Why the US Also Needs Carbon Pricing in the Reconciliation Bill
Both the dangers of climate change and our narrowly closing window for action have never been clearer. The heat waves, wildfires and hurricanes that are wreaking havoc across the country and around the world show that no one will be spared. The steep and rising costs are everywhere: The effects of climate change already cost the United States $99 billion each year, by one recent estimate, yet they’re not integrated into economic decisions.
President Biden made a necessary and ambitious commitment to reduce emissions economy-wide by 50-52% below 2005 levels by 2030, which our analysis shows is achievable. Congressional leadership intends to advance the bipartisan infrastructure deal that passed in August 2021 (Infrastructure Investment and Jobs Act, or BID) alongside an even more ambitious spending and tax package called a budget reconciliation bill.
The multi-trillion dollar reconciliation bill currently being written in the House and Senate includes many essential climate policies, such as enhancing clean energy tax credits and establishing a Clean Electricity Performance Program to reduce emissions in the power sector.
If enacted, together the BID and reconciliation bill have the potential to be the most important climate legislation package in the history of the United States. It can create millions of good jobs, spur the economy at a time when we are still recovering from the coronavirus pandemic, and dramatically reduce emissions across sectors.
The reconciliation package is critical to achieving lasting emissions reductions and transitioning to a clean economy, but to be as effective as possible and ensure long-term success, it should also include a price on carbon emissions.
We need a comprehensive economy-wide shift, which requires us to use every tool at our disposal.
What More Can Congress Do? Deliver a Price on Carbon.
Senate Majority Leader Chuck Schumer’s analysis found that together, the BID and reconciliation package could reduce U.S. emissions by approximately 45% from 2005 levels by 2030. Consistent with many independent analyses, it finds that the biggest contributions will likely come from reducing emissions from power plants, vehicles and methane leaks.
However, there are two challenges: These estimates carry significant uncertainties and fall short of the goal to reach a 50% reduction by 2030.
Proposed regulations under current law — such as tighter passenger vehicle emissions standards, requirements to cut methane leaks and stronger appliance efficiency standards — alongside state and local action could close the gap, provided they are strong enough. But these measures are also subject to technical and political uncertainty and litigation. With so much at stake, we can’t risk falling short.
Pricing carbon pollution could strengthen the policies proposed in the BID and reconciliation package, while closing the emissions gap and producing revenue that can be reinvested in communities. The Senate Finance Committee recently indicated that several carbon pricing options are under consideration as part the Committee’s contribution to the reconciliation package. Including one of them would make meeting the 50-52% emissions-reduction target much more likely and provide revenue that would reduce pressure to trim the progressive investments and tax credits in the rest of the package.
A U.S. Carbon Price Can Increase the Effectiveness of Federal Climate Spending
A central component of the reconciliation bill is incentives for clean energy technologies and products. By incorporating the damages caused by CO2 emissions associated with energy sources and materials into their costs, a carbon price will make clean alternatives even more financially attractive compared to carbon-intensive goods and services. This will further encourage the investments and consumer choices that tax credits and grants are meant to promote.
At the same time, other reforms in the full reconciliation package provide new and enhanced financial support to individuals and households across the country.
Research just released by Resources for the Future (RFF) demonstrates the impact of combined policies in a scenario looking at a carbon price starting at $15 per ton, a Clean Electricity Performance Program, and a clean energy tax incentive package (see graphic below). This combination is substantially more effective in reducing emissions than any of the individual policies alone or a combination that does not include a carbon price. In RFF’s “Central Price Path” combined policies scenario, emissions reach 52% below 2005 levels in 2030, in line with the more ambitious end of the target set by President Biden. If gasoline is excluded from the carbon price, emissions decline 50% by 2030, still meeting the bottom end of the reduction target range, although much less revenue would be raised.
National CO2 Emissions by Policy Scenario
Carbon Pricing Offers an Economy-Wide Approach That Can Reach Sectors Not Fully Addressed in the Current U.S. Reconciliation Proposal
A price on carbon would supplement the range of essential sector-specific spending and incentives included in the BID and reconciliation package. The industrial sector, for example, is responsible for 23% of U.S. greenhouse gas emissions, but it is diverse and therefore difficult to address with sector-specific policies. While the BID and reconciliation package include a methane fee, a clean hydrogen production tax credit, and funding for technology demonstrations, these measures are not expected to make a major dent in carbon dioxide emissions from industry as a whole.
A price on carbon, however, would affect all industrial emissions sources and provide a long-term economic signal to help drive the innovation and investment required to decarbonize the sector. RFF’s analysis shows that adding a carbon price to the other key policies in the reconciliation package would make the most difference in the industrial and buildings sectors.
A Price on Carbon Is a Long-lasting Policy that Can Reduce Emissions Beyond 2030
Given the limitations on the budget reconciliation process, spending on climate priorities in the reconciliation bill are limited to a 10-year window. The next 10 years are essential and will determine if the U.S. achieves its near-term pledges under the Paris Climate Agreement. But it is also important to implement policies now that help us reach net-zero emissions by 2050, the trajectory scientists say is necessary for avoiding the worst impacts of climate change.
A carbon price scheduled to increase each year would do just that, by having deep impacts across the economy that will continue even after the budget reconciliation’s 10-year spending window.
Using the Whole Toolbox to Curb U.S. Emissions
We are entering the most critical weeks, in the most critical year, in the most critical decade for climate action. The decisions Congress makes in the coming days are likely to determine whether the U.S. can rise to meet the climate challenge. We can’t settle for “almost” and leave any tools on the table that can match the magnitude of the climate crisis.
We need all measures – everything in the BID, everything in the reconciliation package and carbon pricing. We can’t accept anything less than enough.