Question

Climate Change will have a disproportionate impact on developing countries. Many economists have proposed a tax on carbon on other greenhouse gases (generally referred to as a “carbon tax”). a) Why do economists favor such a tax? What are the limitations of such a tax? b) Suppose a carbon tax is not politically feasible. Design an alternative policy, or set of policies, to lower greenhouse gas emissions. c) Do you think your proposal is politically and economically feasible?

Answer 1

Climate Change will have a disproportionate impact on developing countries. Many economists have proposed a tax on carbon on other greenhouse gases (generally referred to as a “carbon tax”) :

Carbon tax :

A Carbon tax is a specific tax on the consumption of goods which cause carbon dioxide emissions. C02 emissions have been identified as a major source of global warming and therefore, governments have been keen to reduce carbon emissions.

Economist favors carbon tax because :

• Carbon taxes have been suggested as a way to internalise the negative externality of carbon emissions. This means that consumers/producers will pay the full social cost of consumption. For example, the private cost of an aeroplane may be £400. However, the external cost of pollution from that air flight might be estimated at £120. Therefore, the carbon tax would add £120 onto the flight, and the final price would be £520. This would discourage some from flying – leading to a reduction in air-travel and a reduction in pollution. If people pay the full social cost – it will lead to a more socially efficient level of consumption.
• Carbon taxes provide an incentive for firms to use and develop more environmentally friendly production processes. If we tax carbon emissions, then it may change the balance and make solar power relatively more competitive than burning fossil fuels like carbon. This will encourage investment in renewable energy and lead to further technological developments. In recent years, investment and new technology have made solar energy more effective and efficient.
• They can also raise money to be spent on environmental initiatives. The revenue raised from a carbon tax can be used to fund investment in alternatives. For example, the government can subsidies more environmentally friendly public transport.

Problems with Carbon Taxes :

• It can be difficult to measure how much carbon is produced, and therefore difficult to know what level of carbon tax to charge.
• Carbon taxes can cause the possibility of tax evasion. For example, firms try to mask the true level of pollution. Alternatively, we could outsource production to countries with less stringent tax systems – in effect exporting pollution to poorer countries. Carbon taxes may need global agreements.
• Discourage investment. An argument made by business is that carbon taxes will discourage investment and reduce profitability.

Suppose carbon tax policy is not politically feasible, alternate set of policies to lower greenhouse emission are :

Improve efficiency of air conditioners using efficient equipment :

• Air conditioners have a high impact on the climate, both in the energy and refrigerants they use — super greenhouse gases called hydrofluorocarbons. HFCs are short-lived pollutants, but they have an impact on global warming that’s hundreds to thousands of times more potent than that of carbon dioxide by mass. Yet as the world gets hotter, air-conditioner demand is growing, with experts projecting we’ll have 4.5 billion units by 2050, up from about 1.2 billion today.
• We can also encourage your legislators to require the highest energy efficiency standards for air conditioners, and to use their buying power to insist on only the most efficient equipment.

Encourage electric vehicles :

Americans are driving more miles in the same old cars, and because we use fuels made from oil to power most of our transportation system, moving people and goods around is the largest source of U.S. carbon emissions. Because we use little oil to make electricity, and the power grid is getting cleaner as natural gas and renewables replace coal, electrifying as much of the transportation sector as possible could speed up an energy transition.

Prevent wasted food — the right way

In the United States, we waste up to 40 percent of our food supply — enough nutritional value to feed millions. The United Nations estimates that if wasted food was a country, its greenhouse-gas emissions would rank third globally. That’s in part because of the food system’s outsize climate impact: It accounts for an estimated 19 percent to 29 percent of global anthropogenic greenhouse-gas emissions.

Halving waste of food is an audacious target, but it’s achievable. Food waste bans can dramatically ramp up the

prevention, recovery and recycling of food.

Incentivize carbon farming :

The agricultural industry is a leading source of greenhouse-gas emissions globally. But it can be reduced if states can help by passing legislation that incentivizes carbon farming.

Carbon farming refers to climate-smart agricultural practices that reduce greenhouse-gas emissions by sequestering, or storing, carbon in the soil instead of promoting its release into the atmosphere as carbon dioxide. Carbon farming improves soil health and productivity, thereby maximizing crop yields. It also increases soil resilience and reduces the need for pesticides. Incentivizing carbon-farming practices will ensure that agriculture’s future is both economically and environmentally sustainable.

The above set of policies can reduce greenhouse gas emission to great extent and these are economically and politically feasible as all section of society will take little pain to make environment better for present and future generation and prevent global warming :

A. Economist favors such tax as there is a general tendency of people that "no one likes to pay tax" As it reduces their personal disposable income. Hence, application of tax will discourage more carbon emission. Limitation of such tax is that it may discourage necessary industrial Activities.

B. Other policies could be a use of cleaner fuels. Government should provide subsidy to firms using clean fuel as it would encourage them to do so and eventually will help in pollution reduction.

C. Yes I think the proposal is politically and economically feasible.

Why would we expect economists to support a carbon tax? It's very close to the economic ideal. Global warming is a phenomenon associated with emissions of greenhouse gases over and above natural cycles—largely those resulting from the burning of carbon fuels humans have dug up out of the ground. We expect normal economic activity to maximise social good because each individual balances costs and benefits when making economic decisions.

Carbon emissions represent a negative externality. When an individual takes an economic action with some fossil-fuel energy content—whether running a petrol-powered lawnmower, turning on a light, or buying bunch of grapes—that person balances their personal benefits against the costs of the action. The cost to them of the climate change resulting from the carbon content of that decisions, however, is effectively zero and is rationally ignored. The decision to ignore carbon content, when aggregated over the whole of humanity, generates huge carbon dioxide emissions and rising global temperatures.