Scientific American, December 2015.
Editor’s note (2/8/16): A group of Republicans led by former Secretary of State James A. Baker III is calling for a carbon tax to address climate change, as an alternative to rules and regulations promoted by the Obama administration. Members of the group are expected to meet with senior members of the Trump administration at the White House on February 8 to present their plan. Republished below is a 2015 editorial wherein Scientific American’s board of editors advocated for a similar tax-based approach to reducing fossil-fuel pollution.
In British Columbia, air pollution dwindles while the economy grows. The Canadian province began to tax fossil-fuel users, ranging from utility companies to car drivers, in 2008. Since then, the economy has grown by an average of nearly 2 percent a year, despite a big national recession through 2009, outpacing the rest of Canada. The use of gasoline, coal and other carbon-based fuels has dropped 16 percent during the same period, reducing greenhouse gas pollution. Today the carbon levy is $30 (Canadian) per metric ton; in exchange, both companies and individuals get income tax cuts and other savings.
British Columbia copied this idea from its oil-producing neighbor, Alberta. The time is now right for the U.S. to copy them both and put a price on carbon pollution. Coal, gas and oil are so cheap at present that even with an added tax, fuel costs will remain lower than what people and companies paid just a few years ago.
This is basic market economics: put a monetary value on the use of the sky, and people will not treat it like a free dump. The idea has a long pedigree. In 1920 economist Arthur Pigou suggested that forcing polluters to pay for the air they abuse would discourage heavy use, like sin taxes imposed on alcohol or tobacco. Years later the late economist Ronald Coase, winner of the 1991 Nobel prize for economics, refined Pigou’s idea. He proposed that governments could sell companies or individuals a legal right to pollute, forming a kind of pollution market. Everyone could compete to buy these allowances, which would drive up the price of dirty air. Coase’s idea convinced even the late conservative icon Milton Friedman that trading, buying or selling pollution rights was the rational way to address environmental woes.
More recently, the U.S. has used this kind of market mechanism to combat one particular pollution problem: acid rain. In the 1990s President George H. W. Bush’s administration set an overall limit on the amount of sulfur dioxide—the molecule responsible for the damaging precipitation—that could come out of power plant smokestacks. Shares in that amount were divvied up among polluters. These owners of power plants could stay within their share by installing emissions-scrubbing technology or switching to less polluting fuels. Or they could spend money to enlarge their share, buying permits from other polluters who had already cut emissions.
To tackle another problem—carbon dioxide—nine northeastern states have eased in a similar cap-and-trade program for power plants, and California has even included vehicles, as has the European Union. But attempts to expand this scheme to a national level in the U.S. have failed, derided by opponents as a hidden tax on companies that would cost jobs.
The more straightforward approach, a carbon tax, can have direct benefits for business and does not mean a higher overall tax bill. As it does in British Columbia, a carbon tax could replace other taxes. For example, a carbon tax of $25 per ton levied on coal, gas and oil might raise more than $100 billion that could offset payroll taxes, boost earned income tax credits, fund innovation research or pay to improve infrastructure, or any combination of the above. This is why the proposal has drawn support from all kinds of economists, including N. Gregory Mankiw, who advised Republican president George W. Bush, and Lawrence Summers, who advised Democratic president Barack Obama. The tax would not pain consumers either. In British Columbia today, the share of the tax at the gas pump is only about seven extra Canadian cents per liter.
If the word “tax” remains too frightening for politicians, there is another way, albeit a less direct one, to make an honest carbon market: stop spending tax dollars on subsidies for fossil fuels. More than half a trillion dollars are spent around the world making coal, gas and oil cheaper for businesses to find or consumers to burn, according to the International Monetary Fund. These gifts make fossil fuels appear falsely inexpensive. Any approach that stops obscuring the real price, whether it be a tax, a cap or a subsidy reform, would help clear the air.