Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Advanced Search Go
Free Newsletter Sign Up

INSIGHT: How Republicans Should Respond to Fiscal and Climate Forecasts

Dec. 19, 2018, 11:19 AM

With each passing year, warnings about fiscal deficits and climate change become increasingly ominous. Some Republicans avoid these issues and point to the fact that fiscal predictions are subject to uncertain economic assumptions and climate change forecasts are the product of complex and uncertain models.

But the conservative response Republicans should embrace is to recognize that these evidence-based, consensus forecasts are most likely correct and develop policies to reduce the predicted fiscal and environmental risks. The good news is that these concerns can be addressed in tandem.

Deficit Danger

For fiscal conservatives, long-term economic forecasts should be deeply troubling. The Congressional Budget Office (CBO), which assumes that tax increases and spending cuts will take effect as scheduled, predicts that annual deficits will rise from 3.9 percent of gross domestic product (GDP) this fiscal year to 9.5 percent in 2048. Spending will increase by 8.7 percentage points, while revenues grow by 3.2 percentage points. As a result, the federal debt as a share of GDP will almost double, from 78 percent in 2018 to 152 percent in 2048. Alternative forecasts are even more dire.

At some point, a federal debt of this size will provoke a financial crisis. Long before that, interest rates will rise, increasing spending on interest even more and constraining the rest of the budget. Because the fastest-growing federal programs are those entitlements devoted to the elderly and the poor, programs that can contribute to future economic growth, such as research programs and infrastructure investment, will be squeezed for funds.

Sustained, faster economic growth is critical to addressing our fiscal problem. Increasing real GDP has a significant effect on the deficit. As the baby boomer generation continues to retire, the labor participation rate in the United States is expected to decline 3.7 percent, resulting in just 59.2 percent of the population working in 2045. To support our economy, we have to ensure higher productivity from a relatively smaller workforce. CBO estimates that a 0.1 percentage point increase in the long-term rate of productivity would reduce deficits by $228 billion over 10 years.

Any long-term solution to the deficit almost certainly involves tax and entitlement reform, both of which require difficult decisions. But policies that facilitate faster economic growth can mitigate the scale of the challenge and help avoid political upheaval during the period of reform.

Climate Change Warnings

The long-term outlook for climate change is also troubling. Coastal sea levels are rising, threatening our military installations and naval readiness. Home values in coastal areas like Florida, Alabama, and Texas are dropping as a result. In the West, the cost of damaging wildfires is draining state budgets from Arizona to Wyoming to Montana.

Scientists estimate that human activity has caused global temperatures to rise approximately 1.8 degrees Fahrenheit above pre-industrial levels. Any warming above 2.7 degrees Fahrenheit risks greater flooding, more extreme weather events, and greater environmental strain. Because we are almost certain to exceed this threshold, we will have to deal with many of these crises and costs as they come. Once again, economic growth is a strong imperative. Faster growth delivers higher living standards, making it economically easier to absorb the costs of warming that, at this point, are daunting.

One Policy for Fiscal, Climate Concerns

It is possible to align long-term economic and climate policy while delivering higher growth and lower emissions. This can be achieved with a revenue-neutral carbon tax policy, which would deter carbon pollution while raising revenue that could reduce more distortionary taxes, such as those on worker wages, family income, and job creation. The result would be a more efficient means of reducing climate risk while encouraging the economic growth needed to reduce fiscal risks.

Why not just reduce carbon emissions through government regulation? Regulations intended to reduce carbon dioxide, like many command-and-control strategies, have proven to be costly and inefficient. The American Action Forum found that a carbon tax would result in greater emission reductions than the regulatory approach at less than half the cost.

Similarly, a recent EY analysis concluded that regulatory carbon controls, if fully implemented, would cost each household $1,770 annually, while reducing carbon emissions by approximately 22 percent. However, a carbon tax that rolled back these regulations and cut other taxes would have the same emissions reduction and increase annual GDP by $5,090 per household.

While the biggest boost to economic growth would come from the proceeds of a carbon tax being used to cut other taxes that impose greater burdens on the economy, another source of growth will be innovation in clean technology. A recent report by the Information Technology and Innovation Foundation shows growing evidence that carbon taxes will induce significant investments in the discovery of cleaner technology.

