The current strategy for addressing the effects of fossil fuel emissions and climate change revolves around a cap-and-trade methodology. This has been proposed primarily in the form of an emissions credit trading scheme (see my earlier blog post on it here), as evidenced by the proposed Clean Power Plan (also in one of my blog posts here). In an emissions credit trading system, governments provide the public with permits that allow a certain level of greenhouse gas (GHG) emissions (most of which are CO2). Polluting industries can then either purchase the permit and emit up to the designated amount of pollutants or sell their permit and reduce their own emissions. In this way, industries that are emitting pollutants are incentivized to either reduce emissions or work with other companies to reduce overall emissions. The Clean Power Plan was supposed to use the emissions credit trading approach as one of the primary tools in its effort to shift our economy toward the use of more renewable energy sources.
Under the current administration, the Clean Power Plan is almost certain to be discarded and is therefore not a viable option. However, the cap-and-trade approach is not the only methodology that is being considered for action on climate change. The increasing popularity of a carbon tax proposal warrants a discussion of its merits as well.
In short, the majority of carbon tax proposals involve, quite simply, a tax on the amount of CO2 emissions resulting from the use of fossil fuels. One study (Chen and Hafstead – http://www.rff.org/blog/2017/paris-agreement-under-trump-and-merits-economy-wide-carbon-tax) says that the minimum tax rate needed to meet the Paris Agreement Standards by 2025 would be $37 per ton, while Adele Morris’ tremendously popular proposal recommends a $16 per ton charge and the US Treasury proposes a starting rate of $49 per ton (https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-115.pdf). Most proponents of the carbon tax, however varied in their proposed tax amounts, agree that the tax should be levied at the point of extraction (the well or the refinery) and should be assessed per ton of CO2 emissions for any given product. The primary differences in these proposals, however, are in the ways that the revenues from the tax are used.
What is a Carbon Tax and what are the Proposed Methodologies for how its Revenue should be used?
A carbon tax can sound rather unpleasant. After all, who likes paying taxes? To some, it may even sound like a limit on free enterprise. However, we must realize that energy is already heavily subsidized and that the social and environmental costs of energy production are built into every aspect of our lives. In his paper on climate change (https://www.carbontax.org/wp-content/uploads/2007/09/stiglitz-_-a-new-agenda-for-global-warming-_-economists-voice-_-july-2006.pdf), Columbia University professor Joseph Stiglitz points out that subsidizing something means making it possible for those responsible to not have to pay for the full price of their actions. That is exactly what is happening with our current system of energy use, and the leftover costs are manifesting themselves in the environment and in the international trade system. By cutting to the chase and taxing the source of the energy, those multiple levels of stagnation would be freed up for investment and growth (https://therabblerouser.org/2016/11/10/a-truly-conservative-environmental-policy/). A tax on carbon emissions would also incentivize the development of clean energy, thereby actually bolstering free enterprise. Not only that, but a carbon tax plan would involve a revenue-neutral tax system, in which the revenues collected are used to either reduce other taxes or give back to the people.
Some might raise the concern that implementing a carbon tax would be roughly just as costly to the American people as would be the tax increases we will most likely face without a carbon tax. However, even if a carbon tax’s amount was relatively similar to the amount we would pay without it, a carbon tax would do so while also incentivizing clean energy adoption and innovation that have ramifications for the long-term economic viability of our country (http://www.realclearenergy.org/articles/2013/05/14/why_you_just_may_come_to_like_a_carbon_tax_107016).
There are currently several different proposals for a carbon tax, all of which revolve around the old adage, “Tax the thing you want less of and Exempt the thing you want more of.” All of them are relatively similar as far as the actual taxation process goes, but they differ in regards to how the revenues are to be used. I will highlight the two foremost proposals for how to use the tax revenues and discuss the pros and cons of each. One camp proposes using the revenues as dividends checks that are given back to the people on a quarterly basis. In this methodology, all of the revenues from carbon taxes are returned to the people directly. The other camp proposes using the revenues to reduce other taxes, particularly the corporate income tax. In this methodology, the revenues are used to cut corporate income tax rates to free up investment and growth. This post argues for the implementation of a carbon tax, then compares the two methods of using the revenues described above, and finishes by advocating for the revenues to be used to reduce the corporate income tax.
