Carbon Tax

Summary and economic discussion:

Carbon is one of earth’s most plentiful natural elements, in fact it’s the 15th most abundant elements on Earth and 4th most abundant element by mass, in the universe. Further, Carbon can be found in just about any organic compound, from humans to plants to fossil fuels. Unsurprisingly, carbon is present in every hydrocarbon fuel source this includes coal, oil, natural gas, and petroleum. Indeed, when humans use hydrocarbon fuel sources it releases carbons into the air and it binds with other elements to create Carbon Dioxide (CO2).

However, other sources humans use for energy do not create CO2 as a by-product, only combustible fossil fuels create CO2. Energy sources like renewables such as wind, sunlight, geothermal, nuclear, and hydropower are not included in the combustible fuel class and thus do not create CO2. One troubling thing is that Carbon Dioxide is a “Greenhouse gas” which means it’s a gas that traps heat from escaping out of the atmosphere. This is commonly seen as a negative externality on the climate system and as governments oversee regulating negative externalities. One of the ways to successful internalize this negative externality is by using a carbon tax.

A carbon tax can offer economic and social benefits without significantly damaging the economy while producing a desired impact by promoting climate change policy. Climate change is a desired outcome due to the potentially extremely costly, long term, global impacts greenhouse emissions will cause – natural disasters, population displacement, health problems, etc.

If promoting climate change policies is a beneficial goal then governments around the world should find the most cost effective, least damaging, policy that will promote these long-term goals. The most cost-effective solution is typically seen as a Carbon tax, but a secondary option could be permits or various other solutions governments have at their disposal. But Carbon taxes are a “Pigovian tax.”

Pigovian taxes are a form of tax that attempts to force carbon dioxide producers to internalize the full social cost of their productions, while minimizing the tax to firms that are internalizing the social costs. Although, it’s theorized that carbon taxes might be a regressive tax directly or indirectly. So, one potential method for reducing harm to lower income groups is to give a portion of the carbon tax to those effected by tax.

But other suggestions on how to spend tax revenues are reducing the budget deficit, decrease existing, or marginal tax rates, these suggestions attempt to negate the potential losses to society due to the tax existing. But out of the ways which governments could incentivize climate policies, carbon taxes are generally supported by most economists
“Economists like to argue, about climate change as much as anything else. [...] But on the biggest issue of all they nod in agreement, whatever their political persuasion. The best way to tackle climate change, they insist, is through a global carbon tax.”

Brief literature review:

The researcher review two articles in his attempt to understand the subject matter as previously interpreted by other economists.

A study done by Yonah and Uhlmann from the University of Michigan law in 2009 suggested that there is a very real global climate crisis and that it won’t be easily solved by one country using a cap and trade system. The approach will have to vary by country, but all countries will need to implement a strategy of some sort, to curb greenhouse gas emissions. They recommend a “carbon mitigation strategy” or a carbon tax as the “centerpiece of any successful program to combat global climate change.”

The second study analyzed by the researcher was “The impact of a carbon tax on economic growth and carbon dioxide emissions in Ireland.” The authors, Conefrey, Gerald, valeri, and Tol theorized that the fairest and economically efficient way for Ireland to reduce its carbon footprint was a broad carbon tax on all industries not regulated by current EU climate policy. They determined the carbon tax could have a double dividend for the Irish economy. The tax will lower carbon pollution and then by reinvesting the revenue from the tax into manufacturing and services this could make the Irish economy more competitive on the world stage.

Real World Case:

The real-world case the researcher decided to investigate was British Columbia’s carbon tax. As it’s a close neighbor to America and it stands in stark contrast to America, as it has seemed to embrace the new carbon tax. Indeed, the legislation was pushed by the right wing conservative party and opposed by the left leaning democrats, an odd switch compared to American politics.

A common argument among American, right wingers is that a carbon tax will “collapse the economy” or negatively impact it but evidence in Canada’s British Columbia has shown a bright alternative “British Columbia’s economy did not collapse. In fact, the provincial economy grew faster than its neighbors’ even as its greenhouse gas emissions declined.” But this outcome surprised the province’s environmental minster “the people who modeled it predicted this, I’m not sure that those of us on the policy end of it really believed it.”

A common problem that politicians face when dealing with climate change is getting support from their base, particularly probusiness, anti-tax politicians like conservative, right-wingers tend to be. Although, in British Columbia, as the province’s economy grew faster than their neighbors while cutting emissions, support began to grow for the tax. “Last year only 32%... opposed the tax, down from 47% in 2009.” But not only did voters grow warmer to the tax, businesses did too. The reason being is that a carbon tax is among the most efficient possible ways to implement climate change policy. They began to realize that the alternatives were worse.

However, the real boom to politicians was redirecting the revenues from the carbon tax to the families and business within the providence. As a reminder, this was a suggested policy from earlier studies. But with this promise, to give back every carbon tax dollar, they were able to do numerous things from cutting corporate income tax rate to 10% from 12%, cutting the bottom income tax brackets, and giving low-income families a tax cut.v The government was able to return about 1.7 billion dollars, more than the 1.2 billion it collected through the carbon tax.

Although, not all is great for the pro-carbon tax proponents. They are fighting a hard beast right now, collapse in oil prices. A study found that due to current battery prices, oil price must be very high for electric vehicles to be cheaper to operate, than a gas-powered vehicle. Oil needs to be around $350 or a carbon tax would need to be $700 per ton of carbon dioxide to offset the difference.

