By Paul Krugman
Democrats had far better midterms this year than they did in 2010. Still, with Republicans on the cusp of winning narrow control of the House, there’s unlikely to be major legislation passed over the next two years. So as was the case for President Barack Obama, President Joe Biden’s legislative high-water mark will probably be a bill he got passed in his first two years. In that sense, the Inflation Reduction Act — which, despite its name, is mainly a climate and health care bill — is this administration’s equivalent of Obamacare.
Unlike Obamacare, however, the IRA was barely mentioned on the campaign trail. In other words, it was a huge political success. And this success vindicated what we might call the new climate policy, which emphasizes carrots rather than sticks.
How so? Well, do you remember when progressives pushed for a Green New Deal? Conservatives bashed their ideas, portraying them as a plot to take away Americans’ pickup trucks and force them to eat soy burgers. Even centrist pundits now tend to talk about the Green New Deal as a leftist fantasy that never had a chance of happening.
But the truth is that Biden has basically passed a Green New Deal. True, he didn’t get the large-scale spending on families, especially children, that was in his original Build Back Better act. But he got most of the climate policy he wanted: Modelers have estimated that the Inflation Reduction Act will achieve about 80% of the greenhouse gas reductions that would have been achieved under Build Back Better.
And nobody noticed. Success!
To understand the nature of that success, we need to talk about a long-running debate over how to address climate change.
Pollution in general, including greenhouse gas emissions, is a prime example of what economists call a “negative externality” — a cost that individuals and companies impose on other people without paying the price themselves. When an economic activity like burning coal to produce electricity imposes negative externalities, people tend to do too much of it.
The textbook answer to pollution is for governments to impose a price on polluters, which can be achieved either by imposing a tax on emissions or by establishing a “cap and trade” system in which the private sector can buy or sell a limited number of emissions permits. We actually have a cap and trade system for emissions of sulfur dioxide, which helped contain the threat of acid rain; the House of Representatives passed cap and trade legislation for greenhouse gases back in 2009, only to see the bill die in the Senate. And many economists, including Treasury Secretary Janet Yellen, have endorsed the idea of a carbon tax as the principal response to climate change.
But the economic case for making a carbon tax the centerpiece of climate policy is dubious, and the politics of tax-centered climate policy are hopeless.
On the economics: The world has changed immensely since the cap and trade bill failed in 2009, mainly thanks to incredible technological progress in renewable energy.
The plunging costs of solar and wind power have greatly simplified the problem of getting to a low-emission economy. At this point it no longer appears that drastic reductions in emissions will require major changes in the way we live, which would be hard to achieve without something like a carbon tax. Instead, it’s mainly a matter of electrifying everything we can and generating that electricity from renewables, which means that green energy subsidies, as opposed to taxes, can do the job.
In fact, a carbon tax by itself would be the wrong policy even on purely economic grounds. While pollution is a negative externality, green energy appears to be characterized by positive externalities: an individual’s choice to drive an electric car or a power company’s decision to invest in renewables conveys benefits to others.
Partly, this reflects what appear to be steep learning curves for new energy technologies: The more people make use of these technologies, the better we get at them and the easier they will be to adopt.
And partly it reflects the fact that these technologies become more usable when many people use them: Electric cars become more attractive when there are many charging stations, which will materialize if many people drive electric cars.
There’s still a case for carbon taxes as part of a climate strategy, but there’s also a case to be made that we can achieve what we need to achieve without such taxes, simply by subsidizing green energy. In other words, by using carrots rather than sticks.
And that’s a good thing, because the politics of carbon taxes are poisonous. It’s not just an American thing, although we may be exceptional in the way energy policy gets caught up in the culture war — yes, right-wingers denounce concerns about the climate as “wokeness.” Even in France, energy taxes had to be canceled after violent protests from the yellow-vest movement.
The politics of subsidies for green energy, however, are arguably much more positive. Instead of making it more expensive for people to do what they were doing before, the government is making it cheaper for them to do different things. And it doesn’t hurt that the administration can then boast about the jobs its strategy is creating in everything from battery manufacturing to solar-panel installation.
The job-creating effects of the Inflation Reduction Act probably didn’t have much effect in the midterms, although there has been a steady drumbeat of news reports about plans to open new factories in response. Maybe these benefits will matter more in 2024. For now, however, the point is that the Biden administration pushed through enormously consequential climate legislation without, as far as anyone can tell, paying any political price. That in itself is a major vindication of its strategy.