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Carbon emissions
Every year the UN’s International Panel on Climate Change issues its report, and every year the panel’s warnings are more dire. We recently learned that 2023 was the hottest year on record by far, and that CO2 and methane emissions must be brought under control soon or the target of zero net emissions by 2050 will not be met. Meanwhile, it is an established fact that excess emissions are due to human activity in industry, transportation and agriculture—areas of the economy where, with great effort, emissions can be greatly reduced.
Economists characterize the fundamental problem as a “market failure” wherein market forces actually encourage emissions. Why? The atmosphere is a “common access resource.” This means that an essential ingredient of efficient markets is missing: ownership rights (described in this space in the March issue). Unlike a landfill that is owned by someone who can demand a price to dump waste, the atmosphere is inanimate and cannot charge polluters for dumping their carbon-based effluent. This absence of a price is the essential economic problem of excess emissions; profit-seeking firms will recognize an inexpensive way to dispense with waste products.
To address this market failure, economists have been urging a tax on carbon dioxide and methane per unit of emissions. This “carbon tax” would incentivize a search for ways to cut emissions. Rather than treat the atmosphere as a free disposal site, profit-seeking firms would seek ways to reduce their tax obligation; they would direct their engineers and scientists to seek emission-reducing methods as long as they are cheaper than paying the tax.
Support for the carbon tax is gaining bipartisan support. Recently, Senators Whitehouse (D-RI) and Schatz (D-HI) proposed charging polluters $49 per ton for their carbon emissions. Meanwhile, the Climate Leadership Council (CLC), founded by former Secretaries of State and Treasury George Schultz and James A. Baker III, as well as Harvard economist Gregory Mankiw, endorsed a tax of $40 per ton.
Using Revenue from the Carbon Tax
The carbon tax would generate considerable revenues (e.g., the Congressional Budget Office estimates that the Whitehouse/Schatz proposal would generate over $2 trillion per decade). So, while incentivizing the reduction of emissions, the revenues generated could be spent to partially offset the national debt. Or the funds could be spent to strengthen safety-net programs for the poor; or to shore up the national retirement and health programs; or to fix the nation’s crumbling infrastructure; or to develop alternatives to fossil fuels. Or, as the CLC has proposed, the money could simply be returned to the public in the form of an equal per person “Citizen Dividend.” At $40 per ton, that annual dividend is estimated at roughly $2,000 per family of four.
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The Carbon Tax Would Be Helpful But Not Sufficient
Some “small-government conservatives” who support the carbon tax are attracted by its use of price incentives instead of “heavy-handed” government command and control regulations (quotas, bans, equipment requirements, measurement techniques, inspections, and compliance rules that restrict managerial prerogatives). However, the carbon tax does not substitute for regulation altogether. Regulatory authorities still would be required to continually monitor carbon emissions to determine how high to set the tax—the higher the tax, the lower the emissions. Moreover, the government would monitor compliance. So, while the carbon tax creates compatible incentives to reduce emissions, implementation requires considerable government involvement.
Substituting Low-carbon Goods and Services
As the carbon tax works its way through the market economy, the prices of carbon intensive goods and services will rise relative to the less carbon intensive. For example, due to relatively high carbon content of coal per unit of energy, the carbon tax for coal would be roughly twice that for natural gas, providing coal users with a strong incentive to switch to gas. Similarly, energy buyers would perceive even lower relative prices for non-fossil energy e.g. wind and solar, whose cost of use is falling dramatically. Although wind and solar have an “intermittency problem” with natural interruptions on calm days, dark days and at night, the steady fall in the price of lithium battery power provides a solution to that problem. The carbon tax, therefore, adds to the incentive to adopt wind and solar options.
A Path to Net Zero by 2050
According to estimates by economists at the CLC, the $40 carbon tax would induce investment in abatement methods that would keep emissions well below the 2030 target levels agreed to in the Paris accords. This would be a good start toward "net zero" by 2050, regarded by scientists as a necessary condition to keep the global temperature increase to 2°C.
