Op-Ed: The Myriad Benefits of a Carbon Tax
The New York Times | June 28, 2013
Few goals in Washington have more bipartisan support, at least in theory, than cleaning up the tax code. Republicans and Democrats say they want a system that is simpler, fairer and more efficient. Put simply, they want a system with fewer special tax breaks and lower rates.
Yet one of the best ideas for advancing all of those goals – and also heading off catastrophic climate change — isn’t even on the table. I refer to a carbon tax, which would impose a price on emissions of carbon dioxide and other greenhouse gases.
Most climate experts concur that dangerous climate change is occurring at a more rapid rate than expected. They also agree that the deterioration in the earth’s climate is primarily a result of carbon emissions from fossil fuel consumption by humans. If you dispute the overwhelming scientific consensus about man-made climate change and the role of fossil fuel emissions, you should probably stop reading now. Evidence is unlikely to affect your opinions.
But if you accept this consensus, you should know that economists across the political spectrum agree that a carbon tax is the most effective way to discourage carbon consumption and lower the risks of catastrophic climate changes.
I am convinced by the environmental case for a carbon tax. But I want to make a broader argument: a carbon tax could be an engine for tax simplification, deficit reduction, less government regulation and even increased competitiveness.
To be sure, the environmental urgency alone is compelling. In May, atmospheric concentrations of carbon dioxide reached nearly 400 parts per million. When concentrations were last that high – more than three million years ago — humans had not yet appeared, the world was warmer by 3 to 4 degrees Celsius, and sea levels were 80 feet above where they are today.
United Nations negotiators have set a limit of 450 parts per million to prevent costly and irreversible changes in the earth’s climate. At current emission trends, the world will cross this limit in a matter of decades.
The anecdotal evidence of climate change is everywhere: melting Arctic ice, new migration patterns for plants and animals and extreme weather events including record droughts, heat waves, epic floods and super storms. The frequency, intensity and costs of such events are increasing at an alarming rate. Climate scientists have moved from the view that such events are consistent with climate change to the view that climate change significantly increases the odds of their occurrence.
Economists have long contended that a carbon tax is the most effective and simplest way to reduce carbon emissions. Conservative supporters include Gregory Mankiw, a former economic adviser to President George W. Bush, and George P. Shultz, who was secretary of state under President Reagan. Economic centrists include Alan Blinder of Princeton and Robert Frank of Cornell University. Further to the left are the Nobel laureate Joseph Stiglitz and Robert Reich, former secretary of labor. James Hansen, NASA’s former top climate scientist, is also a vocal champion of carbon taxes. So is former Vice President Al Gore, who has advocated carbon taxes for the last 35 years as the policy most likely to be successful in combating carbon emissions.
The beauty of a carbon tax is its market-based simplicity. Economists since Adam Smith have insisted that prices are by far the most efficient way to guide the decisions of producers and consumers. Carbon emissions have an “unpriced” societal cost in terms of their deleterious effects on the earth’s climate. A tax on carbon would reflect these costs and send a powerful price signal that would discourage carbon emissions.
Producers and consumers would adjust their behavior in response to this signal in ways that are most efficient for them. And these efficient micro decisions would support efficient societal outcomes.
There’s much debate about what the proper “social cost of carbon” might be, but there is no debate that carbon emissions are seriously underpriced. Any tax on carbon would be an important step in the right direction, and it could be gradually increased to give consumers and producers time to modify their decisions.
Without a tax, the government has to rely on second-best regulations to limit carbon emissions. Facing Congressional inaction and staunch opposition to a carbon tax, this week President Obama proposed regulations on carbon pollution standards for new and existing power plants using his executive authority under the Clean Air Act.
A carbon tax is also a cheaper and often more efficient way to reduce carbon emissions than subsidies for alternative fuels. Generous subsidies for biofuels have cost billions of dollars; by reducing the price of gasoline they may have perversely increased rather than decreased carbon emissions.
Other subsidies, like the production tax credit, have been successful at ramping up research, development and deployment of alternative energy technologies in recent years. Such subsidies would be even more effective in combination with a carbon tax that would make fossil fuels less price-competitive and would stimulate research on renewable and energy-saving technologies.
The Congressional Budget Office estimates that even a modest carbon tax could reduce both greenhouse emissions and the federal budget deficit. A tax of $20 per ton of carbon dioxide, which would translate to about 15 cents per gallon of gasoline, would reduce emissions by 8 percent and generate up to $1.2 trillion in tax revenues over 10 years.
None of this is controversial to economists. As Professor Mankiw remarked a few years ago, the basic argument for a carbon tax “is so straightforward as to be obvious.”
Politically, of course, it’s anything but obvious. Republicans and Democrats fear that a carbon tax would antagonize voters by raising the prices of products with fossil fuel content for everyone who uses them. Republicans worry that a carbon tax would be a source of government revenue to feed “big government spending.” Democrats worry that a carbon tax would be regressive.
Both objections are easy to address. The revenues from a carbon tax do not have to be used for more government spending; the tax’s burden on low-income families can be offset by targeted income support measures, like those used in other countries to offset the regressive effects of value-added taxes.
Adele Morris at the Brookings Institution estimates that diverting just 15 percent of the revenues from a $16-per-ton carbon tax would provide enough money to keep low-income households whole. The remaining money could be used to finance a substantial reduction in corporate tax rates and reduce deficits by $815 billion over 20 years. Government spending would not increase.
Put another way, a carbon tax can be a central pillar of tax reform and sound fiscal policy. If a carbon tax were used in part to replace other forms of taxation, it would be a major force for tax simplification. It may seem like a “liberal” initiative, because its core purpose is to slow climate change. But a carbon tax also bears a strong resemblance to the kind of flat, broad-based tax on consumption favored by many conservatives.
Opponents of a carbon tax, and of climate-change legislation in general, often assert that it would put the United States at a competitive disadvantage. They usually point to China, the world’s biggest emitter of greenhouse gases (the United States is in second place and not far behind).
The competitiveness objection to a carbon tax is crumbling fast, however. This year, China announced plans for a carbon tax. Many European countries with which the United States competes, including Germany, an export powerhouse, already have carbon taxes in addition to very high gasoline taxes.
In May, the World Bank reported that countries that either have carbon taxes or are scheduled to impose them account for 21 percent of global greenhouse emissions. If you add China, Brazil and other countries that are actively considering carbon taxes, the share goes up to more than 50 percent.
In his speech, President Obama said the United States must lead international efforts to combat climate change, calling for a global free trade in environmental goods and services and renewed negotiations on a global agreement to reduce carbon. The United States could breathe new life into these negotiations by announcing its commitment to a carbon tax harmonized with those of other nations.
A well-designed carbon tax is probably the single best tool for fighting catastrophic climate change and safeguarding the earth for future generations. It can also be a key component of tax reform and deficit reduction, both of which would enhance the nation’s competitiveness. Much of the world is already heading for a carbon tax: the United States should get out in front and lead the way. As Mr. Gore recently blogged, “A tax on carbon is an idea whose time has come.”