Carbon Tax: What is it and who is calling for the federal government to implement one?

Since 2000, the United States has experienced an increase in the number of severe natural disasters; from wildfires to hurricanes, droughts, and flooding, seeing images of houses and entire communities destroyed is becoming normal occurrences.

In 2018, under President Trump, the US government released the National Climate Assessment which stated that “the evidence of human-caused climate change is overwhelming and continues to strengthen, that the impacts of climate change are intensifying across the country,” and as the climate continues to change there are real “threats to Americans’ physical, social, and economic well-being.” This is the equivalent of the nation’s top climate scientists waving a red flag. We are on a collision course and without concrete action, there are no ways to avoid it.

The approaches needed to address the climate crisis, both in the US and abroad, will be multi-faceted. One of the most common ideas tossed around within policy, private sector, and climate circles is that of a carbon tax.

What is a carbon tax?

A carbon tax is a tax levied on industries and products that emit carbon to be created. A carbon tax allows for a price on environmental degradation to be included in the price of a good or service. Basic economic principles demonstrate that businesses are cost minimizers, meaning if there are additional costs added to their operation, they will search for alternatives to avoid the increases.

While the oil industry is an integral part of our energy system, climate experts understand that the energy sector contributes the highest quantity of greenhouse gases into the atmosphere. Many proponents of a carbon tax argue that if there are no consequences or costs associated with this pollution, companies will be unlikely to clean up their practices.

Who is calling for a carbon tax?

In the past few weeks, various business leaders including Elon Musk have called on the US to implement a carbon tax program. On 13 May, Musk tweeted his support for the implementation of a carbon tax.

The tweet followed comments made on The Joe Rogan Experience podcast, where he acknowledged that his companies would also have to pay, saying “And by the way, SpaceX would be paying a carbon tax too. So I’m like, you know, I’m like, I think we should pay it too. It’s not like we shouldn’t have carbon-generating things. It’s just that there’s got to be a price on this stuff.”

Additionally, the Washington Post published an opinion piece where, Henry M. Paulson Jr., former U.S. treasury secretary and chairman of the Paulson Institute, and Erskine B. Bowles, who served as the co-chair of the National Commission on Fiscal Responsibility and Reform, argued that the Biden administration should take up the idea of implementing a tax on carbon emissions.

In the piece, the two authors who now lead the Aspen Economic Strategy Group highlighted the widespread public support that exists for a carbon tax program. They also mentioned that while there are set-ups that could be regressive, meaning they could dump the burden of the tax on poor consumers, “the wealthy use a lot more carbon-based energy than those with lower incomes. More importantly, the carbon tax revenue could be invested in poorer communities that face disproportionate risks from climate change.” The arguments presented recognize that there is a right and a wrong way to implement this sort of measure but that fears over creating bad policy should not be the justification to forgo it at all.

Other market-based approaches to reducing emotions

Most high-income countries are opposed to the restrictive measures to reducing emissions as their economies rely heavily on carbon-emitting sectors. However, the policies and actions that could and have been taken to reduce emissions go beyond tax systems and can include the creation of carbon markets where carbon offsets and credits can be bought and sold.

For example, the same climate assessment mentioned earlier highlighted the successes made in incentivizing the private sector to create more energy-efficient products such as light bulbs and dishwashers. These strides were not made only by taxing companies that created inefficient products from an energy standpoint, but also by the creation of “financial incentives to lower the cost of deploying efficient energy technologies, the development of building energy codes and appliance and equipment standards, the encouragement of voluntary actions to improve energy efficiency.”

Similarly, in the electric vehicle market, some companies and consumers were given rebates when purchasing electric or hybrid vehicles. In California, some owners of electric vehicles are able to use the state’s “carpool” lanes, even if passengers are driving alone.

Cap and Trade Legislation

In 2013, California adopted a Cap and Trade program to limit carbon emissions. The program forms an integral part of the state’s climate resilience and carbon mitigation strategy and covers eighty percent of all greenhouse gas emissions released within the state each year. The program works by capping the quantity of carbon able to be emitted each year, and as years progress that cap is lowered. The California program allows businesses to purchase carbon credits “equals one metric ton of carbon dioxide equivalent emissions.” Then, each year the limit on GHG emissions is lowered creating “a powerful economic incentive for significant investment in cleaner, more efficient technologies.” Allowances are purchased through “auction[s], limited free allocation (for eligible entities), and by trading with other entities in the Program (i.e., the “trade”).”

The approach taken by California is innovative and while not perfect, begins the process of associating a cost with pollution. Businesses and other entities may be less quick to pollute, knowing that there is a real fixed cost associated.

As the impacts of climate change begin to be felt more strongly in the United States and around the world, governments may move to use this approach in relation to other goods, like water. Many water policy experts fear that the actual value of water is not included in the price of products it is used to create, especially in the agricultural sector. In the agricultural sector, decisions on which crops to plant and harvest often do not account for water scarcity issues. If the true value of water, including how scarcity could impact its price, was factored into agricultural planning, people may be less likely to plant water-intensive crops in places where the long-term use of the resource unsustainable.

Criticisms to this approach

The criticisms of this approach come from all sides and sectors. Those in the energy sector say that the measure is punitive and environmental justice organizations believe that the additional costs from these taxes are often passed to the consumer, which disproportionately impacts low-income communities.

The Balance, an online financial help news outlet, argues that these impacts on low-income families can be avoided if the taxes are implemented gradually. This approach allows the private sector time to adapt their operation over time and may incentive them to not push the additional cost directly to the consumer.

Other critiques go beyond these arguments and center on a general opposition to market-based approaches in combating the climate crisis. Currently, 100 companies account for 71% of global emissions, which creates skepticism that without additional regulation, these companies will on their own move to build more sustainable supply chains and operations. Some activists and policymakers believe that as a profit-driven organization, the private sector will not truly change its behavior until the effects of environmental degradation actually lead to decreases in profit. Fortunately, or unfortunately, this is already beginning to happen and some companies have made public statements stating that they will begin to place a greater emphasis on long-term sustainability rather than focusing so heavily on short-term profits.