Climate Change’s Stunningly Simple Solution
By Alexander Posner
Politicians, commentators and activists around the world heralded the 2015 Paris Climate Accord as a critical victory in the fight against climate change. Now, the more difficult task of converting diplomatic pledges into emissions reductions must begin. While political leaders have a diverse assortment of policies at their disposal, the single most effective strategy is to place a tax on carbon. No other policy is as efficient, minimally invasive, and politically palatable.
At the core of the climate change problem is that producers of carbon do not pay for the environmental impacts of their carbon production. As a 2006 British government report stated, “Climate change is the greatest market failure the world has ever seen.” Instead of prices that account for the true costs of production — particularly environmental damages — consumers pay substantially less. The prices that inform purchasing decisions are fundamentally misleading and encourage both artificially high consumption and a continued reliance on carbon-emitting fuels.
A carbon tax would directly correct for this market failure. By levying a tax on CO2, policymakers would force market prices to reflect the true cost of carbon. The corresponding benefits would be manifold. First, by increasing energy prices, a carbon tax would encourage greater energy efficiency. Consumers and firms, faced with higher energy costs, would be encouraged to minimize their overall energy consumption. Second, a carbon tax would render fossil fuels more expensive and heighten the financial appeal of renewable energies. Third, a carbon tax represents a direct appeal to economic fairness. Under the policy, those who spew the most carbon—and thus contribute most to climate change—would shoulder the associated costs of their behavior.
In addition, the carbon tax could be designed to return any accumulated revenue to the public because the central purpose of carbon taxation is to change behavior not fill government coffers. For example, a $25/ton price on carbon in the US would generate $125 billion annually for tax rebates—equivalent to a 15 percent reduction in personal income taxes or a 70 percent decline in corporate taxes. This revenue-neutral approach would dampen any of the tax’s negative effects and render the policy more politically palatable.
Among economists, support for the carbon tax is widespread. Gregory Mankiw, who runs the Economics Department at Harvard and chaired the Council of Economic Advisors under President George W. Bush, considers the issue “a no-brainer.” He has written countless editorials on the subject, and has heralded the policy as “eminently sensible.” Nobel Prize laureate Paul Krugman is similarly a strong supporter of the carbon tax, which he dubs “the Economics 101 solution.” So too is Nobel Prize laureate Joseph Stiglitz and Dartmouth economist Charles Wheelan, the latter of whom characterized the carbon tax’s merits as “irrefutable.” As Yale economics professor Aleh Tsevinsky neatly summarized, “Basically 100% of economists agree that carbon pricing is the most effective policy response to climate change.”
Many in the private sector have echoed the chorus of support for carbon pricing. Exxon Mobil, for example, has publicly advocated for a carbon tax, as have Shell and BP. In their eyes, a carbon tax would bring certainty to the energy markets, confirm the value of cleaner-burning natural gas, heighten gas’ ability to compete with coal, and diminish the need for other, more invasive, climate policies. As ExxonMobil CEO Rex Tillerson argued in 2009, the carbon tax is “the most efficient means of reflecting the cost of carbon in all economic decisions — from investments made by companies to fuel their requirements to the product choices made by consumers.” In a world without carbon pricing, political leaders—assuming they act to address climate change—would embrace policies like subsidies, grants, and tax credits for renewable energy or perhaps mandated emission requirements. They require government regulators to pick winners and losers (i.e. which technologies and companies deserve subsidies or tax credits) thus interfering with the market’s ability to efficiently guide capital. In the world of a carbon tax, by contrast, the government would simply put a price on carbon, step back, and let the market operate, allowing businesses to choose the most painless path to emissions reduction.
The embrace of carbon pricing by fossil fuel firms, while notable, is not unique. Over 1000 global companies and investment firms, from Nestle to Nokia, have publicly called for carbon pricing. Wal-mart, Chevron, and many others have introduced internal carbon pricing to guide their spending and investment decisions. These companies see a carbon charge as the best and inevitable solution to climate change and are preparing for the future.
The merits of carbon pricing are not simply theoretical; they are also confirmed by real-world experience. In 2008, for example, British Columbia introduced a revenue-neutral carbon tax of $21 per ton—equivalent to 17 cents per gallon of gasoline. Since then, BC has witnessed a 5-15% drop in CO2 emissions and the highest economic growth rate of any Canadian province. In addition, the policy’s revenue-neutrality has yielded over $5 billion in income and other tax cuts and one of the world’s most competitive tax regimes; the province now boasts the lowest income tax rate in Canada and one of the lowest corporate tax rates anywhere in North America. Unsurprisingly, the policy’s popularity has steadily increased, and today the tax enjoys over 60% support from the BC populace. Similarly, Australia — whose per capita carbon output exceeds that of the United States — introduced an economy-wide carbon tax in 2012. In just two years, the country witnessed an 8.2% reduction in overall carbon emissions. Australia repealed its carbon tax in 2014 after conservative Prime Minister Tony Abbott swept into office. Since then, Australia’s carbon footprint, which had been on the decline, has climbed.
Including cap and trade, carbon pricing policies extend to nearly 40 countries, including the 28-member European Union. Almost one billion people—equivalent to 14% of the global population—now reside in regions with some form of carbon pricing, and more carbon pricing is on the way. Alberta, Canada’s largest oil and gas producer, will impose a $21 carbon tax starting in 2018, and Ontario has made a similar pledge. Even China, the world’s largest emitter of carbon, has committed to establishing a national cap and trade system by 2017.
In light of the carbon tax’s strong support and popularity, the US has yet to implement the policy. Working against the carbon tax, however, are a couple of factors. First, the carbon tax requires paying costs in the short term to avoid even greater costs in the long term. Many are reluctant to sacrifice present day well-being for the sake of future generations, especially politicians. In particular, the GOP is the only major party in the democratic world that rejects the science of climate change. Republicans like James Inhoffe — who chairs the Senate’s science committee— allege that anthropogenic climate change is a hoax designed to expand the size of government and funnel money into the pockets of researchers.
To confront overall Republican intransigence on climate change, a carbon tax should be designed to provide strong bipartisan appeal. First, in the short term, the policy should be revenue-neutral; any increase in revenue should be offset by comparable tax cuts for consumers and corporations. A sweeping income tax reduction, for instance, would likely garner widespread public support and increase the popularity of carbon tax regulation.
Second, and most importantly, the carbon tax should be pitched to Republicans as a tool for shrinking the size of government. Because a carbon tax succeeds when there is less carbon left to tax, the revenue from the policy naturally dries up over time. Instead of raising other taxes to fill this void, Democrats could agree to let government revenue shrink and, with it, the size of government. While such a concession would be painful for many Democrats, it is a worthy price to pay to contain the threat of climate change.
Considered alongside its peers, the carbon tax stands as the single-most effective response to climate change. Not only does it reduce energy consumption and heighten the competitiveness of renewable fuels, but it also represents the least invasive and most efficient response to global warming. Its growing chorus of supporters from academia and industry is a clear indication that the policy’s time has come. As Nobel Prize laureate Joseph Stiglitz contended in 2014, “Over the long run we will have to have a carbon tax, the world will come around to this.” Whether humanity comes around on carbon taxation in a timely fashion is ultimately the key question. The longer the US and the world wait to place a price on carbon, the greater the risk of climate change will be.
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Alexander Posner ‘18 is an Ethics, Politics, and Economics major in Morse College. Contact him at alexander.posner@yale.edu.