by Vilasini Nathan and Angelica Vellore
Policy Pro/Con is a series designed to inform readers on the positives and the negatives of certain policies. Keep in mind that these arguments do not necessarily reflect the opinions of BTHS, the editors, The Helix, or even the writers. They are meant to present both sides of a topic.
This graph visualizes the increasing level of atmospheric CO2 and its correlation with CO2 emissions from 1750 to 2019. Large increases in atmospheric CO2 levels can be attributed to human emissions, starting from the Industrial Revolution [4]
Pro
by Vilasini Nathan
Creating a carbon tax has been heavily debated by policymakers. With human-produced greenhouse gases global warming, there is an impending need to discourage carbon use amongst large corporations and citizens. A carbon tax would accomplish this effectively, and such carbon taxes are already successful in twenty-three jurisdictions worldwide [5].
To begin, it is important to understand the need for a carbon tax. Since 2009, the global annual growth rate of carbon dioxide in the atmosphere has been 2.3 parts per million (ppm), as compared to 0.6 ± 0.1 ppm during the 1960s. This is a drastic increase, and with a growing population, carbon dioxide release will only go up without regulation. With carbon being the most significant greenhouse gas, contributing to heating of the Earth, and its role in making the ocean more acidic by dissolving water and releasing carbonic acid, increasing carbon dioxide levels have a detrimental impact on the environment [4]. Since most atmospheric carbon dioxide can be attributed to human emissions, we must be taking a great active effort to reduce such emissions.
Carbon taxes have consistently been favored by economists. In a 2012 poll conducted by IGM Chicago, 98% of polled economists voted in favor of a U.S. carbon tax of $20 per ton increasing at 4% per year. A tax like this would raise about $150 million over a period of ten years. Given the negative externalities caused by carbon emissions, it would not cause as many net distortions on the U.S. economy, as opposed to taxes on labor [1]. In effect, a carbon tax would also be an effective way to raise money.
The carbon tax would be especially useful during the COVID-19 pandemic, where oil prices have drastically decreased. Since economic and social activity has been brought to a relative standstill, the level of carbon emissions has been significantly lower than that of recent years. According to Turkish economist Kemal Derviş, times like this are the perfect opportunity to enforce a carbon tax. Low consumer oil prices create an issue for renewable energy sources—lower prices create greater demand. Hence, greater demand for oil reduces the competitiveness of renewable, “green” energy sources. This detracts from the goal of creating a cleaner environment since more consumers are willing to purchase oil. Enforcing a carbon tax would bring back the competitiveness of renewable energy by increasing the consumer price on carbon energy sources. As oil/fossil fuel prices begin to increase, the carbon tax could be decreased accordingly to alleviate the increasing costs for consumers [2]. Through such a system, a carbon tax could turn some consumers away from nonrenewable energy sources, working towards creating a cleaner environment.
Carbon taxes have actually been implemented successfully in many countries, with twenty-seven national and subnational carbon taxes around the world as of early 2019. Most notably, the Canadian province, British Columbia successfully enacted a carbon tax in 2008. The tax started at 10 CAD (Canadian dollars) in 2008 and has increased in 5 CAD intervals to its current 35 CAD. This specific tax is broad-based, so it taxes based on all hydrocarbon fuels in the province and collects over 1 billion CAD annually. The tax money is returned to households and businesses through tax rate reductions, grants, and other forms of alleviation. British Columbia has also protected small businesses and low-income households by targeting tax cuts towards such groups. Overall, the British Columbia carbon tax can be considered successful and effective, and it is an excellent model of effective carbon taxation.
There are other alternatives to decrease carbon emissions, most notably the carbon cap-and-trade system. In short, a cap-and-trade system involves a cap on the amount of pollution allowed, and the market can buy and sell the right to pollute [5]. In a 2020 IGM Chicago poll, 61% of sixty renowned economists agreed that “carbon taxes are a better way to implement climate policy than cap-and-trade”. Although a cap-and-trade system may be more palatable to politicians and markets, systems like this fail to give a long-term perspective and are prone to special interest lobbying [6]. Taxes, on the other hand, are more transparent. Cap-and-trade systems can also lead to volatile costs due to fixing emissions but not the price [5]. All factors considered, carbon taxes can be considered a more favorable option compared to other alternative forms of carbon emission control.
All in all, carbon taxes can be beneficial and effective. Some form of emission control is necessary to reduce the aforementioned effects of carbon on the environment. In particular, a carbon tax is the most effective form to economists. Carbon taxes are convenient to be implemented during a time like the COVID-19 pandemic, and models for carbon taxation already exist around the world, such as the one in British Columbia. Overall, carbon taxes should be greatly considered by governments when making the first step towards carbon control and creating a greener environment.
Sources
Carbon Taxes II. (2012, December 4). Retrieved March 13, 2021, from https://www.igmchicago.org/surveys/carbon-taxes-ii/
Derviş, K., & Strauss, S. (2020, May 06). The carbon tax opportunity. Retrieved March 13, 2021, from https://www.brookings.edu/opinions/the-carbon-tax-opportunity/
Gleckman, H. (2019, August 15). Why carbon taxes are so hard to pass. Retrieved March 13, 2021, from https://www.taxpolicycenter.org/taxvox/why-carbon-taxes-are-so-hard-pass
Lindsey, R. (2020, August 14). Climate change: Atmospheric Carbon Dioxide. Retrieved March 13, 2021, from https://www.climate.gov/news-features/understanding-climate/climate-change-atmospheric-carbon-dioxide#:~:text=The%20global%20average%20atmospheric%20carbon,least%20the%20past%20800%2C000%20years.
