How the Fed Is Helping Make the Case for a Carbon Tax

The longer interest rates stay higher, the stronger the case grows for … a carbon tax.

Hear me out. The one great legislative push for carbon pricing, in 2010, came at a time of sky-high unemployment and low interest rates. It fell apart, but US emissions decreased anyway as newly plentiful natural gas started to crowd out more emissions-intensive coal. Over the next decade, the world’s entrepreneurs and engineers — assisted by modest government programs in the US and elsewhere — made considerable progress on bringing down the cost of manufacturing photovoltaic panels and batteries, helping to accelerate global investment in clean energy.

This mix of technological progress and cheap money laid the conceptual groundwork for the approach of President Joe Biden’s administration: Subsidize innovation and deployment, and let God and the Federal Reserve sort out the rest.

And on one level it’s working. Electric vehicle sales are up. There will be more investment in solar power this year than in oil. Batteries for both EVs and grid-attached storage keep getting cheaper.

What’s not cheap anymore is money itself, with interest rates up as part of the Fed’s effort to control inflation. Now the central bank says it expects just one rate cut this year. But even if it cuts twice, there’s no prospect of rates going all the way back down to their pre-Covid levels, especially with the budget deficit both high and rising.