Thinking About Interactions of Taxes, Trade, and Climate Policy

Climate change policy proposals frequently take the form of tax policies, but other types of climate policies will also interact with tax law and policy, and for that matter with international trade law and policy.  In the latest episode of my podcast series, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program,” I had the opportunity to explore such interactions with an economist with great expertise in taxation, particularly the international aspects of taxation.  Because my guest was Kimberly (Kim) Clausing, the Eric M. Zolt Professor of Tax Law and Policy at the School of Law of the University of California at Los Angeles.  In addition to her research and scholarly credentials, it’s important to note that she served in the Biden administration in the U.S. Department of the Treasury as the Deputy Assistant Secretary for Tax Analysis.  You can listen to our complete conversation here.

Before joining the UCLA Law School faculty (and before her time in government), Professor Clausing was on the faculty of Reed College and Wellesley College, having previously earned her BA degree in economics at Carleton College and her PhD in economics at Harvard.  I’m pleased to note that she is participating in the Harvard Salata Initiative on Reducing Global Methane Emissions (in a research/outreach project with Catherine Wolfram on (Methane Emissions and Trade”)

Kim Clausing was at the U.S. Department of the Treasury during the first two years of the Biden administration, and she maintains that climate policy has been a priority for President Biden and his administration since day one.

“In fact, on day one, they rejoined the Paris Climate Agreement. They worked with climate at the center of their work in every part of that administration, including the Treasury [Department],“ she says. “The legislative achievements… were substantial, even though they were very difficult and hard fought. The infrastructure bill has some climate provisions in it, but also the Inflation Reduction Act, which I think is probably the biggest contribution we’ve seen to emissions reduction in the legislative sphere, and certainly in my time following these [issues].”

Kim Clausing acknowledges that the Inflation Reduction Act was far from perfect, as it contained a disparate set of objectives (and was based almost exclusively on subsidies designed to reduce carbon emissions, a political necessity). 

“There are good arguments for subsidizing. We didn’t quite have the number of senators that are required to look at the cost side of this equation. It’s something that I’m hopeful that maybe we could do down the road, and I think there’s a moment coming ahead where that might happen. But the approach that we had is the approach that was feasible with a very delicate balance in Congress that was available.”

Clausing argues that trade policy and climate policy can be complementary, if done correctly.

“Some of the most hopeful progress that I can think of is using the carrot of trade and trade liberalization and market access to really encourage countries throughout the world to do more emissions reduction. And I think done correctly and done in a non-discriminatory fashion… I think that can be an incredible force for good,” she says. “An example of a non-discriminatory approach is the European approach where they are charging their firms for emissions allowances, and then they, in parallel, charge importers for that same amount of carbon content in particular industries [via the EU Carbon Border Adjustment Mechanism]. And so that basically incentivizes producers and governments in places like China and India and throughout the world to think about the carbon content of their production and goods like steel and aluminum because they know that if they want to send it to Europe, it’s going to face that carbon border adjustment.”

Clausing notes that many countries that haven’t priced carbon in the past are now considering doing so (and for good reason).

“They’d rather collect the revenue themselves than pay it to the Europeans if they’re exporting. But even those direct effects, while they may not be very big in many country cases, I think it’s a good time for a lot of countries to look at revenue sources that meet fiscal concerns that they might have that can enable them to shift their comparative advantage in a greener direction.”

More broadly, Kim talks about her 2020 book, “Open: The Progressive Case for Free Trade, Immigration, and Global Capital,” which she says was inspired by her desire to provide a fact-based defense of traditional American liberalism vis-à-vis trade and immigration policy.

“I wrote that book kind of in a flurry about a year after President Trump was elected as an attempt to sort of take basic economic intuition and understanding in the field of international economics and convey it to a popular audience,” she explains. “I’m really proud of [the book] in part because I think these arguments aren’t made enough these days. I think that there is this sort of move towards nationalism and America first kind of thinking. And so, I think we do need voices to sort of explain the economics in terms that people can understand, not just in the American Economic Review, but in a broader context.”