Metcalf, G. E. (2019). On the Economics of a Carbon Tax for the United States. Brookings Papers on Economic Activity, (Spring), 405-484.
The European Green Deal. (2020, January 30). Retrieved March 13, 2021, from https://www.igmchicago.org/surveys/the-european-green-deal/
Con
by Angelica Vellore
Last year, COVID-19 brought economic and social activity around the world to a standstill. Carbon emissions declined sharply, which then led to clear skies for the first time in areas in decades. Although this is not a sustainable option for humanity to utilize, the term carbon tax has been floated in the media. Specifically, it is only because the Biden administration altered how the U.S government calculates the cost of climate change. This would then affect decisions regarding climate change, such as carbon taxes. The Biden administration plans to increase the price per ton of carbon dioxide to $51. This is more than seven times higher than the rate that former president Donald Trump’s administration used. The rate of “social cost of carbon,” can potentially reach up to $125 per ton after a more thorough analysis is conducted. This would result in an uproar among corporations and households.
This would not be the first time that the US government has heard of a carbon tax. Several senators and representatives have proposed legislation authorizing a federal carbon tax in the last few years, such as the recent America’s Clean Future Fund Act from August 6, 2020. This act has the goal, a net reduction of greenhouse gas emissions by 45 percent before 2020, based on 2018 levels. Then, 100 percent net reduction by 2050. Though that seems beneficial, a carbon tax also has consequences. The act places a price of $25 per metric ton of carbon dioxide and other greenhouse gasses, starting when just after most economic stress of the pandemic has been weathered. The price of the tax would increase by $10 each year and then be multiplied by the cost of living adjustment.
To clarify, a carbon tax puts a price on the emissions of carbon dioxide and other greenhouse gasses, under the impression that it will encourage individuals and corporations to be mindful of the emissions they are releasing. Officials will believe that with the tax, companies will ultimately release less of those emissions. The money from the tax would make it reasonable that a high tax on carbon dioxide emissions will highlight the severity of the issue. The problem arises when the tax is implemented and the disruption that it places on corporations and households.
The issue is that with the usage of a carbon tax is the higher energy prices would increase production costs. Not only is this detrimental for companies, but it is households as well. Primarily due to the understanding that a carbon tax would lead to lower wages, profits, and consumption. For example, a $40 tax per ton would add 36 cents per gallon of gasoline. This would heavily burden lower-income families rather than higher-income because this tax is regressive. Essentially, it is a larger burden on low-income earners because a higher percentage of their income is for consumption. For this reason, the same amount of money is a much larger percentage of total income earned for lower-income families.
Another concern is with border carbon adjustments or the tariffs that would be on imported goods and services. These tariffs would need to prevent “carbon leakage”, intensive-carbon manufacturing overseas. The border adjustment would be hectic, as many companies receive parts from all over the world. Calculating and keeping track of all carbon flows, over that, avoiding constant disputes over the accuracy of the data seems near impossible. It’s impossible to think that all countries would have the same guidelines for carbon taxes.
Leading to the idea that a carbon tax would need to be near-universal participation, said William Nordhaus (Nobel laureate and economics professor at Yale University). In 2007, he estimated that if only half of the world’s countries agreed to participate in a carbon-tax effort, there would be an “abatement cost penalty of 250 percent.” This meant that countries participating in carbon efforts would have to more than double their carbon tax rates to compensate countries not participating. The likelihood that all countries will participate is very slim.
There is also another option to reduce the number of carbon emissions rather than a carbon tax. The cap and trade policy issues a set number of emission “allowances” each year. These allowances can then be auctioned to the highest bidder or traded on secondary markets, therefore creating a carbon price. Also, there is reducing emissions by encouraging the lowest-cost emissions reductions. The policy also encourages investors and entrepreneurs to develop new low-carbon technologies and generate government revenue. An important advantage that a cap and trade policy has is that setting an emissions cap that declines over time, can increase the certainty that emissions will fall below the predetermined emissions targets.
Overall the argument regarding carbon taxes, and how they should be implemented is more complicated than it seems. It is important to note that carbon taxes, though effective in theory, are not so effective in application. There is still much to discuss and decide in terms of domestically and internationally. And there is also the option of a cap and trade policy. Only a thorough analysis of the domestic economy and international will allow for a solution to come into the light, perhaps a different approach than a carbon tax, to come forward.
Sources
Shriner, M.(2020, December 4)Bill Analysis: America’s Clean Future Fund Act (S.4484).Friends Committee on National Legislation. https://www.fcnl.org/updates/2020-12/bill-analysis-americas-clean-future-fund-act-s4484
Kagan, J. (2020, December 14). Regressive tax. Investopedia. https://www.investopedia.com/terms/r/regressivetax.asp
Kaufman, N. (2016, March 1). Carbon Tax vs. Cap-and-Trade: What’s a Better Policy to Cut Emissions. World Resources Institute.
https://www.wri.org/blog/2016/03/carbon-tax-vs-cap-and-trade-what-s-better-policy-cut-emissions
Metcalf, G. (2019, March 7). On the economics of a carbon tax for the United States. Brookings Institute.
https://www.brookings.edu/bpea-articles/on-the-economics-of-a-carbon-tax-for-the-united-states/
What is a carbon tax? (n.d.) Tax Policy Center.
https://www.taxpolicycenter.org/briefing-book/what-carbon-tax
Dennis, B., Eliperin, J.(2021, February 26). Biden is hiking the cost of carbon. It will change how the U.S. tackles global warming. The Washington Post.
https://www.washingtonpost.com/climate-environment/2021/02/26/biden-cost-climate-change/