The Context

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Introduction

Shortly after winning the election, Donald J. Trump identified his two top legislative priorities for the first 100 days in office: 1) invest $1 trillion dollars to restore America’s economic competitiveness by modernizing airports, repairing roads and bridges, and building-out national infrastructure, and 2) promote economic growth through a major overhaul of the U.S. tax code. The Trump tax plan would lower corporate income taxes, eliminate the estate tax, cuts personal income taxes for certain individuals, and do away with many traditional deductions and loopholes. Independent tax experts predict these fiscal reforms would reduce U.S. tax revenues by $6.2 trillion over the next decade.1

Deficit hawks and fiscal conservatives in Congress are likely to ask Trump to propose spending cuts and/or revenue enhancements to pay for his new tax and infrastructure policies. The President-elect, in addition, will need to attract sufficient support from progressives and moderates to move his proposals through the Senate. Many Democrats are likely to oppose spending cuts and Trump has ruled out cutting social security and other entitlement programs. Democrats might be more open to other fiscal solutions, however, particularly if they advance progressive priorities.

Trump has also promised to do away with regulations that constrain economic growth. High on his list is repealing President Obama’s Clean Power Plan, a new Environmental Protection Agency (EPA) regulation on greenhouse gas emissions from power plants. The Clean Power Plan is currently being reviewed by the Supreme Court. The Trump administration has numerous avenues to repeal or amend the regulation, before or after a decision by the Court.

The Supreme Court previously ruled unanimously that the Clean Air Act requires the Executive Branch to control carbon and other greenhouse gases if they are considered dangerous. The Obama EPA determined greenhouse gases (GHGs) are dangerous and the Trump administration is unlikely to be able to muster the science needed to undo that judgment. New congressional attempts to remove GHGs from the Clean Air Act are unlikely to make it through the Senate without simultaneously approving some alternative emissions control policy. Trump is likely to face significant domestic and international pressure to put forward a credible climate plan, particularly if he does away with the Clean Power Plan.

These forces swirl together to yield a very surprising insight. In the Trump era, the prospects for a federal carbon price are higher than in previous administrations. Even a modest price on carbon would likely generate $1 trillion in new revenue over its first decade. That would go a long way toward paying for new infrastructure investments and making a real dent in financing the Trump tax reform plan, all while filling the hole created by scrapping the Clean Power Plan. While no one solution alone can halt climate change, most experts on both sides of the ideological spectrum generally agree that pricing carbon and other GHGs—i.e. requiring polluters to pay a fee or tax, or buy a permit, for every ton2 of GHG emitted—is an essential part of success and likely the most cost-effective means of reducing climate pollution in an efficient manner.

A strong majority of Americans believe that climate change is real and that the government should do more to address it.3 Ordinary citizens recognize in their own experiences the growing frequency of heat waves, storms, floods and droughts, and they know that without new action their children will inherit a more hostile and dangerous world.

Today, GHG emitters are not required to pay for the adverse impacts of their actions on human health, the economy and communities. When properly designed, carbon prices can efficiently use market forces to incentivize emissions reductions and the development of new clean technologies. In addition, carbon-pricing policies can produce new government revenues from the collection of fees or taxes, or auctioning of pollution permits.

Despite the widespread agreement on the wisdom of carbon pricing policies, the United States has yet to adopt carbon pricing at the federal level.4 Most Republicans and moderate Democrats in Congress have resisted past attempts to price carbon, in part because prior proposals were antithetical to conservative principles of small government and local control, and were seen as highly inefficient and costly. In 2009 and 2010, the Senate declined to adopt a climate bill approved by the Democratically controlled House of Representatives. That bill would have created billions of dollars in new federal spending and given away billions more to special interests (in the form of valuable emissions permits), all while giving state and local governments very little say in one of the largest expansions of the federal government in years.

This paper explores the potential of a specific approach to carbon pricing policy—which we call carbon grants to states. This approach would help pay for the Trump infrastructure and tax reform agenda while remaining consistent with conservative principles of limited government and local control. It would also reduce U.S. carbon emissions far more cost-effectively than the top-down approach taken by the Obama EPA in the Clean Power Plan.

  1. Nunns, J., et al. (2016). An Analysis of Donald Trump’s Revised Tax Plan. Tax Policy Center. 18 October. Available at: http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000924-an-analysis-of-donald-trumps-revised-tax-plan.pdf.
  2. Throughout this paper, we use “ton” as shorthand for “metric ton.”
  3. EESI, 2016. Fact Sheet: Polling the American Public on Climate Change. Available at: http://www.eesi.org/papers/view/fact-sheet-polling-the-american-public-on-climate-change-2016.
  4. Although a number of states, including California and New England, have adopted carbon pricing at the state and regional level.
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On March 27, 2017

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