June 10, 2015

Sen. Whitehouse Unveils Proposed Carbon Fee Bill at American Enterprise Institute

As Prepared for Delivery at the American Enterprise Institute

Thank you Arthur [Brooks] and thanks to the American Enterprise Institute for hosting this event.  I am excited to introduce today the American Opportunity Carbon Fee Act of 2015, and I look forward to a productive discussion of its merits.  Thanks also to Jerry Taylor and Benjamin Zycher for participating in the conversation that will follow my remarks and for offering your input on my bill.  And thank you to Senator Brian Schatz of Hawaii, my lead cosponsor of this bill, who will be here to speak a little later.  

I’ll start by saying the obvious: climate change is real.  It is virtually universal in peer-reviewed science that carbon pollution from burning fossil fuels is causing unprecedented climate and oceanic changes.  Every major scientific society in our country has said so.  Our brightest scientists at NOAA and NASA are unequivocal.  The fundamental science of climate change is indeed settled.

Americans in poll after poll understand climate change is real, know humans are the cause, and want their government do something about it. 

Climate change, of course is not our only national challenge.  The federal tax code, for example, is a mess, with one of the highest corporate rates in the developed world, while some businesses take advantage of loopholes to pay much less or nothing at all.     

We have an economic recovery that has left too many Americans behind and a job market that has still not fully rebounded.   

Well, what if our answer to climate change helped address those concerns?  And what if that approach was firmly grounded in core conservative economic principles—values like property rights, market efficiency, and personal liberty?

AEI’s Aparna Mathur conducted an analysis with a colleague from the Brookings Institution showing that a carbon fee could reduce emissions, shore up the fiscal outlook, and play an important role in broader tax reform.  Kevin Hassett, who will be moderating the discussion of my bill, along with Steven Hayward and Kenneth Greene, has pointed out that a carbon fee could obviate some environmental regulations.  

The idea is simple.  You levy a price on a thing you don’t want—carbon pollution—and you use the revenue to help with things you do want.

Whether you call them “neighborhood effects” or “negative externalities,” the effects of carbon pollution harm all of us.  Conservative economist Milton Friedman wrote that the government exists in part to reduce such harms.

When the costs of such externalities don’t get factored into the price of a product, conservative economic doctrine classifies that as a subsidy—a market failure.  For fossil fuel producers, that subsidy is huge, giving them immense artificial advantage over cleaner energy sources. 

A carbon fee can repair that market failure by incorporating unpriced damage into the costs of fossil fuels. Then the free market—not industry, not government—can drive the best energy mix is for the country, with everyone competing on level ground.

That’s how Nixon Treasury Secretary and Reagan Secretary of State George Shultz sees it.  He and the late Nobel laureate Gary S. Becker made the case for a carbon fee in the Wall Street Journal:  “Americans like to compete on a level playing field,” they wrote.  “All the players should have an equal opportunity to win based on their competitive merits, not on some artificial imbalance that gives someone or some group a special advantage.”

Just last week, the CEOs of Europe’s major oil companies called on governments to institute national prices on carbon.

This could be a big economic win.  George W. Bush’s Treasury Secretary Hank Paulson said, “A tax on carbon emissions will unleash a wave of innovation to develop technologies, lower the costs of clean energy, and create jobs as we and other nations develop new energy products and infrastructure.”

It is in that spirit that I introduce the American Opportunity Carbon Fee Act;  a framework I hope both Republicans and Democrats can embrace.

The bill would establish an economy-wide fee on carbon dioxide and other greenhouse gas emissions.  The fee would be assessed upstream, where it’s easiest to administer, minimizing the universe of taxpayers and the compliance burden:  at the coal mine, at the natural gas processing station, and at the petroleum refinery. 

Other sources of greenhouse gas emissions would be charged at existing reporting requirements at a rate tied to the carbon-dioxide equivalency of each gas. Fluorocarbons, which are used for refrigeration and industrial purposes, would be assessed at a special rate that accounts for their high greenhouse potency.  Sequestering or encapsulating carbon dioxide earns you a credit.  

My bill sets the fee per ton of carbon at $45 in 2016—the central range of the social cost of carbon as estimated by OMB—and would increase it each year at a real 2 percent.  When emissions fall 80 percent below 2005 levels, the annual adjustment would fall to inflation.

Border adjustments for the trade of energy-intensive goods include tariffs on such goods imported from countries with weaker or no carbon pricing, and rebates for U.S. exporters of energy intensive goods.  We took care to design the border adjustments to achieve harmony with World Trade Organization rules.      

According to the nonpartisan group Resources For the Future, this carbon fee proposal would reduce U.S. CO2 emissions by more than 40 percent by 2025. 

In addition to the environmental benefits, this carbon fee would generate over $2 trillion in revenue over ten years.  It is intended to return every dime to the American people.  Here’s how:

First, the bill lowers the top marginal corporate income tax rate from 35 percent to 29 percent. This would cut corporate taxes by almost $600 billion over the first decade.

Second, it provides workers with a $500 refundable tax credit—or $1000 for couples—to offset the first $500 paid each year in Social Security payroll taxes.  The credit would grow with inflation.  The tax credits would return over $750 billion to American households over the first ten years.

Third, it would give benefits to Social Security recipients, veterans’ program beneficiaries, and certain other groups of retirees at the same level as the tax credit.  These benefits would total more than $400 billion over ten years.

Finally, the bill would establish a block grant for states, totaling $20 billion in 2016 and growing with inflation, to help with low-income needs, rural households, and transitioning workers.  West Virginia, for example, could use money to train coal workers for the technology jobs of the future.  Rhode Island, on the other hand, might choose to make homes more energy efficient.  And we have a reporting mechanism for the public to track where the money is going, to assure it’s all going back to the American people.

The entire bill is 37 pages long.  Short, simple, straightforward.

It would cut back on the pollution that threatens dramatic changes to our home planet.  It would cut taxes.  It would end a market distortion.  It would start a wave of investment and innovation.

With this bill I extend an open hand to conservatives everywhere.  Whether you want to pursue tax reform, support the free market for energy, or—as Lindsey Graham suggested this week—honestly address the effects of climate change, let’s get to work.

I am grateful to AEI for hosting the launch of this hopeful endeavor.  I hope it is a consequential moment.

I am happy to take your questions.