For this and much, much more, I encourage you to listen to this 58th episode of the Environmental Insights series, with future episodes scheduled to drop each month.  You can find a transcript of our conversation at the website of the Harvard Environmental Economics Program.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.


An Eminent Economist Talks About Climate Change

In my podcast series, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program,” I’ve had the pleasure of engaging in conversations over the past four years with a significant number of truly outstanding economists who have carried out important work in the realm of environmental, energy, and resource economics, and have been real leaders in the profession.  In my most recent podcast, we topped that, because I was joined by someone who has made important contributions not just in the realm of environmental and resource economics, but has been a global leader in the discipline of economics broadly, across numerous sub-fields, and has ventured and published well beyond economics in seemingly disparate realms, ranging from contract bridge to Italian Rennaisance painting.  All in all, he is the author or editor of 14 books and more than 300 scholarly articles. 

I am, of course, referring to my Harvard colleague – and good friend – Richard Zeckhauser, the Frank Ramsey Professor of Political Economy at the Harvard Kennedy School, and Distinguished Fellow of the American Economic Association, the Econometric Society, the American Academy of Arts and Sciences, the Association of Public Policy and Management, and the Society for Benefit-Cost Analysis.  Beyond that, I want to acknowledge that he is celebrated at Harvard and beyond as a marvelous classroom teacher, and a valued mentor to generations of students and faculty colleagues.

Near the beginning of our conversation, Richard laments a phenomenon he terms “the pumped equilibrium,” in which people hold exaggerated expectations about confronting the challenge of climate change if we do not drastically increase our efforts.  

“People started at least three decades ago saying, ‘Climate change is a terrible problem, but we can control it by cutting back on our greenhouse gases, and this is the last decade that we can do that. If we don’t do it this decade, we’re dead.’ And then, the next decade they said … the same thing. And this decade they’re saying … the same thing. And they keep telling us that we’re going to be able to [limit the global temperature increase to] two degrees centigrade above pre-industrial levels, or even more recently, 1.5 degrees centigrade above pre-industrial levels. I think that’s unrealistic.”

Richard maintains that instead a realistic assessment of the current state of climate change requires new approaches to make an impact.

“The United States has done a so-so job of cutting our emissions by about 10 percent over a number of years, but at the same time, China has increased its emissions by 13 percent, and you can expect that countries like India will be growing much faster in its emissions [levels],” he remarks. “So, I think that we should take a sober look at these problems and say, ‘What else can we do?’”

Climate adaptation, Zeckhauser states, holds the potential for greatly reducing the impacts of climate change. He cites one example in which scientists have proposed building a 100-foot-tall berm around a fjord in Greenland where warm water currently flows in and melts the ice sheets.

“This is very speculative. Will this work? I sure hope so. It’s within our realm of technological capability, but I think we should be looking for many solutions like this that could enable us to deal with … what I consider to be [the] catastrophic track that we’re on,” he says. Other potentially effective adaptation measures, he states, include increasing the alkalinity of the oceans and enforcing smarter logging policies to protect mature trees.

When I question Richard about the distributional implications of climate change, he remarks, “I think dealing with climate change and reducing its impact will automatically have very beneficial distributional consequences.  The places that are currently suffering the most from climate change are the hottest places in the world, which are both suffering under [rising] temperatures and having their weather patterns shifted. So, you would be doing God’s work in restoring or preserving the planet, and you’d be doing work that’s to the benefit of the most affected people in the world.”

He also refers in this context to the challenges posed by massive migrations of people who want to escape rising temperatures in the south by heading north.

“Those [migration patterns] are very uncomfortable for the people in both places – the people who have to do the migration, which is frequently very dangerous and expensive, the people who are still trapped in the old place because they don’t have enough resources, and the people whose areas are being affected by the new people who are coming.”

Zeckhauser says that ultimately, it is up to policymakers around the world to confront the climate change challenge.

