Carbon Tax Best Hope for Bi-Partisan Climate Solution?

Carbon Tax Best Hope for Bi-Partisan Climate Solution?

You may have seen Hank Paulson’s recent op-ed in the New York Times making a case for approaching climate change from a risk management perspective, and touting a tax on carbon dioxide as the most sensible policy to deal with the impending burst of the “climate bubble.” The Risky Business Project, co-chaired by Paulson, Michael Bloomberg, and Tom Steyer, released a report attempting to quantify the economic risks of climate change in the U.S. if we continue on our path of business as usual.

It doesn’t look good.

The report says that by 2050, between $66 billion and $106 billion worth of coastal property will be below sea level, and by 2100 that number could be as high as $507 billion.  By the middle of this century, the U.S. could average up to 50 days a year over 95 degrees, posing serious health risks and a major threat to productivity of outdoor workers.

Jon Schneider (co-managing director of SOFI) and I had an interesting conversation about this report and the carbon tax as an appropriate policy response.

“A tax is a very contentious issue,” Jon says. “An income tax is a very regressive tax, in that you tax something in order to discourage it.” But a tax on carbon dioxide emissions, he says, is akin to a cigarette tax – it discourages the unwanted behavior, and puts the right incentives in place to change that behavior. The carbon tax effectively puts a price on the negative externalities – in this case, pollution – caused by the burning of fossil fuels. It’s only fair, says Jon. “Your gain at the public expense is going to cost you.”

I also spoke with Michael Taylor, founder of the popular blog Bankers Anonymous, who provided a really interesting finance perspective. Michael says a carbon tax is an interesting solution because it addresses what he thinks is one of the main failures of hardcore environmentalists – not taking into account market forces.

“People don’t get that there’s an undeniable weight to market forces as they guide human behavior,” Michael says. “We know that markets are inefficient and people aren’t totally motivated by consumption. But if you assume the opposite, probably you’re going to be totally wrong in the end.”

As a population, we’re not totally controlled by finance, markets, business – whatever the case may be – but we’re not motivated 100% by altruism either. We need a shove in the right direction, either a carrot, or in the case of a carbon tax, a stick, to get us to do the right thing.

So it’s a sensible solution, one that many, many economists agree on as the best course of action. Great. So how are we going to make it actually happen?

The first step is getting voices of reason from both sides of the aisle together to have a facts-based discussion. Paulson joined that discussion very publicly with his op-ed, which Jon sees as a positive thing: “You have to be hopeful when a respected Republican statesman claims climate change ‘is the challenge of our time.’”

I agree. But I wonder how much of a difference Paulson and others can really make in pushing the needle further, given the state of the GOP and politics in general, these days. Eric Cantor was booted in part because he wasn’t seen as conservative enough. Eric Cantor. So is there any room in Congress, in our political and legislative process, for facts-based legislation and leadership?

“When I lived in Manhattan, I was under the impression that a lot of smart people on both sides of the political aisle think there’s a need to address climate change,” Michael says. But then he moved to Texas. “From what I can see here in Texas, people don’t even have a common language to speak to each other.” There’s no common ground and such deeply self-interested political actors, he says, that a conversation about climate change is nearly impossible.

“The Texas Republican party wouldn’t consider Paulson a real Republican. And the Texas Republican party has a lot of weight.”

Jon points out that he’s a born optimist, but his hope here is cautious for the reasons Michael talked about. In the U.S., we simply can’t seem to approach the issue of climate change as if we’re all in it together, so we need to work on a solution. Still, Jon thinks there’s reason to believe we may start moving in the right direction.

“When I look at the history of this country, I look at a history of excess and extremism that gets countered and tempered,” he says. It gets tempered by logic, rationality, compassion. Maybe this is another case where reason will beat ideology?

So who is going to spearhead the push for rational climate change legislation? Who is going to see this as a business opportunity, and embrace a new energy future? The facts-based politicians are going to need some help, because we know the fossil fuel companies won’t be a part of it. A carbon tax threatens their business. Jon and I think it’s really anyone’s guess what industry, or what company, is going to be at the forefront. Anyone with an appetite for risk and access to capital could pave the way.

Jon and I discuss what the new energy future might look like, and he makes what I think is an apt comparison to the computer industry. Where once IBM was just about the only one with access to computational power, now we’ve each got computers in our pockets more powerful than anything they could have imagined in the 50s and 60s. “You can imagine a future with a highly distributed energy system,” Jon says.

But Michael brings up an interesting point, and one that really hasn’t been discussed enough. Who should bear the costs of an expensive transition from fossil fuels to cleaner energy sources? Can we reasonably ask people in the U.S. who can’t even afford to feed their children, to pay more for solar or wind energy, when cheaper coal and natural gas is available? What about in China and India, where billions are in poverty?

Jon’s vision of a distributed energy future may be the answer for billions of people across the globe. But will we be able to provide clean, distributed power to even the poorest, so that one day we are all masters of our own energy production?

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