Representatives from dozens of American businesses descended on Washington, D.C., this week to urge lawmakers to take action on climate change—by implementing a tax on those businesses' carbon emissions. Not long ago, carbon taxes—which charge polluters a set fee per ton of emissions—seemed like a dead end for politicians and environmentalists seeking solutions for the climate crisis. Now even the fossil fuel industry is on board: Oil giants BP and Royal Dutch Shell both pledged $1 million each to Americans for Carbon Dividends, the lobbying arm of the right-leaning Climate Leadership Council, which is pushing for a tax-and-dividend plan that would give the taxes collected back to American households.
It's a major shift for the oil industry, which is facing several lawsuits for its role in both causing global warming and trying to sow doubt about its existence. As far back as 1965, Frank Ikard, the president of the biggest trade association for the industry in the United States, the American Petroleum Institute, warned the body about the "catastrophic consequences" of carbon pollution from fossil fuels, and said it would make finding alternative fuels a "national necessity." Still, oil companies spent the ensuing decades funding a campaign of climate denial to block regulations. But as public opinion on global warming has shifted from agnosticism to alarm, oil companies have begun embracing market-based solutions.
Economists have long endorsed market-based approaches to emissions reductions, including carbon taxes and cap-and-trade systems (which set a general limit on emissions and allow polluters to buy and sell reductions on an open market). And for good reason: Research shows that both can be more efficient than regulations.
"We did some modeling a couple years ago that looked at how high the carbon tax would have to be to replace fuel economy standards, the renewable energy standards, and the Clean Power Plan," says Christopher Knittel, a professor of applied economics at the Massachusetts Institute of Technology's Sloan School of Management, of his as-yet-unpublished research. "It was less than $10 per ton to replace all three federal regulations." Another team of researchers from the U.S. and Switzerland compared a cap-and-trade program to a slew of federal regulatory policies, including some of the regulations Knittel looked at, and found that it could deliver four times the emissions reductions for the same cost.
It's not all theoretical. Carbon taxes have been around for almost three decades. Since the early 1990s, at least 27 national and regional taxes on carbon emissions have been implemented around the world. The rates vary wildly—from less than $1 per ton in Poland to nearly $140 in Sweden. In British Columbia, which implemented a carbon tax in 2008—starting at $10 per ton of emissions and set to increase by $5 each year until 2021—the region cut emissions by nearly 10 percent while growing its economy even faster than its neighboring provinces.
But carbon taxes have historically had little support in the U.S., where politicians and the populace are particularly tax averse. "One drawback is it's a tax," Knittel says, "so any time you utter those words as a politician, you're setting yourself up for defeat." And there is a lot of misinformation about who will pay the steepest price for a carbon tax, according to Knittel.
There's a risk with a carbon tax that it could disproportionately affect low-income households, which spend a larger proportion of their budget on energy than wealthier ones. But Knittel says you can protect against those kind of regressive impacts by reducing income taxes on the poor, or giving the tax-revenue back to families directly in the form of dividends.
That's precisely what the Americans for Carbon Dividends campaign plans to do with the carbon fees: redistribute the money to American households. Known as the Baker-Shultz plan (named for the former Republican secretaries of state James A. Baker III and George P. Shultz), the carbon tax plan that BP and Shell are lobbying for sets the starting price per ton of carbon emissions at $40, with plans to increase it over time. The proceeds from the fee would go back to U.S. citizens, perhaps as dividend checks.
However, climate advocates are skeptical of the industry's motivations. "The recent rise in right-wing support and corporate support for a carbon tax plan in the United States definitely sets off some red flags," says Jesse Bragg, the media director at Corporate Accountability, a non-profit that tracks industry influence over policymaking, "because when an industry spends decades trying to undermine something, and then changes course, you have to ask why."
According to Bragg, there are two provisions in the Baker-Shultz plan that demonstrate the newfound support for climate action is more about self preservation than it is about protecting the planet: The carbon tax would completely replace existing federal regulations for carbon emissions under the Clean Air Act and would shield fossil fuel companies from climate-related lawsuits for past emissions and misinformation campaigns.
"They know the writing is on the wall," Bragg says, "and they're scared of what the Green New Deal could mean for the future of their business, and so they want to get ahead with a program they can manage and manipulate, like a carbon tax, and include in there a line of text that absolves them of any future liability."
Oil companies are now faced with the prospect of dozens of variable carbon pricing schemes as states develop their own climate policies and progressive Democrats are uniting behind the Green New Deal, which demands the U.S. wean itself off of fossil fuels and transition to a clean energy economy. The resolution doesn't explicitly include a carbon tax, but it doesn't rule one out either.
In a draft of the resolution, the Green New Deal sponsors indicated that they were open to a carbon tax as part of a larger, more robust package of regulations targeting emissions, but that market-based solutions alone wouldn't be enough. "It's certainly possible to argue that, if we had put in place targeted regulations and progressively increasing carbon and similar taxes several decades ago, the economy could have transformed itself by now," it states. "But whether or not that is true, we did not do that, and now time has run out."
While the research shows that carbon taxes are more efficient than regulation alone, there are risks to entirely replacing federal regulations. "While the idea of replacing an inefficient regulatory approach with an efficient pricing mechanism is appealing, the Clean Air Act has been a powerful tool for improving environmental quality in this country over the past half‐century," Gilbert Metcalf, an economics professor at Tufts University, wrote in a 2019 Brookings Paper evaluating the economics of a carbon tax in the U.S. "Simply giving up Clean Air Act oversight of carbon pollution is asking quite a bit given the potential for Congress to pass a carbon tax today only to have a future Congress repeal the tax."
Bragg calls oil companies efforts to join the climate action conversation a "classic tactic" for industries faced with regulations that might cut into their profits. "When the reality of regulation seems imminent, you often see industries come to the table seemingly altruistically, to offer up their expertise and propose a plan. Policymakers really need to look at what's driving that," Bragg says.
"It's fear of adequate climate policy," he says, "because climate policy that actually rises to the challenge of this crisis, would mean the end of the fossil fuel industry as we know it."