To address the threat of climate change and reduce carbon emissions, many business leaders, economists, and policymakers--including prominent Republicans--have pushed for a carbon tax in the United States.
On a new episode of Columbia Energy Exchange, host Jason Bordoff sits down with Glenn Hubbard, the Dean of Columbia Business School, to understand how a carbon tax might be designed and what effects it would have on the U.S. economy and business. Glenn and Jason also discuss the outlook for the U.S. economy, President Trump's tax reforms and tariffs on solar, steel and aluminum, as well as the role of business to mitigate climate change and how companies will address their exposure to climate risk.
Glenn has been a Columbia faculty member since 1988. In addition to his role as Dean, he currently serves as Russell L. Carson Professor of Finance and Economics. He was previously Chairman of the U.S. Council of Economic Advisers under President George W. Bush where he was instrumental in drafting President Bush’s tax plan. Glenn has also served as Deputy Assistant Secretary at the U.S. Department of the Treasury and he chaired the Economic Policy Committee of the OECD.
View the transcript
Jason Bordoff: Hello and welcome to the Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. To address the threat of climate change, a growing number of influential businesses, scientists, NGOs, policymakers and front leaders have increasingly called in recent years for a carbon tax, including several prominent republicans.
Economist point of a price on carbon as a key part of a cost effective strategy to reduce emissions and while the prospects for a carbon tax may seem unlikely today, good policy analysis takes time to develop and legislative windows can open and close more quick than sometimes we anticipate, and so why at the Center on Global Energy Policy, we have undertaken a major carbon tax research initiative to analyze the key design choices in developing a carbon tax and their implications.
We are working with leading scholars across Columbia University on this, and so I turn to one of the most prominent to discuss carbon tax, Columbia Business School Dean Glenn Hubbard. Glenn served as the chairman of the Whitehouse council of economic advisors under President George W. Bush, as well as Deputy Assistant Secretary at the US Treasury Department, he has advised numerous republican candidates for president, including Mitt Romney and Governor Jeb Bush in the two most recent elections.
He has been a member of the Columbia faculty since 1998 and is widely recognized as a leading scholar in public economics and corporate institution finance, macroeconomics and industrial organization. In addition to carbon tax issues, we also discussed many other energy and climate issues as well as more broadly the outlook for the US economy, the Trump administration’s recent tax reforms and new tariffs, rising economic inequality, deficits, federal reserve policy and much more. Here is that conversation.
Dean Glenn Hubbard, thank you so much for joining us on the Columbia Energy Exchange, pleasure to have you here.
Glenn Hubbard: My pleasure. Thanks.
Jason Bordoff: So, I’m going to -- so, we are energy center after all though there is much in the global economy and the domestic economy, I want to talk to about, but let me start with energy and the environment and this podcast is always a good place to shamelessly plug the work that we have going on here. As you know, the Center on Global Energy Policy is working with colleagues across the university, including the business school on issues around climate policy and specifically a carbon tax, and namely project looking at the key design choices one need to make if you were to implement a carbon tax and what the consequences of those different choice in design are.
Just to start at a high level for our listeners, I think it’s fair to say most economist seem to agree that putting a price on carbon is the most effective and efficient way to address the climate change, do you agree with that and why?
Glenn Hubbard: Yeah. That’s exactly right. I mean there is a clear externality presented by a carbon use and climate change and the typical remedy for that is putting a price as a tax, and then economist have debated over time whether that tax should be a sliding scale, how it should be said, that’s a design feature, but it is clearly the most efficient way to deal with the problem. The interesting thing is that economist have been on this span wagon for years, we take credit for the SO2 pricing, which was actually done at the Council of Economic Advisors [crosstalk] [00:03:28] --
Jason Bordoff: -- George H. W. Bush, and yet today this methodology sometimes seen far and political discourse, at one point it was squarely in the center.
Glenn Hubbard: Yeah.
Jason Bordoff: I’m curious why that is that this was I mean the history of environment and environmental regulation, hosted problems that emerged and public consciousness of environmental challenges are air quality, smudge, river and lakes in the United States, I think especially through the 60s lead to the creation of the EPA, the Clean Air Act, the Clean Water Act, and then you had a strong regulatory approach to deal with those.
