi: Right.

Gilbert Metcalf: Economists have long been focused on this double dividend hypothesis, the idea that you can use a carbon tax to reduce other distorting taxes, which has real efficiency benefits. But I think where economists have not really thought sufficiently deeply is that while efficiency is certainly a good thing, there's a lot to be said for equity—particularly after the most recent tax reform with the cuts in corporate income tax rates. And, also, in political feasibility. I think the reform is going to have to [...] whatever will make a carbon tax actually possible in this country, it will depend a lot on how we use the revenue. And the dividend approach may end up being the approach—I'm not saying it will be—but it could be the approach that helps us forge a coalition that could actually get this thing enacted.

Daniel Raimi: Yeah. That's really interesting—makes me think of another recent book that I read by Barry Rabe from the University of Michigan, called Can We Price Carbon?, which focuses on some of the political and constituency challenges of implementing policies like these over time.

Gilbert Metcalf: Right.

Daniel Raimi: So, we've really just scratched the surface on so many of these topics, and I want to recommend to listeners that they check out the book, which is called Paying for Pollution: Why a Carbon Tax is Good for America, by Gib Metcalf. Let's close out this episode the way we close out all of our episodes, which is to ask our guests what you have read, or watched, or heard recently, related to energy and the environment, that you think is really interesting and that you'd recommend to our listeners. We call this the Top of the Stack. So, Gib, what's at the top of your stack?

Gilbert Metcalf: Well two books that I recently finished that I thoroughly enjoyed, that I would recommend, one is actually not a new book. It's a book that came out about four years ago by Elizabeth Kolbert, called The Sixth Extinction, which I just found impressive—both for the content in terms of putting our current impacts on species extinction in perspective but also just as a great example of how good technical writing can be done to be accessible to readers, and that was certainly a model to me.

Daniel Raimi: Yeah, she's a great writer.

Gilbert Metcalf: The other book that gave me lots of food for thought is a book called Amity and Prosperity: One Family and the Fracturing of America. What it really highlighted for me was the importance of state regulatory policy in energy development, and I think this is something that energy researchers don't think hard enough about. We think about national policy, we think about taxes; we don't think about the monitoring and the oversight that is crucial for environmental well-being.

Daniel Raimi: Yeah. So that book is Amity and Prosperity, by Eliza Griswold, who also writes for The New Yorker. As someone who's worked on the topic of shale development quite a bit, I completely agree that the issue of regulatory enforcement—the attention that we pay to it and even how we measure it—is woefully understudied and definitely deserves more attention.

So, two great recommendations. Thank you so much for that, and for coming on Resources Radio and telling us about your new book, Paying for Pollution. Gib Metcalf, thank you so much.

Gilbert Metcalf: Well thank you, Daniel, it's been a pleasure talking with you.

Daniel Raimi: Thank you so much for joining us on Resources Radio. We'd love to hear what you think, so please rate us on iTunes or leave us a review—it helps us spread the word. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent, nonprofit research institution in Washington, DC. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org.

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