Roosevelt Institute | Cornell University

The Economists’ Plea to Politicians—Consider a Carbon Tax

By Abigail CundiffPublished February 12, 2019

The carbon tax is gaining traction once again because it seeks to solve one of the world’s most pressing issues—global climate change—and proposes to do so with little controversy. In light of recent events and reports, climate change and its effects have been brought to the forefront of political and social discourse. Members of Congress and top economists now back a carbon tax with a rebate—relying on incentives to change consumer behavior and, ultimately, reduce US carbon emissions and spur green energy innovation.

The carbon tax is gaining traction once again because it seeks to solve one of the world’s most pressing issues—global climate change—and proposes to do so with little controversy. In light of recent events and reports, climate change and its effects have been brought to the forefront of political and social discourse. For young people around the world, climate change remains a priority among a host of global issues. In the 2017 Shapers Survey conducted by the World Economic Forum, “climate change/destruction of nature” was ranked as the most serious global issue, having garnered 48.8 percent of the votes, for the third year in a row. According to a Yale study, more Americans than ever, 73 percent, believe global warming is happening, which demonstrates a 10 percent increase from March 2015 . Additionally, 62 percent of Americans understand that humans cause global warming and only 14 percent think it’s too late do anything. This survey was conducted on a random sample of 1,114 American adults over the age of 18 in the last few weeks of 2018; therefore, its conclusions are recent and representation of the American adult population is accurate. However, while most Americans understand that humans cause climate change, they lack action. Spurring action, however, can be as simple as a tax.

On January 16th, forty-five notable economists of varying political affiliations came together and wrote to the Wall Street Journal to propose a carbon tax in response to the seriousness of global climate change. In the letter, the economists claimed that a carbon tax is “the most cost-effective” way to fix an evident market failure by monetizing the negative externalities associated with global climate change. NOAA estimated that climate change cost the nation about $91 billion in damages in 2018 alone. Additionally, the federal report on climate change, issued in November 2018, expects a 10% decrease in US GDP by the end of the century due to climate change if a “business-as-usual” approach is taken. The effect of climate change is hard to ignore when looking at the numbers and time is running out—the IPCC report gives the world only 12 years to reduce global emissions by 60 percent, urging immediate action. The benefit of the carbon tax is that it not only monetizes the hidden social and environmental costs of carbon emissions but also chips away at climate related expenditures by speedily reducing carbon emissions and driving innovation. The economists’ recognition of the status quo’s unsustainability is based upon numerical analysis. Climate debates tend to be particularly polarizing; however, a bipartisan letter written by some of the nation’s, if not the world’s, best and most experienced economists “guided by sound economic principles” is certainly a positive development in the conversation about American climate policy. It ultimately shifts the debate into a more objective analysis based on factual evidence and also highlights the necessity of compromise in any solution.

The letter caused significant chatter in political spheres. Its contents are especially important due to the resurrection of a bipartisan carbon tax bill first introduced by Representatives Ted Deutch (D-FL) and Francis Rooney (R-FL) in November 2018, which bears significant similarity to the economists’ ideas. The bill proposes a tax of $15 for every metric ton of carbon dioxide emitted in 2019 that would increase by $10 every year and is targeted at “upstream” producers. The authors state that this would reduce carbon emissions by 45 percent (compared to 2015) by 2030 and by 80 or 90 percent by 2050. While this reduction does not exactly meet the IPCC hopes for global emissions reduction, it is a significant contribution and could be compatible with other carbon emission reduction initiatives. The tax, of course, would increase consumer energy costs, which is why people oppose a carbon tax—they hate paying in the present for the future, intangible benefit of an improved environment. In order to account for these rising costs, revenues from the bill would finance a monthly rebate for American citizens, thereby its appealing to consumer self-interest. The rebate both offsets higher energy costs and offers an incentive for consumers to cut back on carbon usage in order to reap more financial benefits from the rebate. The tax also encourages companies to adopt greener technology to avoid the tax.

Some, however, argue that, if enacted, the tax should go towards funding green initiatives. A recent survey done by the University of Chicago and the Associated Press partly examined public opinion regarding the use of a potential carbon tax’s revenue. The survey found that 67 percent of participants would support a carbon tax if the funds were used to restore the environment, and 59 percent would support it if the money went towards funding research and development for renewable energy programs. Contrarily, only 49 percent supported rebates. As indicated, there exists a genuine desire for more climate based action, which runs counter to the expected appeal to self-interest that the rebate offers. However, taking into account the previously mentioned statistics about climate change sentiments, it is plausible that this initiative would gain support since it addresses issues concerning younger generations and a supposed majority of Americans.

However, this method of distributing carbon tax funds may not be the most effective and lacks a certain element of bipartisanship. Identifying worthy initiatives to allocate money towards could prove to be controversial and a bureaucratic process. The tax itself incentivizes green energy corporations to increase research and development, making specific allocation unnecessary, and also eases consumers into the higher energy costs to avoid controversy. Immediately upon passage, green energy corporations would likely be unable to provide most consumers with a cheaper form of energy than their high carbon emitting counterparts, even with the tax. Therefore, having the rebate does not hit consumers’ pocketbooks as hard as a carbon tax would without the rebate. It also encourages consumers to reduce their carbon footprint through lessening their energy use. As the years pass, the carbon tax will rise but green energy corporations will have the opportunity and time to develop a relatively cheaper alternative to the now expensive carbon emitting form of energy. Consumers will ultimately shift over to this cheaper and better form of energy. The proposed carbon tax bill successfully targets consumer behavior and awards equal rebates. Targeting consumer behavior, as the economists and members of Congress evidently recognize, is the most important component of combating global climate change—if people change their purchasing habits, then the market will respond to consumer demand. The economists hail the carbon tax with a rebate for a reason. It would be unwise to doubt the simple and it would be unwise to not put faith in the principle of incentives.

Works Cited