And then throughout -- I think the 80s, you started to see more on both sides of the isle, economists and others talking about would it be more efficient to think about marking mechanisms that allowed people to figure out what the most cost effective way to reduce pollution is and you saw a Reagan, Bush 41, Bush 43 embrace those approaches and I often on the right -- from the right and now here things like cap and trade referred to as far left or even worse European socialist conspiracies, what do you think has caused this loss of some consensus among people on both sides of the isle and supported those approaches.
Glenn Hubbard: Honestly I think it’s framing, if you go back to the SO2 period, economists were able to put cap and trade at the center, because the alternative was clear, was command and control regulation, business people didn’t like it, economist felt it was very inefficient. In the carbon debate, I think the supporters of a carbon tax has not well framed this debate, the choice is again command and control versus the price, congress will ultimately do something about this, regulators will do something about this, the question is why would you rather have command and control or a market mechanism.
For variety of reasons here, I think a pure cap and trade system would be less efficient than a carbon tax, although that’s a debate worth having, but having a market mechanism needs a frame, and we had it in SO2, we don’t have it here, and I think that explains some of the politics, it becomes how do you want to hurt people as opposed to would you rather hurt people less this way that this way.
Jason Bordoff: And SO2 of course was a cap and trade, but you said you think that would be less efficient, why is that?
Glenn Hubbard: Well, I think partly it’s a question of who gets the revenue here and given that we do have needs for revenue in the country, I think a tax system would be the most efficient way so that you don’t have rent seeking. And alternative would be to have a cap and trade with a safety valve, which would be a kind of tax set at a lower level, but it strikes me the simplest argument is for a carbon tax and the value of that tax could of course be set over time and revenues from that tax could be used to reduce other taxes.
Jason Bordoff: What would you think the optimal from a macro GDP standpoint, what are the -- or in a distributional standpoint, what are the optimal uses of the revenue?
Glenn Hubbard: Well, I think you have to consider both growth and distribution, if growth were the key, the right thing would be to reduce business taxation as much as you can, we just did a lot of that in the present tax bill. The other is to support work and to make sure that we are giving low income Americans affectively a rebate from the carbon tax since we know that they would they would bear a disproportion burden of an energy tax.
Jason Bordoff: And as you said, so just from a macro standpoint, the best use might be lowering corporate business taxes which we just did, so would paying for that and reducing the deficit be sort of a sensible thing now?
Glenn Hubbard: That’s another -- and of course we do have needs generally in public policy to fund entitlement programs and other things. I have for many years felt that the biggest force that will bring a carbon to the table is the budget, and I think the understanding to deal with our budget problems, we either have to have the courage to have major restructuring of entitlement programs, good luck with that or a new revenue source, carbon tax being one, that I think will bring it to the table.
Jason Bordoff: I mean that’s interesting, you said a minute ago you think congress will eventually do something about this and this is the best approach, and I think a fair number of people look at congress right now and might be skeptical, that in fact Washington is going to take -- or especially congress is going to take action on climate change, why do you think that’s true?
Glenn Hubbard: Well, because congress eventually has -- if you go back to the air pollution debates in the 1960s and early 1970s, republican president worked with congress was President Nixon to take action, you again see that in Clean Water, you again see that in the SO2 debate, I think eventually public pressure here will be very great for some action, and of course regulators can take some action not universal, but some action purely on regulatory grounds. So eventually I think the business community and the body politic is a choice, are we going to deal with this with command and control regulation with a price system we think is much more efficient.
Jason Bordoff: Yeah. And, I guess that was part of the argument when people push cap and trade in the beginning of the Obama administration, wouldn’t have be preferable to regulatory approach, it didn’t seem to be successful in moving this through congress, what do you think the -- what do you see in the -- you are here in New York City, you deal a lot with senior people in the business community, do you have a sense that they are further along in thinking about this and that leadership could come from there and trying to drive legislative action as well as changes in investment and where we deploy capital?
Glenn Hubbard: I think it definitely can, if you look at the pressure business people are under the investor community, meaning institutional investors activists are getting businesses to talk about sustainability and also about stranded assets for businesses that are in the energy field directly. So, I think this is front and center for business people, remember most business people are really practical in their solutions, it’s not a philosophical or a political argument for them. So, I think pressure could from a business community and from investors.
