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Climate Change

6 arguments for carbon taxes

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The first carbon tax was proposed in the United States in 1973. Almost 50 years later, 27 countries have instituted carbon taxes, but the U.S. has yet to take action.

The idea remains in favor with economists: In 2019, more than 3,600 economists signed a letter in support of a carbon tax as the “most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.” Proponents include MIT Sloan finance professor “It seems clear that it’s going to cost a lot to get the world to where it needs to be,” she said during a recent appearance on Barclays’ The Flip Side podcast. “That money has to come from somewhere.” Efficiency, fairness, and transparency dictate that policymakers address the question of who will pay what head on, she said.

Listen to the full podcast

A carbon tax is a fee for tons of carbon dioxide emitted. Lucas and Jeff Meli, head of research at Barclays, discussed why a carbon tax is what Meli called an “elegant” solution to reducing carbon emissions. A well-structured cap-and-trade program, which also puts a cost on carbon use, is another good solution, Lucas said, and she would be happy to see either become law. 

During the discussion, Lucas and Meli highlighted six arguments for a carbon tax:

1. Carbon taxes minimize the total cost to society of emission reductions.

Greenhouse gases are a classic negative externality, Meli noted — they generate substantial costs that are borne by society at large, not just the person or organization responsible for the emissions. Carbon taxes cause emitters to internalize those costs. Those engaged in activities that can cheaply move away from using carbon will do so, and those that can’t will pay the tax. In the end, we reduce emissions to target levels at the lowest total cost, he said.  

2. Carbon taxes are transparent.

Regulatory costs accrued by companies aren’t visible to consumers, and sometimes people aren’t even aware of them.

A carbon tax is clear and obvious. “With carbon taxes, you can see how much aggregate revenue is being collected, and then you can also see how those costs are being distributed across the different entities that are paying those carbon taxes,” said Lucas, who is also the faculty director of the MIT Golub Center for Finance and Policy.

3. Carbon taxes are enforceable.

Companies have pledged to achieve net-zero emissions of greenhouse gases by certain dates.  These pledges can be hard to measure and they aren’t always credible, Lucas said. This is especially true when the pledges conflict with financial responsibility to shareholders. “Why are these commitments credible?” Lucas said. “There's really no enforcement mechanism.”

Carbon taxes have clear enforcement mechanisms — companies have to pay their taxes.

4. Carbon taxes produce explicit revenues.

Carbon taxes would create new tax revenues, and it remains to be seen how that money would be used — policymakers would decide. One possibility: The tax could be used to subsidize lower-income people who might have trouble paying energy costs.

5. Carbon taxes are adjustable.

It isn’t clear how people would respond to a carbon tax, and how much it would reduce emissions. A carbon tax could be dynamically adjusted over time as new information comes in, Lucas noted — the cost could be raised if emissions need to reduced further, for example.

“It’s harder to make those adjustments to other sorts of policies,” Lucas said.

6. Carbon taxes reduce uncertainty.  

Taxes are unpopular, and are often considered anathema for politicians, Lucas noted. But they actually reduce uncertainties for companies. “It gives them something they can plan to,” she said. “If they don’t have a tax, they’re going to be hit with policies that are less predictable, potentially more onerous, more inefficient.”

Read next: The drastic power of a modest carbon tax

For more info Sara Brown Senior News Editor and Writer