In the midst of a global pandemic, federal policymaking is focused on the immediate need to halt the spread of the deadly coronavirus and manage the economic shock in its wake. As the crisis fades, Congress will likely support multiple rounds of stimulus and recovery efforts. If they are smart, they can also put the conditions in place for lower greenhouse gas emissions. 

After the 2008 crash, the 2009 American Recovery and Reinvestment Act put $90 billion into clean energy. Subsidies and grants for wind and solar and energy efficiency upgrades added hundreds of thousands of jobs and turbocharged those industries for a decade of growth. Increases in grant funding through DOE and other federal agencies led to many first-of-a-kind demonstrations of technologies like fossil fuel plants that capture carbon or low-emission fuels to supplement oil. Similar efforts now, to further reduce the costs of clean energy and stimulate investment, will be warranted, as climate change will not stop for the coronavirus. 

One of the lessons from 2009 was that a program of recovery needed to be matched with long-term policy. This has implications for both direct stimulus spending and spending on innovation and demonstration. As Joe Aldy, an architect of the clean-energy portion of the 2009 stimulus package, wrote in this 2013 assessment of the program, “with only the fiscal stimulus in place, the uncertainty about the prospects for greenhouse gas regulation likely imposed a drag on potential investments in clean energy.” Even if tax credits can get steel in the ground quickly, the effects dissipate with time. Stimulus temporarily juices up clean energy, but investors will look to optimize for the long term and uncertainty limits their investment. 

The same lack of policy certainty can reduce interest in capitalizing on new demonstration projects. As David Hart shows in this programmatic review, the 2009 stimulus invested heavily in demonstration projects for smart-grid technologies; offshore wind; carbon capture, utilization, and storage (CCUS); and biofuels. All of those would be useful, if not necessary, for a low-cost transition to a zero emissions economy. Hart argues that not only does the implementation of demonstration programs matter, but long-term market conditions do as well. The 2009 stimulus package invested heavily in CCUS and biofuels, for example, but each needed policy to develop market demand.

As was true before the pandemic, and will be after, the best option for efficiently providing such certainty would be a carbon price, likely a tax. Other regulatory interventions, such as stronger EPA enforcement, sector-by-sector performance standards, or cap-and-trade systems require large administrative burdens and do not have the ability to raise revenue. The revenue from a carbon tax could be particularly attractive in the coming years, as there will be an appetite to balance the fiscal picture after years of massive spending. Carbon tax revenue could also be used, long-term, to continue making investments in infrastructure and innovation in the wake of the stimulus spending. 

Establishing a carbon price in the midst of an economic shock is counterintuitive, but committing to one would be wise. One option would be for Congress to pass legislation to levy a small and rising carbon tax that would take hold as the recovery proceeded. On the lee side of this crisis, a carbon tax which started low and increased over time would add pennies to the price of a gallon of gas and be no real impediment to economic growth. Even before it was collected, the expectation of the tax would affect how investors and firms went about financing the economic recovery.

The exact timing for instituting a tax could be conditioned on economic recovery or fixed up front. For something as novel as a federal carbon tax, the Treasury Department would in any case need a year (maybe more) to write the rules governing the tax and set up provisions for rebating exporters, taxing carbon-heavy imports, and crediting firms for capturing carbon dioxide. The Treasury could do that work as the economy recovers and stimulus spending encourages investment. As investors consider where to put their money during an economic recovery, the expected carbon price will keep them from overcapitalizing the highest emitters and capitalizing lower emitters.

For the next few years, market conditions could help make a steadily rising carbon tax politically salable. Oil prices are now around $30 per barrel and retail gas prices are falling. If those prices persist, a steady increase starting from such a low baseline might blunt citizen opposition to the new tax. That is especially true if policymakers have green investments to point voters toward, since polling finds such investments are often the most popular use of carbon tax revenue. 

The crisis provoked by coronavirus creates an opportunity to rethink how society can effectively manage threats to social welfare, large scale risks, and climate change. If spending and stimulus are required, then climate considerations should play some role. But based on the lessons learned from 2009, long-term policy is critical to maximizing the impact of our investments.

Photo by Chait Goli from Pexels