Jason Bordoff: And what do you -- I mean it has been raising pressure from some investors and pension funds and public investors as well as you’ve seen black rock on this issue, but some more broadly Larry Fink’s recent letter, I mean what do you think of that movement among some in the investor community to push companies to disclose climate risk and potentially change where they are deploying capital toward sources of energy, given that we are still using 80% of our energy makes comes from hydrocarbons and we’re going to be using that for some time to come.
Glenn Hubbard: Well I know some of those letters are viewed with skepticism by business people that there are stocking horse for political action, but that’s not how I see it. I actually think investors have a responsibility to look to the long term and these are long term health threatening issues for companies and if you are a passive investor, let’s say you’re an index investor; theirs isn’t an S&P 499. You have to hold all these stocks but those investors really will be the “long term” investors who will put social pressure on these companies. So I think you will see increasing pressure from the business community. And even many energy leaders in the business community had been more forward leaning than politicians.
Jason Bordoff: Do you see a pathway on meaningful climate action without the federal price on carbon, just investment and innovation, R&D, maybe federal or state regulatory action or is having a carbon price kind of essential if we’re going to make progress here.
Glenn Hubbard: Well, you never say never, but I think that innovation while it is happening and good, I personally an investor in some of these non carbon innovations, but a price on carbon really helps, because, you know, business people aren’t innovating just for the sake of it, they’re innovating for potential return. And if you put a price on carbon you have set a boogie for another form of energy. So I can't say never, but I think it’ll be hard to imagine without a federal price on carbon and state local action is just not a substitute, you know, the atmosphere doesn’t really care whether carbon comes from Mississippi, Illinois or New York and for that matter, United States versus some other country, this is really a matter for global coordination.
Jason Bordoff: Which is hard and do you worry that that global coordination is getting harder at a time when we’re may -- we’ll come to trade in a minute, but we’re starting to see increased tension on issues like trade between the U.S. and China, and among other issues does that make it harder to have that coordination?
Glenn Hubbard: It can and of course the irony is the way to get the coordination is to go in a bit of a different direction that we’re going right now in trade policy, for example leaders of China and India could be forgiven if they said well, wait a minute. You, the United States were, had a lot of admissions -- admissions as you were developing, now you’re telling us dial it back when we need to grow and provide living standards for our people that’s a perfect reason for argument, normally the way economist suggest dealing that with this is technology transfer, is helping those countries lower the cost of the machine reduction. But we’re not quite moving in that direction.
Jason Bordoff: Yeah and that’s something you heard from many countries especially India, I think in the recent Paris agreements and in other international climate, then you -- I mean a part of the tension here is also this, it’s often framed as a zero some tradeoff between protecting the environment and economic growth. And you hear people on one side saying well we’re just getting jobs every time we try to protect the environment and then arguments on the other side that we can grow the economy even faster if we have regulations, and put people to work with new technologies, what’s the brief way to think about it?
Glenn Hubbard: I think both of those sounds extreme to me. The right way I think is we have an externality. We need to fix the externality. We need to do in the most efficient way. There will be dislocations, but frankly the dislocations whenever we have technological change, so instead of saying climate change if I just had an innovation that displace a lot of workers, sure, we would need public policy to address that. We may need that here, but that’s part and parcel of dealing with it, which is why I think the federal government will have to play a significant role here.
Jason Bordoff: And of course there were benefits presumably from the externality you’re avoiding from the avoided climate impacts where pollution or whatever the earth -- I think which sometimes get, I think forgotten; we’ll look only at the cost side of the ledger?
Glenn Hubbard: Sure, I would urge people to spend a week in Beijing and come back and say this is this, you know, a problem we want it or not.
Jason Bordoff: The -- I want to just broaden a little bit beyond climate change to energy more broadly. It just generally your views on the role of and how important energy, the Shale Revolution, energy prices are to the U.S. economy, how important I’d say the Shale Revolution been to the U.S. recovery?
