President Biden’s Monumental Climate Policy Mistake About Carbon Pricing Will Be Very Costly

President Biden is in the process of making a monumental climate policy blunder. And unless he reverses course, the end result will be incredibly costly for the country and the world. Despite President Biden’s gargantuan spending proposal for addressing climate change, his plan sidesteps putting in place a policy that would price carbon at its social cost. The odds that his overall program will succeed, without carbon being priced at something near its social cost, are low. Or to put it differently, without sensible carbon pricing, the failure risk is very high.

I ask readers to contrast two recent events which occurred on the same day, March 24, 2021. One was the publication of an article in The Wall Street Journal by journalist Greg Ip and the other was a presentation by John Kerry, United States Special Presidential Envoy for Climate.

Greg Ip explains why Biden is sidestepping the carbon pricing issue, despite the strong recommendations of most mainstream economists, including his Treasury Secretary Janet Yellen. In a nutshell, Biden and his political allies in the Democratic party are concerned that imposing a carbon tax to reflect carbon’s social cost will disproportionately harm lower income households. In this, the Biden camp is seriously mistaken: but more on that below.

John Kerry, in a presentation to the Project Syndicate (PS) conference Investing in Climate Action, emphatically made the point that thus far, the reductions in carbon emissions have been woefully inadequate. Kerry gave a figure of 1%. The theme of the PS conference, which was sponsored by the European Commission and the European Investment Bank, was that the next decade will be make or break when it comes to addressing climate change.

You merely have to juxtapose Biden’s non-policy on pricing carbon and Kerry’s statement about past failures to recognize that there is a very serious problem staring us in the face. At its root, the problem is psychological, as well as physical. To my mind, both Biden and Kerry and their allies in the Democratic party suffer from a lack of self-control, reinforced by confirmation bias and motivated reasoning, wishful thinking, and risk taking in the domain of losses.

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The self-control problem is centered on overvaluing the present relative to the future, and presents as the inability to delay gratification sufficiently. Biden and Kerry and their allies share this problem with their Republican counterparts who engage in climate change denial. This shared problem is nontrivial, and it is important that readers understand that despite the difference in climate change rhetoric, Biden’s unwillingness to enact sensible carbon pricing places him in the same company as Republican climate change deniers.

Confirmation bias relates to underweighting evidence that goes against, or if you like disconfirms, a particular view. When that view is not just hypothetical, but held, the holder exhibiting confirmation bias is said to exhibit motivated reasoning. In this regard, Biden is underweighting the evidence about carbon pricing being advanced by his Treasury Secretary, one of the most respected economists in the world.  

In the past, I have criticized John Kerry for wishful thinking about carbon pricing. In his presentation to the PS conference, Kerry boasted that he has long been a climate change activist, having been present when esteemed climate scientist James Hansen spoke before Congress in 1989. This is all well and good. However, Hansen has been a longtime advocate of carbon pricing, and made his position clear to Kerry when Kerry led the U.S. delegation to the 2015 Paris Climate Conference (known as COP 21). At the time, Kerry dismissed Hansen’s argument for pricing carbon; and in the end, the Paris climate agreement did not include a provision for pricing carbon. At the time, I wrote that as a result, the accord was as likely to succeed as a New Year’s resolution.

Kerry’s remarks to the PS climate conference make clear that his earlier rejection of Hansen’s position about carbon pricing was wrong. And the Biden policy that he currently represents is still wrong, and is likely to be catastrophically wrong. Kerry only needs to listen to his own presentation remarks, recall his past recalcitrance to pricing carbon, and draw the obvious inference.

Moreover, because of the delayed reaction to global warming, the world now finds itself operating in the domain of losses. There is strong psychological evidence that people are prone to exhibit risk seeking behavior in the domain of losses; and that is precisely what the failure to price carbon sensibly entails. We are taking a big risk, with unfavorable odds, that we will be able to address global warming successfully without pricing carbon sensibly.

When it comes to instituting a successful carbon tax, Biden only needs to look at the job Canada is doing. The Canadian government passed a measure establishing a federal price on carbon; and the IMF concluded that Canada’s action places the country “on track to meet its Paris Agreement targets, providing a model for other large-emitting countries to follow.”

Canada has set an example which the U.S. would be wise to follow. As Greg Ip pointed out, Canada’s carbon tax policy involves rebating the tax revenue collected to the general population. The Canadian policy might be best described as a “combination carbon tax and full tax revenue refund policy.” This is precisely the point which President Biden and his Democratic allies appear to have overlooked. A combination carbon tax and full refund policy need not harm those with lower incomes.

U.S. leaders would do well to mitigate the psychological obstacles that stand in the way of adopting a sensible carbon pricing policy. The cost of failing to do so will likely be very high.

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