On the Political Economy of Climate Legislation

Rolled out in February and sponsored by Rep. Alexandria Ocasio-Cortez (D-NY) and Sen. Ed Markey (D-MA), the Green New Deal is both ambitious in its scale and aspiration. It is viewed by its proponents as a rough draft of sorts, and nonetheless has been hailed from the left as a strong first-step towards climate justice. On the right, it has predictably been vilified as “unserious and juvenile”. There’s no need to further discuss the lack of any conservative urgency over climate change or failure to engage in any meaningful climate policy rebuttals (Fox News has gotten plenty of play on this legislation as a prop for its socialist boogeyman).

Yes, we can acknowledge that this plan is not fully fleshed out. Yet, even with all its flaws, the Green New Deal’s yearning to address the existential threat of climate change is commendable. Its core components include aims to completely transition to renewable energy within a decade, promote innovation in green technology, and upgrade public infrastructure to maximize energy efficiency. For a myriad of political and economic viability reasons, it is unlikely to become law anytime soon, especially in its current, rudimentary form. For starters, many experts have refuted the ability of America to obtain 100% of its energy needs with clean energy by 2030 (economist Robert Pollin posits this would likely not happen until 2050, at the earliest). This nuance will have to be ironed out in the years to come.

But what makes the Green New Deal proposal particularly interesting is how it contrasts with consensus economic wisdom. In economics, climate change is a textbook example of a market failure. The current makeup of incentives pushes rational actors to make decisions that adversely affect society in aggregate. Put simply, energy prices do not factor in the social costs imposed on people and the environment by greenhouse gas emissions. This is a glaringly significant negative externality that we have failed to address for decades.

The straightforward way to combat this is to alter those incentives. And that’s where the concept of a carbon tax enters the picture.

A carbon tax would ideally enter the social costs of climate change into the consumer equation, thus spurring individuals and companies to make decisions with these costs as part of the calculus. It is viewed as the most cost-effective way to reduce our carbon footprint.

But when taking a step back and looking at the political economy, a carbon tax begins to get tricky. Fossil-fuel producing industries would certainly feel the burden of a carbon tax, but so would low and middle-income households. While it is possible to concentrate the burden of a carbon tax on large industry producers; in turn, they would likely pass on the cost to consumers. It doesn’t help that corporations and the wealthy have mastered the art of avoiding taxes in the face of tax administration cuts and successful lobbying to maintain tax costs that disproportionately affect lower classes.

From the Tax Policy Center:

Because low-income households consume a more energy-intensive basket of goods than wealthier households do, a carbon tax would be regressive; it would cost poorer households a higher share of their income than wealthier households (Marron, Toder, and Austin 2015). A carbon tax of $20 per ton would account for about 0.8 percent of pretax income for households in the lowest income quintile, as compared to 0.5 percent for the highest income quintile.

So, while a carbon tax may prove effective, its distributional impacts make it rather unpalatable on a political level. This was borne out recently in France, where the “Yellow Vest” protests over Emmanuel Macron’s fuel tax have engulfed French society and demonstrated the forceful popular headwinds of a poorly implemented carbon tax.

The French example shows that any policy to address climate change that imposes costs on the people (as they would all do) necessitates complementary policies to ease the economic burden of the lower and middle classes. Undoubtedly, sacrifices will have to be made by all, but those who can afford it least should be spared to the greatest extent possible. Thus, policies to address climate change will also necessitate remedies to income inequality.

In this light, the Green New Deal seems somewhat pragmatic from the perspective of the political economy. Given its sizable scope, this would seem nonsensical on its face. It would require massive amounts of public investment (hence its namesake), but those investments would flow to sectors with high long-run rates of return, promoting a more sustainably prosperous economy. As Robert Hockett writes, investments in climate change mitigation yield grand economies of scale via technological innovation and upgrading America’s degraded infrastructure, among other things. On a fiscal level, the Green New Deal is effectively an economic stimulus package.

Politically, the scale of the Green New Deal invites active participation from millions of citizens, including many who have been perceived as “left behind” by a rapidly globalizing economy. Globalization has been, and will continue to be, a large aggregate boost to global economic conditions, but it has simultaneously produced a litany of “losers” and exacerbated income inequality. Large scale social programs such as this have the potential to remediate that, and redistribute the benefits of globalization to those lower on the income scale. Addressing climate change should and will require the active participation of the masses, and accordingly, we will all be able to reap in the benefits of averting disaster.

What the critics of a Green New Deal fail to see when assessing its flaws, is that it is not meant to be static. It ought to be a fluid series of legislation that adapts to successfully address our nation’s (and the world’s) glaring national security and economic threats. The Green New Deal sets high expectations for itself by promising to address the totality of America’s socioeconomic flaws, such as healthcare and affordable housing. This is a lofty bar to set, but it doesn’t mean we shouldn’t try to reach it. And bundling these issues may be necessary to achieve large-scale buy-in.

The Green New Deal, or any form of comprehensive climate legislation, will cost a lot. There is no way around that. But whatever its immediate costs are (there are no precise estimates at the moment, but it will undoubtedly be in the tens of trillions), they pale in comparison to the cost of inaction. This is not something that will get cheaper over time, and if we don’t pay up soon, we may never get another chance.