The Climate Leadership Council, based in Washington D.C. and run by a group of high-level economists from the Ivy Leagues and a few former secretaries of state, recently proposed a Carbon Tax & Dividends Plan (https://www.clcouncil.org/wp-content/uploads/2017/02/TheConservativeCaseforCarbonDividends.pdf). Their plan has four pillars:
1) A Gradually Increasing Carbon Tax. This tax would be implemented at the refinery or well at $40 per ton. It would be a gradually increasing flat tax, not a graduated tax, and any fuels that do not emit CO2 would be exempt. The amount of increase each year would be based on the Consumer Price Index, plus 2%. (Hafstead and Kopp’s study – http://www.rff.org/files/document/file/RFF-Issue-Brief-15-01.pdf – estimates that there would have to be about a 15% increase by 2028 in order to meet the Paris Agreement targets).
2) Dividends Payments. All revenues from the carbon tax would be returned to the American people through quarterly tax-free dividends checks from the Social Security Administration. Each individual’s eligibility would be based on their social security number, so those at the lower portion of the socio-economic scale would supposedly benefit more than those at the upper portion.
3) Border Carbon Price Adjustments. In order to ensure that our market position does not suffer as a result of our carbon tax, imports will be taxed with appropriate carbon fees and exports will receive rebates based on their carbon content. This would not only incentivize other nations to adopt carbon management policies of their own, but it would eliminate the possibility of other countries “free-riding” by benefiting off of our policy without taking any responsibility themselves.
4) Significant Regulatory Rollback. In short, this means that unnecessary and extraneous regulations would be removed to free up economic growth.
The writers of the Carbon Tax & Dividends Plan – Henry Paulson (former secretary of state), Rob Walton (Walmart), Martin Feldstein (Harvard), Ted Halstead (D.C.-based entrepreneur), Gregory Mankiw (Harvard), George Schultz (former treasury secretary) and others – point to the success of British Columbia’s carbon tax methodology as proof that their model can work. They also reference Adam Smith’s Wealth of Nations when they discuss the role that our human nature plays in this dilemma. Whereas regulatory approaches are based on either voluntary self-limitation (hardly attainable in today’s world) or grudging compliance (never the way to achieve optimal results), this plan is based purely on the human motivation for profit and economic success. The self-serving business will be making a wise choice when it choose to reduce its emissions, switch to cleaner energy sources, and invest in more environmentally-friendly technology. Adam Smith’s ideal of harnessing individual self-interest for the common good can be a reality through the implementation of a carbon tax.
I agree with at least the first, third, and fourth pillars of CLI’s proposal. A carbon tax will send a powerful message to American businesses that the reduction of emissions is not only the right thing to do but also the economically wise choice to make. The UK Treasury Secretary points out in his review of Climate Change’s effects on society (http://webarchive.nationalarchives.gov.uk/20100407172811/http://www.hm-treasury.gov.uk/stern_review_report.htm) that a blanket carbon pricing scheme would create lasting incentives for clean energy development and economic growth. A carbon tax would also give American businesses a new level of predictability that they do not currently have under the current regulatory regime, which breeds uncertainty. Businesses would be able to know ahead of time how much their carbon taxes would be and how much investment potential they will have in the future (https://www.nytimes.com/2017/02/08/opinion/a-conservative-case-for-climate-action.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-left-region®ion=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region&_r=0).
Hafstead and Chen’s study (http://www.rff.org/files/document/file/RFF-DP-16-48.pdf) lends support to the dividends approach. The United States’ total net emissions in 2005 (the year that base emissions under the Paris Agreement are calculated) came to roughly 6,700 mmt of CO2, and approximately 94% of all CO2 emissions in the country are due to fossil fuel usage. America’s emissions reduction target, according to the Paris Agreement, is 26-28% reduction by 2025. The current regulatory framework is estimated to achieve less than half of that. Hafstead and Chen propose a carbon tax of $22 per ton as the best way to reduce emissions, harness the motivations of the polluting industries in question, and incentivize clean energy and technological development. They also advocate a dividends approach over a revenue-neutral tax reduction approach. They point out that reducing other taxes will lead to increased consumption, which will lead to increased emissions and the necessity of raising the carbon tax. Hafstead and Chen therefore recommend the adoption of a dividends plan because of their belief that a tax relocation strategy will not reduce the overall tax burden or overall emissions levels.
