The economics of climate change: How taxes can reduce carbon emissions

With emissions of carbon dioxide and other greenhouse gases still on the rise, the United States stands to lose a lot if no action is taken to combat climate change.

Staff Reporter

Patiently waiting for the crowd of students to thin, Michael Mark maintains a gentle smile behind his plastic folding table at the GreenAllies environmental advocacy conference, held at Messiah College.

As a group leader for the Harrisburg chapter of the Citizens’ Climate Lobby (CCL), Mark spends hours each month garnering support for the policy program that he and the CCL believe will help the U.S. significantly reduce its carbon emissions, without dampening the economy or creating a tangle of government regulations.

“We visit Congressional offices in D.C. and in home districts. We meet face to face with members of Congress when we can,” Mark said. As a member of CCL, he explains the proposal to policymakers but also engages with local citizens to raise public support.

“We write letters to the editor and op-eds. We make presentations to organizations, service clubs, congregations – whoever will have us,” Mark said.

He said promoting CCL’s policy can be thankless work, but it is a mission he believes is critical to minimizing future climate impacts.

With emissions of carbon dioxide and other greenhouse gases still on the rise, the United States stands to lose a lot if no action is taken to combat climate change, according to a study by the Center for Integrative Environmental Research at the University of Maryland.

For example, a global temperature increase of just 2 degrees Celsius could cause billions of dollars in economic losses in everything from agriculture to tourism. Heat-related deaths are expected to rise into the thousands annually, and more frequent severe weather events will cause billions of dollars in damage to infrastructure. Mark and the CCL hope to minimize the chances of these catastrophes from ever happening.

Economists have long known that as long as there is no monetary incentive to reduce pollution, firms will continue to pollute if it is cheaper to do so. Because of their deleterious effects on climate, greenhouse gas emissions are considered negative externalities, a type of market failure in which the side effects of commercial activity are not reflected in the cost of the product or service.

CCL espouses a policy, commonly known as a carbon tax, which seeks to correct this by placing the responsibility for greenhouse gas emissions on the emitting party. CCL’s specific proposal places a $15 fee on every ton of carbon dioxide (CO2) or its greenhouse gas equivalent, measured as CO2eq, emitted in an effort to encourage industry and consumers to adopt more efficient technologies and practices.

Under this plan, a manufacturing plant would pay $15 for every ton of CO2 it emits during its production processes. Consumers buying gas at the pump would also pay for the amount of CO2-equivalent they emit from burning gasoline. This incentivizes consumers to drive less and purchase more fuel-efficient vehicles and pushes producers to innovate new technology to create more efficient production systems.

However, the CCL knows that higher prices can place serious financial strain on families. They propose that the revenue from the fee be redistributed to households through a monthly dividend, removing the burden of the fee on families while simultaneously incentivizing reduction of carbon emissions.

Economic theory suggests that as long as it is free to pollute, firms will do so. A policy placing a fee on carbon seeks to create a market for emissions. Under a fee, a firm will reduce its emissions until the cost of abating one more ton of CO2-equivalent is greater than the fee for emitting that ton. This naturally leads to the efficiency point of a market, where it is most advantageous for a firm to neither emit nor abate one more ton of CO2-equivalent.

A carbon tax is not the only policy tool useful for reducing carbon emissions. Under a system known as “cap and trade,” the government creates a limit, or “cap,” on the number tons of CO2-equivalent emitted in a given year and mandates that firms possess permits for every ton of CO2-equivalent they emit. The government only issues as many permits as there are tons of CO2-equivalent in the cap.

Once the permits have been issued, firms may “trade” their permits. The firms that can upgrade their technology to reduce emissions at low cost can sell permits to firms for which updates would be more expensive, allowing for emissions reductions to occur where it is most economically feasible.

Both systems have their strengths and weaknesses, but climate policies ultimately depend on the willingness of legislators and lobbyists to create change.

“Many politicians found the cap and trade way too complicated, too unpredictable and too easy to game,” Mark stated in an email.

In addition to being hard to understand, some economists doubt the viability of a cap and trade system because it is difficult to set the cap at a level that will produce the desired economic effects.

“The [cap and trade] cap will undoubtedly be wrong. Then what do you do?” Joshua Duke, professor of applied economics and statistics at the university, said.

“The key advantage of the tax approach is that it puts a clear price on carbon, which can be adjusted with new info and which can be slowly ramped up over time to give the economy a chance to adjust,” Duke said.

It is easier to adjust the level of a tax than it is to change the number of emissions permits on the market. While a cap and trade system would require additional bureaucracy to manage the issue and exchange of emissions permits, a carbon fee can be layered onto existing governmental structures. This gives carbon fees an added degree of flexibility and helps address the qualms of legislators.

“[A carbon fee] offers something to both sides of the political spectrum,” Beth Chajes, group leader of the Wilmington-Newark CCL chapter, said.“Republicans like that it is a market-based, revenue-neutral solution that doesn’t grow government or rely on regulations, while Democrats like that the dividend would actually benefit lower and middle income households.”

Political feasibility is one of the biggest hurdles faced by climate activists. Armed with viable policy solutions backed by scientists and economists, the next step for groups like CCL is winning the support of federal legislators.

“Anything proposed by Democrats while Republicans are in control of Congress is pretty much dead on arrival. So there’s a lot of work going on in Republican-held districts,” Chajes said.

Different CCL chapters face different local political climates and therefore, their advocacy tactics vary.

“In Democratic districts such as Delaware, we are mainly working to educate our delegation on how our proposal fits with their priorities and making sure that they know we will have their backs to vote for our proposal, or one sufficiently similar, if and when it is offered by the Republicans,” Chajes said.

The GOP is typically thought of as opposing climate action, but this trend may be changing.

In February, the Climate Leadership Council came out with its own carbon tax proposal. The Council is an international conservative advocacy group of politicians and economists that promotes a market-based solution to climate change issues.

Similar to CCL, it proposes a fee on carbon emissions, with the revenue returned to American households. While the Council acknowledges uncertainties about the causes of climate change, it claims that its impacts are too great to ignore and that conservatives should seize the opportunity of a Republican Congress and presidency to pass climate legislation that protects free market ideals.

CCL has partnered with the Council, and the two groups have similar fee and dividend proposals. However, the Council hopes to impose a $40 fee on each ton of CO2.

They believe that this is the minimum amount needed to produce the emissions reductions necessary for the U.S. to meet the commitments it made in the Paris Agreement. Under the Council’s model, a $40 fee would produce enough revenue to give a family of four almost $2,000 in dividends in the first year.

Like the CCL, the Council proposes incremental increases in the fee once the program is established, which would result in even higher dividends.

Most carbon tax proposals that include the return of revenue to households aim to reduce the burden of more expensive goods and services, but some suggest that this money would be better used to fund renewable energy projects.

The long-term success of climate change policy depends on the availability of new technologies to further reduce emissions. Because it could be years before these types of technology would be necessary or profitable, many industries are reluctant to invest in the research needed to develop them.

Revenue from a carbon tax could be used to subsidize research and development in renewables, which could even lower the amount of the fee in the future.

Taxes that raise federal revenue are often hard to pass, especially in a conservative legislative branch. But just as there are now climate policies not only backed but even proposed by conservatives, attitudes towards taxes may be changing as well.

“I used to think taxes were federally infeasible, but no more,” Duke said. “Budget pressures have evolved.”

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