If you have been following politicians or economists over the past few years, you’ve probably heard about the idea of a carbon tax thrown around as an important tool for fighting climate change in the United States. Despite discussion year after year, nothing ever happens with it. Implementing a carbon tax is the first and easiest step we can take towards slowing climate change.
Taxes aren’t fun. Indeed, no one likes paying them, but they are an effective and important economic tool for correcting market failures. A market failure occurs anytime the market naturally produces an inefficient outcome through either incomplete information or an imbalance in market power. In relation to climate change, the burning of fossil fuels and the subsequent greenhouse gasses that are generated is a negative externality in the market — my choice to burn one more ton of fuel impacts other people, at a negative cost, without taking that cost into the price of the transaction. Taxes work to remedy this. They raise the costs of the private transaction in order to reduce the total number of transactions.
But is a carbon tax worth it? Some critics say that carbon pricing would be largely ineffective in actually stopping climate change. It’s true that a carbon tax alone will not be able to stop anything by itself — but it can delay its effects. Additionally, it shouldn’t be the only policy enacted, but rather the first step towards a reasonable and effective portfolio of climate-forward policies. As far as climate policies go, a carbon tax is the lowest hanging fruit.
Another concern is that carbon pricing could be a regressive tax. Structurally, the policy would levy a per-unit tax on fossil fuel on the producer (for exmaple, companies would have to pay per barrel of oil they extract from the ground). However, producers will pass along some of the cost of the tax to consumers by raising prices. In a perfectly responsive market, people would then consume less as a result of the price change. The problem is that fossil fuels today remain an inelastic good: People can’t easily reduce their consumption overnight.
How you view the legitimacy of that argument largely depends on your reasoning behind who is buying what and how much of it. On the one hand, lower income communities have less free cash to switch to more environmentally friendly alternatives. They can’t just trade in their gas-guzzler for a Tesla to avoid the higher price of gas. Alternatively, richer people burn more on the aggregate just by way of owning more things (multiple cars instead of one), or through more air travel. As it turns out, this intuition is more likely to be the case. In the U.S., wealthier people produce more emissions, even those who describe themselves as “green” or “environmentally conscious.”
One of the more exciting perspectives about carbon taxes is the ability to draw bipartisan support. A popular national policy proposal currently in circulation is a carbon fee and dividend. This policy, with Republican and Democratic support in Congress, would address many of the related issues. What is unique about the fee and dividend proposal is that it is revenue-neutral. All the revenue generated by the tax is redistributed to all Americans. This is to help offset any rising prices as a result of the tax and is a progressive solution to what others argue is a regressive tax.
Yet, as I stated earlier, we have been here before. The economic and environmental justifications for a carbon tax in any form are established and clearly defined. We simply lack the political will, it seems, to actually do anything about it. The current administration, at the national level, does prioritize adopting smart climate policies at all — in fact, it’s almost the opposite. That needs to change. Especially if something bold like the Green New Deal never comes to be. In the absence of scoring a “Hail Mary” touchdown, we need to kick the easy field goal in passing a carbon tax to help slow climate change.
Timothy Spurlin can be reached at timrspur@umich.edu.