Environmentalists and progressive politicians have long upheld the carbon tax as a mechanism of steering us away from an environmental apocalypse. While there is clear value to these policies, several economists and politicians also point out red flags. Are carbon taxes the solution we have been searching for, or do they create more harm than good?
The aim of a carbon tax is to incentivize individuals and corporations alike to stop taking actions that create mass carbon dioxide emissions, or at least perform these actions on a smaller scale. Carbon dioxide is a greenhouse gas. Lowering carbon emissions can help diminish the harmful effects of climate change.
At first glance, the solution seems simple. Carbon dioxide and other greenhouse gases are byproducts of bringing other goods to market. In other words, emissions are negative externalities to production, because they create a situation where the marginal social cost exceeds the marginal private cost. The First Law of Demand predicts that when the price of a good increases, the quantity demanded decreases, ceteris paribus (“all else being equal”). If legislators place a tax on carbon, the cost of producing carbon will increase. We can then anticipate that carbon-producing companies will take steps to decrease the amount of carbon they produce. This analysis, however, is only cursory. There are several other factors we must consider when holistically evaluating the potential impact of the carbon tax. Price elasticity of demand for a good in question is a prime example, representing how much the quantity demanded of a good changes as a result of a shift in price.
Some Context: Movement Toward Greater Environmental Regulation
The future of our environment is becoming an increasingly hot topic (pun intended). Electing Alexandria Ocasio-Cortez to the House of Representatives in 2018, with her sponsoring of H.Res.109, has only exacerbated this trend. The bill, released in February of 2019, calls upon the government to develop a “Green New Deal.” While the text does not explicitly mention a carbon tax, it does allude to a policy of this sort. It asserts that “the United States must take a leading role in reducing emissions through economic transformation.”
While there is currently no federal carbon tax in place, state governments have taken other actions to de-escalate emissions. Instead of taxing emissions, some state governments rely on cap and trade programs, which set an upper limit on the quantity of emissions and then create permits to pollute that sum up to the decided amount. Firms can buy and sell these permits among themselves. The Regional Greenhouse Gas Initiative is one such system, currently encompassing ten states. California has its own cap and trade program, which is linked with the Canadian province of Québec. (This covenant came under fire in October 2019, when the Trump administration declared that California had moved beyond its ability to direct international affairs.)
Regardless, politicians on both sides of the aisle advocate for a means of putting a price on carbon. For example, in December 2018 and January 2019 politicians in the Senate and the House of Representatives raised bills aimed at pricing emissions and redistributing the income to households.
Our neighbors to the North have also contemplated a carbon tax as a means of lowering emissions. A federal carbon tax was instituted under the Trudeau administration in the spring of 2019. However, several provinces have their own specific plans (whether in the form of taxes or cap and trade initiatives) they will use in place of complying with the federal one. In provinces held to the federal tax, increasing costs of emissions are complemented by “climate action incentive payments” to taxpayers.
Arguments for the Carbon Tax
Many economists agree that a tax on carbon emissions would motivate people to transition over to more eco-friendly alternatives. In situations where the precedents are not already in place, scientists and engineers would have clear provocation to devise these new, more efficient mechanisms – if not morally, then at least in pursuit of the profit resulting from increased demand. Whether this occurs on a large scale in industry or a smaller scale in households, the effects are likely to be positive.
A carbon tax would also generate revenue for the government, which could be put towards researching and developing sustainable industrial practices or used to fund social or educational programs. This revenue could also be given back to the public more directly through a refund or stipend program.
Advocates also point to the reliability of a carbon tax over cap and trade programs. While the price of permits in the latter scheme is determined by the market, the price of emissions in the former is set to a specific level, making a carbon tax less volatile. Therefore, companies can use this knowledge to formulate long-term green plans and projects.
Arguments Against the Carbon Tax
Even in the wake of these benefits, the carbon tax is not a flawless policy. Critics state that the tax would likely be regressive, meaning people on the lower end of the income spectrum will be impacted more negatively than earners on the higher end. It seems, then, that the tax could very well end up exaggerating the inequities that climate change makes very clear.
Additionally, the impact of a moderate carbon tax may not be as drastic as one would hope. Those opposing the policy acknowledge that since energy tends to be a rather inelastic good – meaning an increase in price will be met with a smaller drop in the quantity demanded – the tax would have to be extreme in order to get emissions to desired levels. Therefore, some scholars note that a carbon tax might be most efficiently used in conjunction with other policies, such as investment into more sustainable transportation systems.
A carbon tax could also be damaging for American manufacturing, because the increased costs would force companies to look to save money in other areas – by cutting jobs. Several American companies are already criticized for outsourcing labor overseas. This policy could create even more disdain for the labor strategies of these companies.
Where does this leave us?
In constructing a comprehensive dialogue surrounding climate change, it is important to note that communities of color are especially likely to bear the brunt of its negative effects. For example, Green America points out that water shortages are detrimental to large-scale farms and their laborers, many of whom are Latinx, who rely on them to make a living. Similarly, the organization highlights that systemic inequity often manifests itself in natural disaster preparation and relief, as seen with the homogeneity of Louisiana levee boards and the destruction of Black neighborhoods after Hurricane Betsy. In response, activism around climate change has expanded to include climate justice.
Given the plethora of points on each side of the debate, what do you think about carbon taxes? Take the poll below to let us know.
Photo by Jason Blackeye via Unsplash
Is a carbon tax the right solution?
I’d prefer a cap and trade program