(Hafstead and Chen also highlight a very important factor that I believe any carbon tax proposal must consider very carefully. They suggest that, while the tax can certainly start at a lower rate and increase in larger increments each year, it is better for it to start at a higher rate and increase in smaller increments each year. The less drastic increase will result in a smaller market shock in future years and therefore more potential for sustainable environmental and social benefits. This is a key reason why Bernie Sanders’ (D-VT) Climate Protection and Justice Act, which proposes a $15 per ton tax increasing to $73 per ton by 2035, is not a wise choice. Conversely, Sheldon Whitehouse’s (D-RI) plan for a $42 per ton tax that increases very slowly over several decades is a much more economically prudent choice).
On the political front, the Carbon Tax & Dividends Plan would redirect the energy of the recent populist movement into a positive channel that fosters economic well-being while also appealing to the populations that tend to value an economic scheme of distributionism. Environmentalists will value the decrease in emissions, economists will appreciate the increased level of economic predictability, libertarians will laud the government’s reduced regulatory role, conservatives will praise the market-oriented strategy, liberals will like the extra benefits for citizens, and populists will preach the distributive nature of the dividends.
A second group of economists proposes that the revenues from a carbon tax be used to reduce other taxes. Some say that the revenues should be used to reduce the personal income tax, others the payroll tax, others the capital gains tax, and so on. In many ways, the tax that is reduced is irrelevant as long as the carbon tax amount is less economically harmful than the tax it is replacing. A study from the Niskanen Center points out, for instance, that even the coal industry would suffer less from a carbon tax than it would from any of the other taxes mentioned above (https://niskanencenter.org/wp-content/uploads/2016/01/Coal-Report-Final-January-27.pdf). While their suggestion of which tax to lower vary to some degree, the most commonly proposed reduction would take place for the corporate income tax (http://www.rff.org/research/publications/using-carbon-tax-meet-us-international-climate-pledges). Therefore, for our purposes, we will use the corporate income tax as the proposed tax to be reduced using the revenues from a carbon tax.
The first and most obvious benefit to this approach is the financial benefit. Lowering the tax rate on a very common tax such as the corporate income tax has the potentially to free up a lot of money. Doing so would enable Congress to finally deliver on its promise to cut taxes for American citizens. A study by the Congressional Budget Office on the effects of a carbon tax predicts revenues of over $1 trillion in the first decade of carbon taxation if a $25 per ton carbon tax is implemented. The revenues would be much greater if the more likely rate of roughly $40 per ton was implemented. It is of interest that CBO also notes that $1 trillion is equal to roughly 25% of the current corporate income tax net revenue total. It is encouraging to see that even one of the lowest carbon tax amounts currently being proposed would be able to significantly reduce the corporate income tax and thereby free up room for additional investment and growth.
Another benefit from using the revenues to reduce other taxes would be the way that it would offset the increase in fuel prices that will initially result from a carbon tax. Whereas a flat-rate dividends check would not do much to offset the increase of fuel prices, using the revenues to reduce other taxes would offset that increase. By using the revenues to cut the corporate income tax (for example), the carbon tax could be revenue-neutral, meaning that whatever money it extracts from society it is “giving back” in the form of reduced costs of the same amount.
A policy brief from the think tank “Resources for the Future” elaborates on the benefits of using the revenues from a carbon tax to reduce the corporate income tax. Their analysis (see the graphics in the study linked below) shows that using the carbon tax revenues to reduce the corporate income tax significantly reduces the cost of the policy compared to a dividends approach (http://www.rff.org/files/document/file/RFF-PB-16-06_0.pdf). In other words, the cost to society per ton of CO2 is reduced significantly more when the revenues from a carbon tax are used to reduce taxes than when they are used as dividends payments to the members of society.
