What to Expect on Energy in Obama's Second Term

Coral Davenport

The president hopes to use his second term to fight global warming. By signing a law to cut fossil-fuel pollution and decisively turn the nation toward clean, renewable-energy sources, Obama could make a profound difference in the economic, environmental, health, and national-security future of the United States—and the rest of the world. And it’s the kind of sweeping achievement that historians say he craves for his own legacy.

Obama’s last, best chance to do this will come as part of a nuts-and-bolts effort to reform the corporate tax code.

Here’s why: Economists and environmentalists have long agreed that the most effective way to stop climate change and drive markets toward clean energy is to put a price tag on carbon pollution. It’s a time-tested and effective policy. Raise the price of the thing you want less of—pollution from coal and oil—and market forces will drive consumers and businesses to buy low-polluting sources of energy instead. The increased market demand for those sources drives up production scale and lowers the down price.

In his first term, Obama tried and failed to push such a cap-and-trade bill through Congress. Cosponsored by liberal Democrats from California and Massachusetts, championed by green advocacy groups, and reviled by most Republicans, the measure ran aground in the Senate, and “cap-and-trade” became a politically toxic catchphrase. The administration was instead reduced to using the Environmental Protection Agency to push through a slate of antipollution regulations. 

Over the next two years, the president will have one more chance to push carbon-pricing legislation through Congress—this time, however, with a distinctly different political profile. As early as next year, Congress is expected to take up a sweeping tax-reform package that would lower corporate rates and eliminate loopholes in the tax code. As part of that process, support is growing for a carbon tax, to be paired with a cut in the payroll or income tax. The strongest supporters of the idea are conservative economists—including Gregory Mankiw, Mitt Romney’s economic adviser; Douglas Holtz-Eakin, who advised Sen. John McCain’s 2008 presidential campaign; and Art Laffer, President Reagan’s chief economic adviser. Republicans want to find a way to cut taxes on work or income—and many, at least, don’t oppose the idea of moving that tax over to carbon pollution.

The idea taking shape is to tuck a “carbon-tax swap” into a broader reform package, framed as conservative fiscal policy and championed by Republicans. That could provide the political cover it would need to get through Congress, although it will still require an uphill push. One big challenge will be to get enough Republicans, and many coal-state Democrats, to  sign on to something that will inevitably be labeled an “energy tax” by groups like Americans for Prosperity, the super PAC linked to the oil conglomerate Koch Industries.

Still, a growing number of political pieces are sliding into place to include a carbon-tax swap as part of broad reform. If that happens, it could be the biggest, most transformative energy and environmental legislation in a generation—a policy that could fundamentally change the nation’s energy economy for the next century.