The ’90s are over: 5 reasons to embrace carbon pricing today

Trends from the 1990s have made a resurgence in today’s fashion and pop culture. But one unfortunate development from the 1990s stayed with us all along; that of politicians fearing they’ll be “BTUed,” a play on President Bill Clinton’s proposed 1993 “BTU tax,” which was a close cousin to a price on carbon emissions. 

Democrats in the House voted — some reluctantly — for the tax, which the Senate soundly defeated. Many House Democrats who lost their seat in the 1994 midterms blamed it on their vote for the BTU tax. This political lesson still resonates; just last week 10 Democrats vulnerable to losing seats in November chose to join Republicans in voting “no” on a carbon tax measure.

This political lesson still resonates; avoid forcing congressional votes on divisive issues destined to fail.

But the entrenched view that the United States will never support a carbon price is misguided. Here are five key reasons why now is the time for U.S. politicians to embrace it.

1. Since the 1990s, many more American voters have experienced the ravages of climate change firsthand. In 2023, the U.S. experienced 28 “billion dollar” natural disasters, many intimately tied to a changing climate; in 1993, there were only five. The preferences of voters in 1993 say little about the preferences of voters in 2024; today, a majority of Americans indicate that they view climate change as a serious threat.

2. Most of the U.S.’s closest allies have successfully implemented robust carbon pricing regimes since 1993, including the United Kingdom and the European Union. Even large fossil fuel producers like Canada and Australia have carbon prices, and, although smaller in comparison, Mexico just added one. Other countries are also enacting carbon border adjustment mechanisms. This means that many U.S. exporters will soon pay a price for their carbon emissions, but crucially, the U.S. Treasury won’t reap the benefits. If, instead, the U.S. government includes a carbon border adjustment mechanism alongside a carbon price, our less carbon-intensive producers would see a comparative advantage, as pricing carbon emissions will lead to smaller fees for clean production relative to dirtier counterparts. By cooperating with partners abroad, the United States could also help incentivize greater climate policy action abroad, as producers in China, India and elsewhere will have strong market access reasons to reduce emissions. Trade can be a key lever to action in a world where voluntary pledges often fall far short.

3. The Inflation Reduction Act has paved the way for carbon pricing adoption in the United States. Its investments in clean energy infrastructure and capacity will keep energy bills down, even with a carbon fee, allowing households to substitute clean energy for dirty energy. The act also helps communities negatively impacted by the energy transition. Through the Inflation Reduction Act and other government actions, we are investing heartily in removing carbon. This makes sense, but it’s folly to spend a lot of money removing carbon from the atmosphere while emitting carbon costs nothing.

4.  The coming fiscal reckoning in 2025 provides a golden opportunity to pursue carbon pricing as part of a grand bargain on tax reform. Fully extending the Trump tax cuts scheduled to expire at the end of next year will cost about $4 trillion; Congress will desperately need new sources of revenue. Our new working paper shows that a carbon price can help meet fiscal goals, particularly if it applies to all fossil fuel production.

5. Carbon pricing can help the least well-off. This may seem counterintuitive since energy is a greater share of low-income households’ budget and classical estimates of carbon price distribution show modest regressive effects. However, any such impacts can easily be more than countered by changes in tax rates or expansions of the earned income or child tax credits, all of which will be on the table in 2025 tax legislation. And many climate policy alternatives, including Inflation Reduction Act subsidies and regulations and bans, have similar distributional effects that can also be countered through changes in the tax system.

2025 will be a big year for Congress to tackle longstanding fiscal issues and further climate policy efforts. Before this can happen, politicians need to hear timely arguments backed by up-to-date evidence to stifle any fear of being “BTUed” in the present.

Kimberly Clausing is the Eric M. Zolt Professor of Tax Law and Policy at UCLA School of Law. Catherine Wolfram is the William F. Pounds Professor of Energy Economics at the MIT Sloan School of Management.