Glenn Hubbard: I think the Shale Revolution has been very important for the country on many dimensions, if-if somebody had said 15 or 20 years ago that North America would approach energy independence most, even “serious” people would have laughed, that they’re not laughing, the Shale Revolution was really a technological revolution that allowed various forms of hydraulic fracturing to work. It wasn’t that people didn’t know the fields over there, it’s the technology wasn’t there. Now the technology is better, marginal extraction costs are coming down. And so I think you will see Shale as a continued swing supply factor. It’s also easier to shut down and bring back up. So I think this is a big change in terms of the economy as a whole it boosted energy investment for a period of time. It certainly improve the availability of low cost energy for much of the United States. So I think it’s a… it’s a very, very, big deal.
Jason Bordoff: I mean one of the ways in which I wonder how significant it may have changed things, I think it’s fair to say you can tell me if this is right, when you were in the White House, but I would guess for most people in your role leaving CEA in different administrations, lower energy prices would better for the U.S. economy from a macro standpoint?
Glenn Hubbard: Oh sure.
Jason Bordoff: We saw a historic price collapse recently from 120 something down to a low point $27, $28 and there’ve been some academic papers including, I saw one from last bookings BPI [Phonetic] [00:15:51] conference showing that this probably had little to know net benefit for the U.S. economy. It is the result becoming a much smaller importer change the way we should think about the cost or benefits to the U.S. economy of higher or lower energy prices?
Glenn Hubbard: I think it does in the transition, certainly the transition you did see a collapse in investment spending, in the energy sector is there lot of low oil and gas prices, but in the longer term low oil and gas prices are still in the interest of the economy as long as they’re reflecting market forces, I would expect going forward as marginal extraction costs get lower and lower and lower, the swings will have less filing economic effect. So I do think have a long term lower prices are still better than higher prices.
Jason Bordoff: And that would be true even if we were in net zero importer or even an exporter or --
Glenn Hubbard: Well, correct, it’s a sown intermediate good. As long as those are world prices yes.
Jason Bordoff: Well, so that, just to make sure I understand prices are set in the global market, so whether we import or not, you’re going to see prices at the pump go up, but if that increase consumer spending is circulating within the economy rather than flowing overseas so it has a less of a terms of trade effect, does that change the macro, GDP impact of an oil price change?
Glenn Hubbard: I don’t think it changes as much, I think in a long term I think about the supply side of the economy, so I'm focused really on intermediate goods prices and the lower prices struck me as a good thing.
Jason Bordoff: On the economy more broadly we been sort of, I mean, I'm curious and your outlook for the global economy, I'm struck by how optimistically the outlook was in dollars just this past January and I was standing some hiccups, the markets at least had since then and then how spooked about geopolitical risk. Everyone seemed a month later when I went to the security conference among other places, what’s your outlook for the U.S. and global economy and how worried -- what are you most concerned about?
Glenn Hubbard: Well, I think the U.S. economy has benefited from a reset in expectations of different public policy environment, different spring and to step up business people, the tax bill, regulatory changes all that is there. I think globally you’ve seen uptakes in growth in much of the world, so I think the environment is good, the risks are familiar, geopolitical risks I would put near the top of the list and potential public policy errors in this country and other countries, but by a large I think the economy if you’re looking at overall GDP growth as your measure of health is in good shape. The political question of course is more about the distribution of that growth. But on the average it’s fine.
Jason Bordoff: When you say policy errors are you -- did you have trade in mind?
Glenn Hubbard: Trade would be near the top of by listing just the environmental policy uncertainty. They would make it difficult for business people to plan. The advantage of the tax bill if that it was a big cut in the cost of capital for investment. And it needs to see that undermined by an increase in certainty that business people feel it would hinder that cost of capital effect flowing through.
Jason Bordoff: So you were among economist who sign the letter to the president urging him not to impose tariffs on steel among other goods and you advice President George W. Bush the same, when you were in the white house.
Glenn Hubbard: So more for two, is that you’re --
Jason Bordoff: No, no I'm not. I'm, why --
Glenn Hubbard: Well, I mean here’s my thinking of it and I think the two scenarios were different and I, the argument I made to President Bush was not the Econ 101 argument he knew that. I made an argument that there would be more job losses as a result of the action he was going to take including in places he cared about from political perspective then there would be job gains. I think at the end of day, he made the temporary steel tariff decision that he did because he was after a bigger trade price which was trade promotion authority.