So why can’t a Carbon Tax get off the ground? What are some arguments against it?
Critics of a carbon tax plan usually focus on a few primary points when discussing the shortfalls of the strategy. They state that a carbon tax would increase the price of fossil fuel emission without reducing the amount of emissions (https://www.theatlantic.com/science/archive/2017/02/the-new-rhetoric-of-climate-denial/516198/). The market will then be left to its own devices if it hopes to curb emissions in any significant way. However, as discussed above, business would either reduce their emissions in order to not have to pay as much in carbon taxes or they would invest in new technology through which to continue their work with less emissions. In both instances, emissions are reduced because of the incentives that stem from a carbon tax. It is important to remember that regulation does not create growth because it doesn’t incentivize the regulated entities to do anything other than meet the status quo. It is also worth noting, as Jerry Taylor does in his article for the Niskanen Center (https://niskanencenter.org/blog/debating-carbon-taxes-oren-cass-bill-gates/?utm_source=Digest&utm_campaign=dda2af6482-EMAIL_CAMPAIGN_2017_04_24&utm_medium=email&utm_term=0_b57b3ffb8c-dda2af6482-520782809), that letting market factors decide how to reduce emissions will inevitably be faster and more efficient than regulation because the markets have a vested interest in maintaining as much economic power as possible. Employing a carbon tax methodology is the most powerful incentive possible for businesses to reduce their carbon emissions.
William Nordhaus of Yale University says that a carbon tax might be infeasible in the international context, noting that a carbon tax would be difficult for other countries to enforce carbon taxes of their own and would therefore put the United States at a disadvantage. A policy brief from the D.C. think tank “Resources for the Future” adds that the border tax rates for imports to the U.S. may not be popular with other countries (http://www.rff.org/files/document/file/RFF-PB-16-02.pdf). It also points out the possibility that other countries may not feel obligated to reduce their emissions if we begin to reduce our emissions. However, that is where the proposed rebates for exports and carbon taxes on imports come into play. These policies will ensure that products entering the country are taxed at the same level as products created within the country and will prevent our economy from being stagnated or disadvantaged. Regarding the popularity of a carbon tax, I would submit that such a criticism is relatively null because any new policy is always going to have opponents.
Another smaller concern that has been raised regarding carbon taxes is the fact that they may contain loopholes that aren’t visible until after they are implemented (https://newrepublic.com/article/47961/are-carbon-taxes-really-simpler). This is perhaps the one aspect in which a cap-and-trade system is superior to a carbon tax, for a cap-and-trade system does indeed make it easier for one to find potential loopholes before implementation.
Opponents of carbon taxes also say that they are not a viable option simply because they wouldn’t have a sizeable impact. They point to the fact that the US currently produces only 18% of the world’s GHG pollution and that a decrease in our emissions wouldn’t make much of a difference on the international scale. However, if the US addresses climate change, the rest of the world will to follow. Whether they do it out of necessity – since all of them have an interest in doing business with us – or desire – to maintain connections – the U.S. example will start a large-scale move toward clean energy. Carbon taxes would therefore be almost guaranteed to have a significant environmental impact. (Another factor to consider is the overall financial benefit of a carbon tax for our economy – some estimates (http://www.ayreslawgroup.com/policy-alerts/policy-alert/) say that close to $100 billion could be raised in the first year of a carbon tax’s operation).
Critics worry that a carbon tax might increase the size and reach of the government, but they forget that regulatory frameworks increase governmental reach more than any other possible solution. As discussed previously, a cap-and-trade approach would require the implementation of many new programs and therefore significant governmental expansion. In addition, a carbon tax would be revenue-neutral and would therefore simply shift the focus of the government rather than increase its range of focus.
There is also the concern that elites might try to exempt themselves from the tax. To this I would point out that elites will always try to exempt themselves from any tax, regardless of its objective. While such instances are certainly possible, any instances of this would be minimal or even negligible. This problem would be largely solved by the fact that the tax will be applied at the point of production (the well or the refinery), and it would be extremely difficult for anyone to carve out exemptions when the entirety of the funds that need to be transferred have been exchanged far upstream in the process.
