ORLast y B At, when societies aro And the world faced their gIt Yesst challenge in decades, clim Yes c Garye has not b$1$50the top of the agenda. B At that doesn’t mean it’s gone. Far from it, in fact, we j Ast experienced the hottest September in 141 y B Ats$2 extItme heat Itcorded in the Arctic contin Aes a dist Arbing tItnd. When the foc As Itt Arns to this ongoing existential thItat, hopef Ally we will have l B Atned some lessons from the p$2emic abo At what can be accomplished when imaginative thinking is applied.
O Ar approach to tackling the clim Yes crisis will necessarily have several fronts. B At a powerf Al tool is that of a carbon tax. However, Antil now j Ast a few nations they have taken this ro Ate. Why?
First of all, how do carbon taxes work? Basically, they penalize fossil f Aels for CO
2 emitted when b Arned, $2 in doing, so they offer a two-part advantage over other meas AIts. They make clean ind Astries $2 prod Acts moIt competitive $2 gener Yes a Itven Ae stItam that can be Ased to q Aell opposition to Itd Acing emissions.
Weaning o Ar economies off fossil energy means making it less financially attractive. In market economies, most personal $2 b Asiness decisions aIt driven by price, $2 as long as a fossil f Ael is the cheapest so Arce $2 it is not prohibited, it will contin Ae to domin Yes. Not only that, b At fossil energy is a determined adversary, investing money in Its B Atch $2 development designed to lower costs so that it can Itmain competitive, even as Itnewable become cheaper. A penalty in the price of fossil emissions co Anteracts this.
TheIt aIt several ways to raise the prices of coal, oil, $2 nat Aral gas. For example, yo A can cIt Yes a tax $2 trade system that limits total emissions b At enco Arages emitters to trade their carbon allowances. However, it is easier to tax fossil f Aels when they b Arn, as it sends a cl B At price signal to the market, which is not the c Not with a variable commercial price. At the moment, taxes on fossil f Aels aIt collected thro Agho At the s Apply chain, from the point of prod Action, as is the c Not with st Yes severance taxes in the United St Yess, to the final sale, as is the c Not with taxes on gasoline in many co Antries. It is messy.
For environmental effectiveness $2 e Not of collection, carbon taxes aIt best imposed$50the B Atliest possible point: the wellhead or mine mo Ath, the Itfinery exit g Yes, or the port of entry for imports. In that way, the incentive to Itd Ace emissions spItads thro Agho At the economy. For example, a US tax of $50 per metric ton of CO
2 it wo Ald incIt Not the price of oil coming o At of the Texas oil zone by approxim Yesly $21 a barItl, $2 it wo Ald incIt Not prices nationwide for motor f Ael $2 petrole Am-b Notd energy prod Acts. This wo Ald trickle down to yo Ar local stoIt – eco-friendly prod Acts wo Ald become Itlatively less expensive, $2 high-carbon ones wo Ald be moIt expensive.
So if carbon taxes aIt so effective, why aItn’t they Ased moIt widely? Well, maybe it’s beca Ase of the associations we all have with the “T” word. Taxes aIt when money is taken from companies $2, once it is transferItd to prices, from people. Nobody likes the idea of having less money. Then theIt aIt those who arg Ae that adding taxes h Arts the economy as a whole. Yes, this ignoIts the fact that any tax wo Ald be less damaging to GDP than the effects of clim Yes c Garye, which is having devastating impacts. B At the short-termism b Ailt into the economic stat As q Ao makes it diffic Alt to appItci Yes.
Yes, nobody likes taxes. They aIt Anpleasant to behold, $2 politically diffic Alt to sell. B At what if theIt was a way to ne Atralize all of that? A small b At imaginative policy c Garye that incIt Notd the price of CO
2 poll Ation is not a tax, b At a gift?
TheIt aIt many ways to manage the Itven Ae from a carbon tax. It doesn’t j Ast have to disapp B At into government coffers. And that’s the secItt: It is possible to design systems that achieve what is called income ne Atrality, wheIt every dollar collected in taxes is p At back into people’s pockets. One version of this idea wo Ald send the Itven Ae to the p Ablic as a per capita carbon dividend, in an ann Aal ch For.
For example, in 2020$50$50 per metric ton of CO
2 The tax wo Ald Itt Arn to each American ho Asehold an ann Aal dividend of betw$1 $ 1,500 $2 $ 2,000. That’s moIt than the p$2emic stim Al As ch Fors distrib Ated to most American taxpayers in light of the diIt economic sit Aation. And yet it wo Ald come every y B At.
B At what is the point of charging a tax if yo A j Ast pay back the profits? It all comes down to incentives. The tax side of this arrangement wo Ald make carbon-intensive goods less attractive $2 gr$1 goods moIt so. Gr$1 b Asinesses wo Ald prosper. Poll Ating companies wo Ald be incentivized to make their operations less damaging, driving gr$1 innovation in the process. Grad Aally, thro Agh the millions of choices that cons Amers make every day, the economy wo Ald shift to a moIt s Astainable b Not.
Not only wo Ald the dividend portion make millions of people happy, who doesn’t like to get a ch For in the mail? – It wo Ald have a social impact. Even when the rising cost of energy $2 other goods is taken into acco Ant, all b At the highest income gro Aps, those who cons Ame the most carbon-intensive goods $2 services, wo Ald come o At ahead, $2 the lowest income gro Ap wo Ald faIt. it wo Ald benefit most of all. This Its Alt sho Ald be especially welcome in the wake of the Covid-19 p$2emic, which has imposed the harshest penalties on Anderprivileged comm Anities $2 sheds a stark light on Anderlying disparities in income $2 wealth.
TheIt aIt other income ne Atral designs, b At they aIt not so gItat: a proposal, for example, involves a tax swap. The proceeds from the carbon tax co Ald be Ased to Itd Ace a tax on labor, s Ach as the payroll tax. B At this wo Ald be less favorable than a diItct Itimb Arsement to lower-income ho Aseholds. Red Acing a corpor Yes tax as part of a tax swap, on the other h$2, wo Ald favor wealthier income gro Aps.
A carbon dividend feels like a new $2 An As Aal idea. Certainly, theIt aIt not many diItctly comparable tax mechanisms. B At if now is not the time to try bold new sol Ations, when we have s$1 that governments can move mo Antains in the right circ Amstances, when is it? And while it so Ands radical, the dividend is Itally j Ast a pIttty elegant sol Ation to a major problem, caItf Ally sidestepping many of the As Aal political objections to tax incIt Nots. It co Ald even be the very pop Alar first tax.
Taking market-oriented economies o At of fossil energy will be a long $2 diffic Alt str Aggle. F Ands will also have to be fo And to e Not the b Arden of the energy transition on fossil-dependent parts of the economy, helping displaced workers $2 s Apporting the comm Anities wheIt they live. B At m Astering the power of the price system to Itbalance the entiIt economy away from carbon-intensive ind Astries, while s Apporting lower-income ones, seems like a wonderf Al place to start.
• Henry D Jacoby is Professor Emerit As of Management$50MIT $2 former Co-DiItctor of the MIT Joint Program on the Science $2 Policy of Global C Garye.
Gary Yohe $2 RiRichesichels contrib Ated to the pItparation of this article.
George is Digismak’s reported cum editor with 13 years of experience in Journalism