It was highly confrontational with the congress. He viewed that is a tradeoff. I'm an economist. That’s above my pay grade as they say. But he made a political tradeoff. In the current setting, I don’t think there’s much of trade off. I mean there’s a view that these tariffs are somehow per se good, that’s just not true. The Steel and Aluminum tariffs raise cost in the economy. They are not in the nation’s interest. Even on the issue of China, China is a problem in the world becoming. It is a problem at over supply; it is a problem in theft of intellectual property. The president has his diagnosis more or less right. But, going after China is a multilateral issue, not a unilateral issue. So, that’s where I take issue.
Jason Bordoff: And where does this go from here? How worried are you about this escalating into a trade war when we’ve already seen countries threaten retaliatory actions?
Glenn Hubbard: So far, I think the numbers are pretty small. So, for example, even in the Steel Aluminum tariffs, it’s small number -- billions of dollars of effective consumer tax. It’s not good, but it’s not the end of the world. The China actions so far are not so bad. I just worry about creating again an environment of uncertainty where business people don’t know how to plan or worry about threats not simply in tariff retaliation, but in threats to U.S. businesses operating in China. Remember, we have a lot of corporate presence in China. General Motors sells more cars in China that it does in United States. So, we should really care a lot about those dimensions when we set policy.
Jason Bordoff: And what about the rationale for them on national security grounds or in the solar case section 201, harm to U.S. industry? Are you worried about using some of the -- how could these spiral, how could these be used by others and is the rationale -- should the rationale for these be a concern, even apart from the impact of tariffs?
Glenn Hubbard: I think so. I’m of course not a military expert. But if the Secretary of Defense doesn’t see a national security argument, I’m willing to accept his bona fides on that. And so to me, national security allows a fairly vague argument that other countries can use too to hide -- my mother used to say because I said so. It’s that kind of Ipse Dixit argument their worries me here.
Jason Bordoff: There have been -- as they're often are on these cases, there have been claims by people on both sides about how horrible -- the parade of horribles that will result from this including in the energy sector where people have said increased cost of steel will raise the price of pipelines, raise the price of LNG export terminals et cetera. Is that a legitimate risk or is that kind of exaggerated?
Glenn Hubbard: I think the sign the right in everything you just said. So far, the magnitudes are not very large. I think people need to be calm. The real issue is trying to, I think work with a white house and the President on what is the problem that you're actually trying to solve because I think there are other ways to solve the problem the President sees both as an economic problem and a political problem. I worry his advisors aren’t giving him the options they should.
Jason Bordoff: You mentioned in addition to this -- you mentioned something about policy errors. I brought up the trade thing and then you also mentioned in the distributional question. So, with the stagnant medium wages for a while now and many Americans feeling like they're being left behind in a more globalized economy, this is not new to today. This has been going on for decades. But just talk a little about kind of how you diagnosed that problem and what does it mean for where economic policy needs to head?
Glenn Hubbard: I think it’s really the core of both the economic situation and certainly the politics of where we find ourselves. There are many Americans, typically lower to middling income Americans who feel left behind. When I say the GDP growth may be fine on average, we don’t live on average. We live in our personal situation. Some people have done relatively well, others not. Tangibly to me, that is about supporting work. And I don’t see that as a conservative or a liberal proposition. In fact, I could make conservative or liberal arguments for why to do that and both conservative and liberal political leaders have argued to do that.
President Trump’s swing voters exactly would benefit from that. Some little _____ [00:24:11] just too why this isn’t on the table. I think a number of people feel that the system was not rewarding people who played by the rules. For example, during the financial crisis, a colleague of mine, Chris Mayer and I had argued for mass refinancing home mortgages for people who were current in their mortgage. And instead, many of those people couldn’t refinance, had to pay higher costs or lost their homes and banks were bailed out. And I think people looked at that going, wait a minute, this is not what I voted for. So, I think we have to be very careful. If we don’t have inclusive growth, we should wonder when people say we don’t trust the system anymore.