We’ve now seen that almost all of these common criticisms can be easily refuted with a basic level of economic awareness. So what is it that makes a carbon tax unrealistic? To begin with, it is hard for politicians to embrace without jeopardizing their voter base. The right can’t support it without losing the support of the working class, and the left is largely opposed to it already. There is not yet enough bipartisan support for a carbon tax to be considered a legitimate option. In addition, voters can see the potential benefits of regulations much more easily than they can see the potential benefits of taxes (http://www.thenewatlantis.com/publications/toward-a-conservative-policy-on-climate-change). In the face of the political impossibilities regarding a carbon tax, it makes sense that many on both sides of the aisle resort to supporting technological innovation and development as the only solution to climate change’s effects. They argue that the best course of action for the government would be for it to put all of its available money towards the development of new climate-smart technologies and the development of clean energy (https://www.manhattan-institute.org/html/conservatives-and-climate-change-6272.html). To top it all off, cap-and-trade proposals have an “Ivy League economics” feel to it and they enable politicians to avoid the dreaded “tax” word (https://newrepublic.com/article/40010/environmental-mandates-versus-carbon-taxes).
Another significant issue that has contributed to the slow progress of climate change policies is international “free-riding” (http://www.nybooks.com/articles/2015/06/04/new-solution-climate-club/). Free-riding occurs when one country benefits from another country’s actions. For instance, a country without a carbon tax may benefit off of the economic consequences of another country’s carbon tax program. It is commonly seen in the fact that smaller NATO countries often try to free-ride on the U.S.’s military power in order to avoid having to invest in military development themselves. The problem with this phenomenon is that it creates a situation in which only a few countries are acting in the interest of the common good and most of the others are benefiting from their efforts. Preventing free-riding on climate-related issues is especially difficult because any efforts in that regard are purely preventative, not formative. No product is created through addressing climate change, which makes it hard for the public to fully appreciate and therefore hard for them to want to implement programs of their own.
A Carbon Tax should be utilized and the Revenues should be used to reduce the Corporate Income Tax
Regulatory approaches are like taking a test without studying for it. We have to work within our system in order to use it, and laying down regulations without molding the system first is risky, naïve, and incomplete at best. If you’re a regular on this blog, you know that I regularly emphasize the importance of intimately knowing land if you are to use it for farming, forestry, or any other purpose. The same concept applies here – we must be able to use and work within our system before we can lay down a blanket regulation and hope that everyone can scramble to comply without too much trouble.
Cap-and-trade strategies are unappealing on many levels. First, they are extremely labor intensive when compared to a carbon tax. Emissions credit trading programs, for instance, will require the creation of vouchers, the distribution of the credits, massive amounts of research, entire new departments, and much more. Carbon taxes, on the other hand, require none of these trappings and will be relatively simple to institute. Since they will be based on the exact carbon content of the fuel in question, and we have precise measures of the amount of carbon in every fuel in existence, the tax will be exactly proportional to the amount of carbon emissions from each fuel and will be quite simple to measure.
Cap-and-trade schemes are beneficial because they allow for a wide degree of variability in what each company can do to reduce their emissions, but the flip side of this is that each industry can demand different levels and types of compensation. This would create a massive regulatory and managerial disaster that would be impossible to oversee (http://www.aei.org/publication/climate-change-caps-vs-taxes/). For instance, the forestry sector will want more financial compensation because of all the carbon it sequesters through forest management, while the manufacturing sector will want additional compensation because of the losses it must take to reduce the emissions levels of its cars.
Emissions trading credits will also be highly unpredictable and volatile due to their reliance on the market. Fluctuations in the market will lead to credits that might be worth very little, thereby creating a disincentive for emissions reduction. Carbon taxes, on the other hand, lend stability and predictability to the market, which will enable companies to invest with greater freedom and less reservation.
