A bipartisan pathway for pricing carbon in 2025
Photo by Kaique Rocha
Citizens Climate Lobby has been advocating a price on carbon since 2013. While carbon pricing legislation has been introduced in every Congress since 2018 and has been sponsored by up to 95 Representatives, precious few Republican Members of Congress have supported it. Although it came close to passing in 2022 via budget reconciliation — 49 of the 50 Democratic Senators publicly expressed support for a price on carbon and Democrats controlled the Presidency and the House of Representatives — it fell short.
Still, there are good reasons to think that a national price on carbon can be passed by Congress in 2025.
Why should we expect a carbon price in 2025? That’s when most tax cuts in the Tax Cuts and Jobs Act expire. That legislation was passed by Republicans using budget reconciliation in 2017; and since Republicans passed it, we can expect them to want to extend the tax cuts beyond 2025.
How can the extension of the tax cuts — lower income tax rates, a doubled standard deduction and personal exemption, and a doubled child tax credit — be used to advance a carbon price? You might have noticed that the federal debt has grown so large that it is becoming impossible to ignore, especially since the rise in interest rates has made servicing the federal debt a much larger portion of federal expenditures. The annual federal deficit could be reduced by simply letting those beloved tax cuts expire. But another option is to extend the tax cuts while simultaneously raising revenue by increasing the price on carbon. Such a tax swap plays well with the appealing notion of taxing the bad (pollution) rather than the good (income).
Another driver of a carbon tax is the prospect of tariffs on U.S. exports to Europe because of the European Union Carbon Border Adjustment Mechanism (CBAM), which puts tariffs on carbon-intensive imports starting in 2026. If the U.S. has a price on carbon, it can avoid tariffs on its exports to Europe and it can apply a CBAM to imports from China (or from any other nation without a price on carbon). Republican Members of Congress have proposed legislation establishing a U.S. CBAM. Since the U.S. is a major importer of goods, its CBAM could drive other nations to also price carbon.
Even if Democrats fail to keep the Senate or take the House in November, there is an opportunity to pass bipartisan tax/climate legislation in 2025 like an extension of the 2017 tax cuts, the introduction of an increasing price on the carbon content of fossil fuels, and a U.S. CBAM.
However, we know that a straight carbon tax hurts the poor most, because they spend a larger fraction of their income on energy and are least able to reduce their use of fossil fuels. That’s why Citizens Climate Lobby has always called for returning all net revenue to the economy in equal shares to everyone. If that is done, 99% of the lowest family income quintile will either break even or get more from their carbon dividend than they pay in carbon fees. But we can’t do that if a carbon tax is to generate net revenue. To both generate revenue and protect consumers, a large fraction — say 50% — of the revenue could be distributed to the people in equal shares.
Why would such legislation pass? Because everyone gets what they want. Republicans get the extension of their tax cuts (which Democrats should also appreciate because, as I noted in the February 2024 issue of Tumbleweird, those tax cuts decreased the share of taxes paid by the lowest 50% of household incomes) and a justification for tariffs on imports from China. Democrats get the carbon tax that drives down emissions more effectively than the Inflation Reduction Act. Everyone appreciates carbon dividends and a reduction in the federal deficit.
Yes, many people would object to paying higher prices for gasoline, but they can use their carbon dividend to either pay more for fuel or to purchase an electric or more fuel-efficient vehicle.
For more on the feasibility of this scenario, I recommend watching the recent discussion hosted by Center for Climate and Energy from a mix of conservative and progressive economists.
Climate scientist Steve Ghan leads the Tri-Cities Chapter of Citizens Climate Lobby.