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Carbon tax myths

Over a two-week period in November 2018, the Camp Fire, the deadliest forest fire in California history, burned over 150,000 acres, killed more than 80 people, and destroyed some 18,000 buildings. A National Oceanic and Atmospheric Administration report documents the unusually warm and dry conditions that sparked this fire. Each year sees new records being set for temperature extremes in the United States. Six of the ten hottest years on record have occurred since 2000. The six months ending this past October was the hottest six-month period on record, surpassing the previous record for 2016 by 0.3 degrees F. This is climate change at work.

The Camp Fire is a tragedy of epic proportions but should come as no surprise. A 2017 National Climate Assessment report has documented increases in large fires in 7 out of 10 Western regions over the period 1984-2011. Larger and more frequent forest fires are just one of the outcomes of our warming planet. The most recent report of the National Climate Assessment states that “annual losses in some economic sectors are projected to reach hundreds of billions of dollars by the end of the century—more than the current gross domestic product of many US states.”

The National Climate Assessment makes clear that doing nothing to reduce our greenhouse gas emissions will be extremely costly and puts the lie to the claim that cutting our emissions is too expensive a policy for the United States. Doing nothing will be much more costly. But what’s the right action to take? Economists across the political spectrum agree that a national carbon tax is the best way forward, as evidenced by the membership in the Pigou Club, Harvard economist Greg Mankiw’s list of economists who support the use of taxes on pollution such as greenhouse gases to combat climate change.

The arguments for a national carbon tax are compelling. Most importantly, a tax ensures we cut emissions at the lowest possible cost to society. It also would raise a lot of revenue – something regulations do not do. The US Treasury estimates that a carbon tax starting at just under $50 a year would raise over $2.2 trillion over a ten year period. This is after netting out reductions in income tax collections because of the higher costs of fossil fuels and other greenhouse gas emitting inputs to production. You could do quite a lot with $2.2 trillion. It could help finance the Green New Deal that newly elected members of Congress are calling for. Or it could provide a hefty climate dividend to US households, as proposed by the bipartisan Climate Leadership Council. The Treasury study shows that a dividend policy like that proposed by the CLC would make over 70% of US households better off. In other words, more than two-thirds of US households would get back more in dividends than they would pay in higher costs for carbon-intensive goods.

That low- and moderate-income households would have more money to spend or save with a carbon tax cum dividend puts the lie to one of the common misperceptions about a carbon tax – that it is regressive. One recent academic study by current and former Stanford economists shows that a carbon tax is likely to be progressive even if one ignores revenue. That’s because the tax impacts owners of capital more than it does workers and because transfer payments – disproportionately received by lower-income households – tend to be indexed against price increases.

A carbon tax will certainly kill more (if not all) of the remaining coal mining jobs. But solar, wind, and other green technologies have created hundreds of thousands of new jobs.

Here’s another myth that is, well, a myth: that a carbon tax is a job-killer. Sure, it will lead to fewer jobs in coal mining. Coal mining jobs have shrunk by nearly half over the past decade from roughly 91,000 to 50,000 jobs. Most of that job loss is due to the shift from Eastern to Western coal that can be mined with fewer workers with large excavation equipment that strips the topsoil off and reveals 60 to 100 foot deep beds of coal that can be hauled off in giant dump trucks. The other factor killing coal jobs is cheap natural gas, a product of the fracking revolution. A carbon tax will certainly kill more (if not all) of the remaining coal mining jobs. But solar, wind, and other green technologies have created hundreds of thousands of new jobs. For every job lost in coal mining, a green economy creates nearly ten new jobs.

Here’s another myth: a carbon tax will stunt economic growth. Despite a carbon tax of roughly $135 a ton, Sweden seems to be growing just fine. The accompanying figure shows that Swedish GDP has risen by nearly 80% since it enacted a carbon tax in the early 1990s while its emissions have fallen by one-quarter. The gap between Sweden’s GDP growth rate and that of the US has shrunk since Sweden enacted a carbon tax. The carbon tax can’t explain the convergence in growth rates. But it’s hard to argue that Sweden’s carbon tax has crippled its economy.

Will a US carbon tax make a difference given the surging economies – and emissions – of the developing world? Strictly speaking, a US carbon tax will do little by itself to dent global emissions. But it is difficult to imagine that developing countries struggling to move their citizens out of poverty will take the lead in reducing emissions if the world’s wealthiest country is not taking strong climate action itself. It is true that major emitting countries and blocs like the EU and China have reiterated their commitment to the promises they made in the Paris Agreement despite the Trump Administration’s retreat from the US commitments. But it is doubtful parties to the Paris Agreement will strengthen those commitments to the extent needed to address the climate problem in a meaningful way without US engagement. If the United States enacted a carbon tax and showed leadership in moving to a zero- carbon economy, it would strengthen the hand of leaders in major developing countries like China, India, and Indonesia who want to reduce emissions. A US carbon tax will not guarantee that developing countries will dramatically ramp up their efforts to reduce carbon pollution. Our acting to reduce emissions significantly is a necessary condition for more ambitious global engagement on what is, after all, a global problem.

Featured image credit: Cloud Factory by Dirk Duckhorn. CC BY-SA 2.0 via Flickr.

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