The issue with such a huge carbon tax is… it lacks support from anyone. It would be political suicide to support such a massive increase in the carbon tax. Further, without increasing the carbon tax British Columbia will miss it’s stated goal for carbon reduction. And further increases will result in backlash from business owners in industries exposed to international trade. For example, the cement makers, argued that imports from international countries exploded from 5% to 40% as the carbon price slowly increased. This makes it rather difficult for these domestic producers to compete with companies located in a carbon tax free country.

The solution seems to be persuading other countries and providences to implement their own carbon tax, as this “would mitigate many of the concerns over competitiveness.” However, convincing America, China, and the rest of the world, that they need to adopt carbon taxes will be it’s own monumental task. But perhaps, looking a relatively successful case, like British Columbia, the support will grow. Indeed, the best cure for anti-climate change advocates is trust and pro climate change role models.

Policy Proposal:

The researcher agrees with previous literature on the subject. That the Pigovian carbon taxes are the best option that we currently have to reduce global carbon emissions. Previous literature suggests using the carbon taxes to reduce the emissions because of the long term social cost carbon produces. And further, literature on climate change suggests that some large portions of the world will be underwear if we allow greenhouse gasses to go unchecked.v This not only causes destruction of capital but also loss of human life and displacement of vast amounts of people. For example, many low-lying areas will be impacted, Miami, Rio de Janeiro, Osaka, Hong Kong, and Shanghai. That is not a complete list of the affected areas either, but those cities have a combined population of 35.6 million. If what climate scientists theorize is correct, then the world could have a major refugee crisis on our hands, even worse than our current Islamic/north Africa refugee crisis. Besides, the damage to capital just in Osaka amounts to 1 trillion dollars by 2070, which is not far off. Fortunately, these horrible events can be reduced or even stopped if we just implement meaningful greenhouse regulation.

America should implement a Pigovian carbon tax in America. Indeed, America would need to set the emissions tax equal to the marginal cost of every source. However, that is both costly and time consuming to calculate. Economists would need to calculate the tax for each industry across the nation, then assign them all a discount rate. And finally assign a tax per industry. But, other countries have decided to approach it with a different strategy – arguably more efficient upfront (and without administration costs).

What previous countries have done is to impose the same emissions tax on all sources, while not economically efficient, it gets closer to the overall goal. The Reacher believes this is what America should do. Although, marginal costs are not equal across the whole economy, then the economic costs will be higher than necessary. Although, America should still reach an ideal amount of reduction. For example, if it is cheaper to reduce a ton of carbon in manufacturing than in the energy industry, then emissions should be reduced further in manufacturing and less far in energy. Then eventually the emissions would reach a relative equilibrium that might be satisfactory to both our economy and the future.

Then, the carbon tax should be raised by a small amount each year. As the future gets discounted, businesses should expect that as the future nears, things become costlier. Further, an ever-increasing carbon tax incentives business, consumers, and researchers to find alternative fuel sources through renewables and implement their use. Finally, the revenues should be used to offset the harm caused to business and lower-income groups which will provide political capital to enact the tax.

Expected outcome:

If America decides to implement a carbon tax, then they can expect greater growth. Not only would other countries recognize America’s commitment to global security and be more willing to trade, they might follow in our footsteps. If countries decide to follow America then an even greater dividend comes, by adverting numerous, potential deadly, and catastrophic natural disasters as well as lives. Finally, humanity can expect greater growth over the course of the next century – rather than extreme costs. Admittedly, there will be costs either way. But the long-term benefits outweigh the short-term costs.

Sources:
"Effects of a Carbon Tax on the Economy and the Environment". Congressional Budget Office. 2013-05-22. Retrieved 2017-09-29.

Article "The way forward. Second-best solutions", The Economist, special report on "Climate change", 28 November 2015, pages 15-16.

Reuven S. Avi-Yonah and David M. Uhlmann. “Combating Global Climate Change: Why a Carbon Tax is a Better Response to Global Warming than Cap and Trade.” Stanford Environmental Law Journal 1 (2009): 50.

Thomas Conefrey, John D. Fritz Gerald, et all. “The impact of a carbon tax on economic growth and carbon dioxide emissions in Ireland.” Journal of Environmental Planning and Management 7 (2013): 947.

"Does a Carbon Tax Work? Ask British Columbia." The New York Times. December 21, 2017. Accessed May 31, 2018. https://www.nytimes.com/2016/03/02/business/does-a-carbon-tax-work-ask-british-columbia.html.

Covert, Thomas, Michael Greenstone, and Christopher R. Knittel. "Will We Ever Stop Using Fossil Fuels?" Journal of Economic Perspectives30, no. 1 (2016): 117-38. doi:10.1257/jep.30.1.117.

Puniewska, Maggie. "There's a Strategy to Persuade Climate Change Deniers." Tonic. November 08, 2017. Accessed May 31, 2018. https://tonic.vice.com/en_us/article/a3d35a/how-to-sway-a-climate-change-skeptic.

Holder, Josh, Niko Kommenda, and Jonathan Watts. "The Three-degree World: Cities That Will Be Drowned by Global Warming." The Guardian. Accessed May 31, 2018. https://www.theguardian.com/cities/ng-interactive/2017/nov/03/three-degree-world-cities-drowned-global-warming.