Why did President Joe Biden’s Build Back Better plan combine such disparate issues as climate policy, child tax credits, and free tuition for junior college? And why is his administration talking now about dividing it into separate pieces? Their own reasons might be purely political, but the separation of these policies can make it easier to reach their separate goals.
The original Build Back Better plan followed the new fashion of combining laudable goals like slowing climate change and correcting social inequalities. Other examples include the European Union and the World Bank. It seems that everybody wants to solve climate change and inequality and do it within the same programme. Yet, combining those goals can make each more difficult to achieve.
Climate and inequality are indeed linked, but in complex ways. One link is environmental: less advantaged people live in more polluted places. A policy aimed at global carbon pollution may result in less local air pollution, which may in turn benefit disadvantaged communities. But that relationship is speculative and depends on the policy.
A second link is regulatory. Some existing environmental policies impose costs on disadvantaged groups. Examples include building energy codes and fuel economy standards. Others provide financial benefits to rich households – like subsidies for Tesla buyers.
The third link is political. Perhaps climate activists and social justice activists can concoct a hybrid policy that both groups would endorse. But that mixed bag would also attract multiple opponents – fossil fuel investors, the one-percenters, and big-government sceptics generally.
All of that complexity means that one goal is unnecessarily traded off against the other.
An example is pricing electricity. Utility regulators in the US typically set a high price per kilowatt-hour that’s above the incremental cost, even including pollution damages. Utilities can then lower the fixed monthly fee they collect to pay for building the power plants and distribution lines. That pricing scheme favours ratepayers who use less electricity, who are presumed to be less advantaged.
What’s the problem? For climate reasons, we want people to quit burning fossil fuels in their cars and furnaces and switch to electricity – particularly as more renewable sources are added to the grid. Charging a high price per kilowatt-hour discourages people and businesses from switching from fossil fuels to electricity.
Worse, that sort of electricity pricing also does a poor job of addressing inequality. The correlation between income and electricity use is surprisingly small, as the highest electricity bills are often paid by the poorest ratepayers. Combining environmental and equity concerns in one programme – electricity pricing – makes achieving either goal more difficult.
Here’s another example. Economists have long argued, perhaps tiresomely, that pollution taxes would efficiently reduce pollution the most per dollar of cost. A chief objection is that the taxes would be paid disproportionately by low-income households. That’s perfectly correct, as far as it goes, but fairness concerns about pollution taxes are misplaced for two big reasons.
First, the objection ignores who gets the pollution tax revenues. If revenues were directed to low-income households through targeted tax reductions or expenditures, then the overall programme could be as progressive as desired.
Second, the objection that pollution taxes are unfair ignores what policy would be implemented instead. If the regulatory alternative is worse for poor people, then that regulation could be less environmentally beneficial and less equitable.
Energy efficiency standards fall into that regrettable category. Efficient cars and appliances cost a bit more to purchase, but they cost less to operate. If you’re going to use them more, then it’s financially worthwhile to pay the up-front cost in exchange for future savings. If you’re not going to use them much, efficient appliances and cars aren’t worth the extra cost.
Richer people typically drive more and use more air conditioning, heating, and lighting. Required energy efficiency is not a burden for them, because they already buy the most efficient cars and appliances. Poorer people generally drive less and use less energy at home. For them, the future energy savings don’t justify the extra upfront costs of energy-efficient cars and appliances. Requiring energy efficiency primarily burdens disadvantaged groups.
The bottom line here is the same: efficiency standards not only cost more and clean the environment less than pollution taxes, they are also worse for low-income households. Combining environmental and equity concerns with one programme increases the difficulty of addressing either.
The solutions in these two examples are straightforward. Separate the environmental and equality objectives. Utilities can help reduce fossil fuel use by charging only the true cost per kilowatt-hour. Other government programmes can help cover the fixed monthly fee for ratepayers that need assistance. Pollution taxes are the least costly way to reduce greenhouse gas emissions. A separate government policy could help low-income households afford what they need. Reducing pollution and inequality are both worthy objectives; they each deserve their own targeted policy.