A quick look at international climate change mitigation efforts shows us that cap-and-trade approaches will not work. Europe’s cap-and-trade emissions reduction program is an utter disaster. It’s reliance on market dynamics has made it unmanageably volatile (http://www.aei.org/publication/to-slow-climate-change-tax-carbon/). Emissions credits also have the potential to limit the flexibility of the market once they are instituted because everyone then has the same level of interest in maintaining the status quo, thereby limiting investment in development and innovation. (For those of you who have read Atlas Shrugged, this exemplifies the Anti-Dog-Eat-Dog rule in which the development of the common good is stymied because of the system imposed on each individual in the name of the common good). Even Pope Francis had a few words to say about the weaknesses of a cap-and-trade approach involving emissions trading credits in his encyclical on the environment, noting in particular the tendency of carbon credits to stagnate entire economies in the status quo (http://www.nybooks.com/articles/2015/10/08/pope-and-market/).
Some point to the fact that carbon taxes will raise fuel prices as a reason to discount the strategy entirely. However, price increases are nearly just as likely under a cap-and-trade strategy as they are under a carbon tax strategy. Under an emissions credit trading regime, fossil fuel producers will have to raise the price of fuel in order to compensate for less of it being used by those companies that are reducing their emissions and getting emissions credits in return. In an American Enterprise Institute and Brookings Institute testimony before the Senate Policy Committee, it was made clear that their research shows that cap-and-trade systems actually increase the price of energy sources because they introduce scarcity into the system. Whether a company reduces their emissions, invests in new technology, or opts to buy a permit, their production costs will go up because of the costs inherent in all of those activities. In order to stay afloat, these companies will then increase their prices to consumers (http://www.aei.org/wp-content/uploads/2011/10/Mathur%20Testimony.pdf). Therefore, a cap-and-trade program is simply another way of implementing a carbon tax, but with several added layers of unnecessary complexity.
Harvard economist Robert Stavins points out the difficulties of using a cap-and-trade (or, what he calls a “command-and-control regulatory”) approach. He writes that command-and-control systems established standards for all companies and states the methods by which those companies are to achieve the desired standards. Because of the wide variety of entities that such methods and standards apply to, there are many entities who suffer considerable losses just in trying to meet the required standards because they are so limited in their means of achieving those standards. The required methods for achieving these standards might be very financially detrimental to many entities. On top of that, the almost endless number of pollutants in the world would all require their own credit value, a task which would be nearly impossible for a government department to accomplish. Stavins adds that carbon taxes solve this problem by equalizing the amount that each entity reduces their emissions rather than equalizing the existing pollution amounts across all entities. Implementing a carbon tax does not require the government to form any new programs or set values for each pollutant, and it incentivizes companies to adopt cleaner energy sources in the process.
Having established that a carbon tax is the better option of the two, we must now examine the possible uses of the revenue from the tax. I agree with the U.S. Treasury Department, the Brookings Institute, the American Enterprise Institute, and several other organizations that using the revenues to reduce taxes would be immediately beneficial to society and would incentivize investment in clean energy sources. I am wary of the dividends approach primarily because dividends checks would do very little to offset the inevitable increase in fuel prices. It may enable some people to manage that expense more easily, but there will be many levels of society that will either not benefit hardly at all or end up losing much more than they would otherwise. This would be particularly concerning for those in the lower portions of the socio-economic scale, who have to use a larger portion of their income for expenses like fuel. A flat-rate dividends check would not do much to offset the increase of fuel prices, but using the revenues to reduce other taxes would offset that increase. By using the revenues to cut the corporate income tax (for example), the carbon tax could be revenue-neutral, meaning that whatever money it extracts from society it is “giving back” in the form of reduced costs of the same exact amount.
Using the revenues to reduce other taxes would be helpful but would not offset the increased cost of the carbon tax as much as reducing the corporate income tax. For instance, a reduction in the payroll tax could very well increase incentives for working and business expansion, but it would not affect the increased cost of the carbon tax by any noticeable measure. A study by the Tax Policy Center of the Urban Institute shows that using the revenues to reduce the corporate income tax would not only offset the initial impacts of a carbon tax but could eventually lead to a net financial gain (http://www.taxpolicycenter.org/publications/taxing-carbon-what-why-and-how/full).
