Question

Recent failures of carbon tax proposals and cap and trade program proposals to gain sufficient political support are causing environmental economists to shift their thinking on preferred policy. There is a thought that any policy is better than no policy. And what good is a carbon tax if it works in theory but never merits democratic consideration? There is concern that incentive based schemes --which were supposed to avoid such political contentiousness-- are just simply unpopular.

Expound on this issue, making sure to draw upon our many discussions regarding the costs, benefits, and uncertainty regarding environmental policy. Also, be sure to add your own voice to this discussion, specifically with respect to why you think it's so hard to pass environmental policy at the state level.

Answer 1

By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future

Not all economists agree that the tax should be revenue neutral in this way, but the profession has been coalescing in recent years around the idea of a carbon tax. Most prefer such a tax to the most prominent alternative policy for tackling carbon emissions, cap and trade, according to a recent poll of expert economists.

But a carbon tax seems to be a political nonstarter in the United States. The bipartisan call for action from economists over the years has been echoed by a failure to act by presidents from both parties. President Donald Trump denies the need to confront man-made climate change. But although Barack Obama, his predecessor, in 2015 called a carbon tax “the most elegant way” to fight global warming, he didn’t push strongly for one to be introduced. “One of my very, very few disappointments in Obama when he was president is that he did not come out in favor of carbon tax,” Yale’s William D. Nordhaus told the New York Times last October, days after winning the 2018 Nobel Prize in Economic Sciences for his work on economic modeling and climate change.

US states have shown that they, too, can reject a carbon tax. Even in heavily Democratic Washington state, voters last year rejected (for the second time) a proposal to tax carbon-dioxide emissions. The New York Times published an opinion column in December by one of its former environmental reporters titled “Forget the Carbon Tax for Now,” calling it politically toxic. Days later, Paul Krugman, a Times columnist and 2008 Nobel laureate, wrote that he too had concluded there was no near-term political support for such a tax.

In terms of confronting climate change, the US is a laggard. Twenty-six countries and provinces have implemented some form of carbon tax, according to the World Bank, and there are another 25 emissions-trading systems. In Canada, where some provinces have introduced carbon pricing, Prime Minister Justin Trudeau is leading a charge to introduce a federal carbon tax, with 90 percent of the revenues directly rebated to citizens.

To its proponents, a carbon tax is simple and clearly beneficial. It would account for the costs of pollution that aren’t already priced into what people pay at the pump to fuel cars, send to the electric company to power homes, or offer up daily to Amazon to have items shipped. Releasing carbon dioxide into the atmosphere is heating the planet, melting glaciers, and changing the Earth’s weather patterns. These emissions cause long-term damage that could destroy the environment as we know it, and, the argument goes, a tax would give businesses, governments, and households an incentive to reduce and ultimately eliminate them.

Many believe the need for action is urgent. According to the US National Oceanic and Atmospheric Administration, carbon stored in the Earth’s atmosphere is at its highest levels in 800,000 years. The effects of the warming atmosphere will be felt more quickly than anticipated, a UN scientific panel concluded last October, saying that without a global carbon tax, any temperature target will be exponentially harder to meet. However, does a tax, arguably the best economic tool that exists for addressing climate change, have any possibility of ever being implemented widely? And if not through a carbon tax, how should we put a price on carbon?

THE COST OF CARBON

Economists generally believe that we, as current users of fossil fuels (heating and air conditioning our homes, driving to work), have gotten a free ride for too long because the price we pay at the pump, however high it may seem, accounts only for the costs of extracting and refining the oil, plus profit and overhead for the company selling it. We’re not paying for the costs that come later, in the form of harm to future generations—rising sea levels, destructive heat and erratic weather patterns, and social and political turmoil. The market hasn’t accounted for these “external” costs because they are not embedded in the prices of the carbon-intensive goods we produce and consume today. As a result, we ignore those costs, carbon emissions are high, and the burden falls on others down the road.

This puts democracies in a particular political pickle. When a commuter burns a tank of gas and belches exhaust, the brunt of the bill is passed to future generations. The same is true for people who fly in planes, or leave their lights or appliances switched on, using electricity often supplied by burning coal. The free ride has gone on for so long, how can anyone convince the current generation of consumers, many of whom are skeptical that the government’s role should be expanded, that the bill should land on them?

Carbon emissions create an economic externality, when the costs of an economic activity are borne by neither the producer nor the consumer. Economists would have us measure the cost of the externality and add it to the price of the good. If producing plastic coffee pods releases carbon dioxide into the atmosphere, for example, the price of pods at the grocery store would reflect that. The idea is that adding to the costs of pollution will eventually reduce pollution, as businesses and consumers find money-saving alternatives.