“This is a political problem on a global scale. So, even if you didn’t want to worry about it, as a political actor, as the president of the United States has to be and our climate envoy has to be, and the UN has to be, you have to pay serious attention to it.”

My conversation with Richard Zeckhauser is the first episode of 2024 and the 57th episode over the past four years of the Environmental Insights series, with future episodes scheduled to drop each month.  You can find a transcript of our conversation at the website of the Harvard Environmental Economics Program.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunesPocket CastsSpotify, and Stitcher.


A Different Perspective on What Happened at COP-28

A few days ago, I posted at this blog my personal take on what happened at COP-28 in Dubai (and what didn’t happen).  Feedback from readers indicates that some people found my assessment helpful and realistic, but it’s conceivable that some found it insufficiently enthusiastic.  So, today, I’m pleased to offer some potential balance.  It comes from my most recent podcast interview, which was with Amy Harder, the founding Executive Editor of Cipher News, who expresses her pleasant surprise with the outcome from the recent 28th Conference of the Parties of the United Nations Framework Convention on Climate Change (COP 28) in Dubai during a special post-COP episode of “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.”   The podcast is produced by the Harvard Environmental Economics Program. Listen to the interview here.

Amy Harder notes, “I think the results [of the COP], although not perfect, and certainly not as strong as some delegates had wanted, it’s certainly stronger than I had anticipated. I think this line in the… agreement about transitioning away from fossil fuels, this will be cited in every protest, and probably lawsuits in the coming years, decades, and centuries. And that’s a big deal. Even if it wasn’t a phase out or phase down, it still was stronger than I had thought was possible.”

Harder recognizes that it will be challenging to wean the world off fossil fuels, considering that aggregate energy consumption has continued to rise over the past three decades.

“We call it the energy transition, but we actually have only added clean energy on top of oil, natural gas, and coal. We actually haven’t even begun the process of displacing fossil fuels with clean energy. That’s because of growing energy demand, and a lot of other factors that we can get into. But those two goals – tripling [the production of] renewable energy, and [enhanced] energy efficiency… those can happen even while we continue being dependent upon fossil fuels.”

Harder also expresses surprise at the ease with which negotiators reached agreement on the operationalization of the Loss and Damage Fund, which is intended to help support developing countries suffering severe impacts from climate change.

“I think it was interesting and very strategically smart on behalf of the UAE government to come out of the gate on basically the first day of COP in Dubai with an agreement on loss and damage,” she says. “That was really set to be a controversial point that was really taken off the table relatively quickly in a positive way.”

Harder and I agree that the number of private companies and entrepreneurs at the COP continues to grow every year as they become more and more aware of the need to build awareness around clean energy technologies.

“We need… two to three different ledgers of climate action, and one is over time reducing fossil fuels, but two, commercializing the technologies that will replace them. And that’s what we saw in Dubai, and that’s really significant,” she remarks. “We can expect to see climate entrepreneurs attending COPs much more in the future now, and I think that’s significant, and we will only see that more as the Dubai consensus percolates into our society.”

She and I also agree that the lack of agreement at the COP on carbon markets (Article 6 of the Paris Agreement) was a significant disappointment.

“It really comes at a pivotal time for this industry, which has been facing… a lot of questions about the efficacy of carbon offsets and the markets themselves,” she says. “Hopefully at the next COP, with the Global Stocktake and the statement about fossil fuels in not only the review mirror but in motion… negotiators can really focus and get more resolution on the carbon markets question because it really is an essential part of managing carbon effectively in the decades and centuries to come.”

My conversation with Amy Harder is the 14th and final episode of 2023 in the Environmental Insights series.  Click here if you wish to subscribe to the Cipher News weekly newsletter.  

Finally, I hope you will listen to this 56th episode of the Environmental Insights series, with future episodes scheduled to drop each month.  You can find a transcript of our conversation at the website of the Harvard Environmental Economics Program.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunesPocket CastsSpotify, and Stitcher.