Jason Bordoff: We brought up in the beginning of conversation the potential for carbon tax revenue to pay for a corporate tax reduction. But, that’s not -- we had corporate tax reduction without paying for it in the sense. So, the estimates vary one trillion, two trillion depending on how you're counting. Adding that much borrowing this late in recovery, are you concerned that we might not have sufficient room moving forward to respond with fiscal policy, if and when there's an economic downturn?
Glenn Hubbard: Marginally, yes, but only marginally in the sense that the fiscal problems facing the country were enormous beforehand and they're principally long term entitlement problem. So, this made them a little bit worse to be sure. But I don’t know that it really changed it too much. But we do have to decide as a country if we want what I would call fiscal space, not just the room to move in a business cycle, but the desire to defend on our nation or to invest more in education or invest more in supporting work. We risk becoming a country whose spending is limited to entitlements and interest payments. I don’t think that’s what the American people signed up for.
Jason Bordoff: I think you warned about this in the Wall Street Journal last month. You wrote about how deficits kind of historically had -- we had seen them in war time periods and there’s been an assumption that we pay for general operations.
Glenn Hubbard: Yeah. I mean we had until recent decades what I would call kind of we the people budget. The people felt that the normal operations of government should be paid for by people alive at the time. And when there are extraordinary things, a war, maybe big infrastructure projects, you use debt for that. But for current consumption, you wouldn’t use debt. That of course unraveled starting about mid 1960s.
Jason Bordoff: Do you think that’s going to complicate the FED’s decisions to have all of this stimulus grading short run pressure at a time when they're looking for signs of inflation?
Glenn Hubbard: I don’t think so. I mean I think the FED, if anything may welcome an extension of the recovery given some of the risks that were being faced. And while inflation is rising, I think it will cross 2% this year. I don’t see anything that tells me there’s a blow out in inflation coming.
Jason Bordoff: I wanted to -- just in our last minute or two sort of asking your reflections on what's happening in Washington more politically with this administration. Now you’ve been in senior position at CA, Chaired CA in the White House. So, having this pace of turnover, this early in administration, seeing kind of people leaving, are you concerned with the stability of the staff and what that means for the policy certainty that you talked about a minute ago?
Glenn Hubbard: Well, obviously there is a lot of turnover. I try as an academic, not a Washington person to focus on low frequency things and when I look at the low frequency things, I like a lot of what I see. I like most of what I saw in the tax bill. I like the regulatory agenda. I like the FED appointments the President has made, all that sounds fine. There’s a lot of high frequency noise that concerns me and the only advice I would give is try to tone that down a little bit, not to please those of us in universities, but to make sure that business people don’t get confused.
Jason Bordoff: And some of the noise, some of maybe twitter -- I mean some of it is real policy. You mentioned trade a minute ago. What are the other policies that kind of most concern you that you're seeing?
Glenn Hubbard: Well, immigration is an example. I’m dean of a school where half of my students are not Americans. I’m very proud of that. I also would love for everyone to work in my country. It’s not because I’m a saint, it’s because I’m fundamentally selfish. I want my country to have the smartest people in the world working here and I’m amazed why our political leaders don’t feel that way. So, we really have to have a way of thinking about immigration that’s smart for the country. And if you want to have better growth prospects for the nation, better demographic prospects, immigration as it has in America’s past will have to be a big part of America’s future.
Jason Bordoff: What are your thoughts about Larry Kudlow coming into the NEC?
Glenn Hubbard: Well, I think Larry comes with some real pluses. He is a conservative thinker which to my mind it weighs as a plus. He’s also a very good communicator of ideas. And I think we’ll be able to articulate those ideas to the President. So, I don’t know who all the President was looking at. But Larry Kudlow is certainly a reasonable choice.
Jason Bordoff: Okay. We’ll continue. We have months -- no, next year or two, we’ll be working on this carbon tax designed project. We’ll have you back to talk about that on the podcast and also some of the public events we have planned on campus later. But it’s been a pleasure to have the chance to talk with you about some issues in the energy world and in the economic world more broadly. Dean Glenn Hubbard, thanks for joining us today.
Glenn Hubbard: Thank you.
Jason Bordoff: For more information about Columbia Energy Exchange and the center on Global Energy Policy, visitors online @energy policy.columbia.edu or follow us @columbiauenergy on social media. We’ll see you next week, thanks for joining.