Co-author Nikki Niloufar Hafizi

From the state of Washington to the streets of Paris, proposed taxes on carbon have been making headlines. Why a carbon tax, and what are the arguments for and against it?

Pricing carbon

A progressive carbon tax is a climate-change mitigation policy preferred by many economists. Their reasoning goes like this: Carbon and other greenhouse gas emissions contribute to collective problems such as air pollution and climate change, but the entities emitting the GHGs don’t pay for the damage to the “atmospheric commons”. The price of GHG-emitting activities is lower than its theoretical market price should be, and humans consume more than they otherwise would of these GHG-intensive products and services (think gasoline). A tax on carbon content would correct this market failure and incentivize market participants (consumers and producers … such as yourself?) to emit less carbon by changing their behavior and using different technologies.

The tax can be levied at the point of emission, or on carbon-intensive products and services at the point of consumption (such as a gasoline tax). Either way, most economists will tell you that a tax on emitters would likely show up in the product price.

Citizens have not been eager to implement this economist’s dream. Just last month a Washington state ballot initiative to charge a carbon fee of $15 per metric ton failed for a host of reasons. Across the border, Canada’s federal government is having difficulty convincing the provinces to meet its carbon pricing and reduction goals, while in France, “yellow vests” have forestalled a proposed diesel fuel tax by upholding the national tradition of seriously disrupting daily life in a series of sometimes violent protests (They have since moved on to other grievances).

What are the arguments?

Proponents cite these benefits:

  • Market corrective that discourages air pollution
  • Can be administered to reduce the marginal tax rate over time
  • Generates revenue that can be used to invest in education, energy research, and poverty reduction initiatives
  • Reduces uncertainty about cost that comes with regulatory limbo or cap-and-trade systems

Opponents cite these detriments:

  • Hurts families and the economy in areas dependent on oil and coal production
  • Will disproportionately impact the poor, who tend to spend a larger portion of income on fuel (the complaint of the yellow vests)
  • Ignores better market-based approaches, such as cap-and-trade systems
  • Merely incentivizes people to buy gasoline and other carbon-rich products elsewhere
  • Such a tax will be the result of the political process, and thus likely not to be designed or implemented judiciously (See this criticism of Portugal’s carbon tax)

Views on a carbon tax do not always fall neatly into one of two opposing camps. Jerry Taylor of the Niskanen Center voices a nuanced and qualified support of the tax considered in a larger policy context.

Dividends, not taxes

One plan garnering attention in the U.S. is the Baker-Schultz Carbon Dividend Plan, named after its two most illustrious proponents, James A. Baker, III, and George P. Schultz. The plan, proposed by a primarily oil and gas industry-led group called the Climate Leadership Council, seeks to popularize a $40-a-metric-ton tax by combining it with other features, one of which is regulatory streamlining, such as eliminating the EPA’s authority to regulate carbon emissions. More appealing for the average American is how the proposed tax becomes a dividend: The proceeds would become a monthly payment to Americans [administered by the Social Security Administration] instead of government tax revenue. The plan has support from across the spectrum. As of two days ago ConocoPhillips and The World Wildlife Fund have pledged their support.

This plan, too, has critics, varying in nuance and political bent.

  • Some criticize the plan’s price, arguing that its environmental benefits will not justify  the economic costs, and that a cap-and-trade program would be superior.
  • Some take this argument further with regard to any carbon tax, which they have characterized as an unnecessary response to uncertain climate projections based on biased assumptions. A major criticism of carbon pricing generally is that it is meant mainly to prevent future harm. When estimating the benefits of carbon pricing, analysts must put a value on future generations’ well-being, an inevitably subjective, ethical judgment that can’t be quantified well.
  • Some say that the plan’s payout feature is unsustainable, and is meant to make Americans rely on continued fossil fuel consumption in order to receive a check.
  • The plan excludes methane, a GHG with potentially more powerful adverse warming effects than CO2.

Will carbon pricing in any form become reality in 2019? We’ll have to wait and see.

Regardless of what you think of carbon, Hey! Merry Christmas … and some church music for the season.