Creating an economy that captures the true cost of energy production and its externalities would enable Republicans to embrace the economy of the future rather than defending the economy of the past. Once that economy is established with a clear, long-term price for carbon pollution, capital will flood into the marketplace seeking opportunities to invest in cleaner cars and better furnaces; every opportunity that the free market can identify to reduce carbon pollution will be developed.

On top of this, a conservative carbon tax policy has several other advantages:

  • A carbon tax is easy to administer and will enjoy greater tax compliance than the income tax.
  • A carbon tax will advance U.S. trade policy by imposing a cost for imported carbon pollution at our borders to protect U.S. industry from overseas manufacturers that do not correctly price carbon pollution externalities, a feature not available for carbon regulations.
  • A carbon tax will create an economy-wide market for advanced energy and energy-efficiency technologies without mandates and subsidies.

What Do Voters Think?

A growing majority of voters now believe that climate change is real and that the U.S. should act to reduce it. This includes young Republicans. Among Republican millennials, 59 percent believe climate change is having an effect on the U.S, and 47 percent believe the government is doing too little to reduce the effects.

There is also broad Republican support for alternative energy. A recent Pew poll shows that 79 percent of conservative Republicans favor more wind turbines, while 84 percent favor greater use of solar panel farms. A 2015 poll shows that 91 percent of Republicans believe we should accelerate the growth of clean energy to reduce pollution in the U.S.

An increasing number of conservative organizations have responded to growing public support by advocating some form of a carbon tax. These include the Niskanen Center, R Street, American Enterprise Institute scholars, the American Action Forum, and Americans for Carbon Dividends. The Alliance for Market Solutions, which I lead, is devoted to building conservative support for a revenue-neutral carbon tax. To this end, we have sponsored a number of academic studies, including some mentioned here. But these efforts still represent a minority of conservatives.

An Opportunity for Conservatives to Lead

Carbon pollution and the resulting risk of climate change are not going away. The growing scientific evidence is increasingly accompanied by physical evidence such as the mounting intensity of storms, rising sea levels, and opening of the Arctic sea lanes. This evidence is prompting an increasing number of large organizations to prepare for greater warming. These include insurance companies, building contractors, and the U.S. military. These groups are not responding to any political philosophy. They are looking at the evidence and moving to protect their interests.

Conservatives should take this opportunity to demonstrate leadership on an issue that will only grow in importance. We need to resist regulations that impose large economic costs but deliver few environmental benefits, but we have to offer a valid alternative. The best alternative—a revenue-neutral carbon tax—has the added benefit of encouraging greater economic growth, thereby mitigating to some degree the fiscal dangers we also face.

In recent years, conservatives have been reluctant to acknowledge climate and fiscal warnings. Yet these problems aren’t going away. They will build and build until finally public pressure precipitates a government response. The result is all too often costly, excessive, and ineffective regulation, which, because conservatives were not at the table, we had little say in.

It needs to be different. There is no reason why conservatives shouldn’t be willing to address climate, just as much as we need to address fiscal and security concerns. And there is every reason to anticipate key voters’ concerns with an eye to reclaiming the electoral map.

To be relevant—and to anticipate key voters’ concerns with an eye to reclaiming the electoral map—conservatives need to offer pragmatic solutions to our looming fiscal challenges and alternatives to overregulation in the face of a warming climate. Today’s generation has more wealth, a better education, and more advanced technology than ever before. There is no reason why tomorrow’s citizens need to face fiscal stringency or environmental crises. Neither is there any reason why tomorrow’s environment cannot be cleaner and healthier than today’s. A conservative carbon tax policy can contribute to a stronger economy and a better world.

Alex Flint is the executive director of the Alliance for Market Solutions. He previously served as staff director of the Senate Committee on Energy and Natural Resources, senior vice president of governmental affairs at the Nuclear Energy Institute, and as a member of President Donald Trump’s transition team.

The opinions expressed here do not represent those of Bloomberg Environment, which welcomes other points of view.