Another concern raised by the Treasury Department’s analysis (https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/Carbon_One-Column.pdf) is that dividends checks would incentivize people not to work as much. This could, in turn, lead to a loss of economic productivity. While I am not fully convinced that this would be a consequence of the dividends program, I agree with the positive side of this statement, which is that shifting the tax burden could certainly remove barriers to working and economic growth (http://www.carbontax.org).
However, the U.S. Treasury Department’s analysis of the issue states that it would be possible to use a mixture of both methods. In other words, they believe that the revenues could be used to reduce other taxes AND to be returned to the people through quarterly dividends checks. For instance, dividends checks could be provided to those in the lowest portion of the socio-economic scale and the rest of the revenue could be used to reduce other taxes. Studies have shown that the cost of offsetting the impact of carbon taxes through dividends checks for lower-income households would only require about 15% of the revenues that would be raised from the carbon tax, which leaves a full 85% of the carbon tax revenues for the reduction of other taxes.
Metcalf and Weisbach’s study from Harvard University (http://www.law.harvard.edu/students/orgs/elr/vol33_2/Metcalf%20Weisbach.pdf) also supports this mixed approach. They point out that a dividends program would be highly inefficient and would be simply treading water when the reduction of taxes could be opening doors as well as maintaining the status quo. Their example is that of coal workers, who will be hit arguably the hardest by a carbon tax and who will have to find new sources of employment (which, by the way, is an inevitable consequence of progress and development towards cleaner energy sources). They advocate using part of the revenues to offset the most significant negative effects on such populations and using the rest to reduce taxes. (Metcalf and Weisbach also propose an interesting method of credits or financial rewards for those who implement practices with the specific intent of sequestering carbon. It is an interesting thought and one worth further research).
So what have we learned?
1) There is no way to reduce carbon dioxide emissions without the participation and effort of the industrial sector that is causing most of the emissions. While local efforts may be worthy and helpful, lasting and widespread change will not come until those industries get on board with the effort. This will be difficult because many of those industries have powerful lobbyists that are linked to climate deniers in the Senate, and it will take time to work through those roadblocks. However, I continue to say what I’ve said several times before in this post and others, which is that we must harness those industries’ drive for profit if we are to have any hope of working with them to reduce emissions. Adam Smith’s concept of the Invisible Hand fits perfectly with this proposal; since all industries are driven by a desire for profit, we must make environmental health profitable. I don’t necessarily agree with or endorse this approach – I would love it if our society would embrace environmental health purely for his own sake – but our context requires that we use economic factors to incentivize the right behaviors.
2) Any successful emissions reduction program must effectively reduce emissions and ensure that the economy retains its health. Per the reasons outlined above, the best way to do this is to implement a carbon tax and use the revenues to reduce other taxes. Cap-and-trade strategies are volatile, unpredictable, and can lead to economic stagnation, while a carbon tax is steady, predictable, and incentivizes investment in clean energy and new technology. There is also the possibility that using a portion of the revenues to provide financial compensation to the population in the lower portion of the socio-economic totem pole would be possible and commendable.
3) The emissions reduction program that is chosen must make sure that international free-riding is not possible. William Nordhaus (Yale) notes that free-riding can put the U.S. at a massive economic disadvantage if allowed to continue (http://www.nybooks.com/articles/2015/06/04/new-solution-climate-club/). He also says, however, that if we are able to eliminate free-riding we will maintain our economic status, since the rest of the world cannot afford not to trade with us. This is one of the primary reasons that I agree with the third pillar of The Climate Leadership Council’s proposed plan that implements border carbon adjustments through taxes on imports and rebates for exports. Such a system would eliminate free-riding because it would incentivize all of the countries trading with us to implement carbon pricing programs of their own. Nordhaus proposes an International Climate Club as an additional step towards the elimination of free-riding. This would be a group of countries that agree together to implement a carbon tax at the same rate. It would most likely make sense to group these countries by socio-economic status. Those outside the club will be penalized for their emissions levels, which will incentivize them to either join the club or implement emissions reduction plans of their own. This proposition seems, to me, to be rather harsh and susceptible to abuse by any of the countries involved, but Nordhaus does bring up an interesting idea for a global organization like the UN to consider.