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Why a Carbon Tax is Good for the U.S. Economy

November 01, 2016
A revenue-neutral carbon tax is a good choice for the U.S. to mitigate the negative externalities of pollution and promote economic activity.

By Anna Cheyette, C’19

It is a generally accepted fact among scholars that a properly-implemented carbon tax would result in the reduction of a country’s carbon emissions; economists consider a carbon tax to be the most efficient way to reduce emissions.[1] Many argue or believe, however, that a carbon tax or reduction in carbon emissions must come at the cost of economic growth. In this article, I will use Citizen Climate Lobby’s proposal of a national carbon fee and dividend (a $15 fee of carbon dioxide–CO2 equivalent emissions at the source, increasing by $10 every year, with all net fees returned to American households equally) to argue that, not only is a carbon tax essential to slowing climate change, but it would produce substantial economic benefits.[2] These benefits, the economic effects of a carbon fee and dividend, can be sorted into two categories: direct economic benefits and indirect economic benefits.

Direct Economic Benefits

Citizens Climate Lobby (CCL) calls their proposal a carbon fee and dividend (instead of a carbon tax) because the money collected from the fee is redistributed to American citizens directly; it’s revenue neutral. Some form of revenue recycling (such as a dividend) is the form of carbon tax most favored by economists due to its economic benefits. One of the effects of a carbon tax is undoubtedly that the price of goods would increase. For the first year that a $15 per metric ton of CO2 carbon tax is implemented, the cost of gasoline would go up by 16 cents per gallon, natural gas by 19 cents per therm (a 7.4 percent increase), and electricity by 0.6 to 1.1 cents per kilowatt-hour (kWh), depending on whether its source is coal or natural gas.[3] Without the dividend, this price increase (which would extend to goods and services, as well as individual energy needs) could generate adverse effects on the economy due to decreased spending and demand for American goods.[4] With a dividend, however, these findings are reversed.

According to a study by Regional Economic Models, Inc., a dividend such as the one proposed by CCL would result in an initial rebate of over $300 per month for a family of four.[5] Taking into account extra expenditures due to the tax, the dividend would result in 53 percent of households receiving more than they spend, and among households benefited, the median gain is estimated to be $192 per household per month.[6] Low-income households receive more from the dividend than higher-income households, creating a progressive system.

Since 53 percent of households will receive extra money from the dividend, this extra cash will become increased spending that contributes to the national GDP. According to the same report by Regional Economic Models, Inc., the industries that would see the largest increase in spending from a carbon fee and dividend are predicted to be “Health Care and Social Assistance” and “Retail Trade,” as shown in the graph below. These particular industries will likely see gains because they are labor-intensive and highly affected by consumer spending.[7]

Employment ramifications of national fee and divided carbon tax.Employment ramifications of national fee and divided carbon tax. Credit: Graph source: Regional Economic Models, Inc. and Synapse Energy Economic, Inc. “The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax.” 2014.

This graph also shows a decrease in employment from energy-related sectors such as mining and utilities, as is expected from a carbon tax. If the total increase in national employment is aggregated, we can see the positive effect that a steadily rising carbon fee and dividend would have on total employment from 2015 – 2035:

Projected employment augmentation from carbon fee and divided system.Projected employment augmentation from carbon fee and divided system. Credit: Graph source: Regional Economic Models, Inc. and Synapse Energy Economic, Inc. “The Economic, Climate, Fiscal, Power, and Demographic Impact of a National Fee-and-Dividend Carbon Tax.” 2014.

Indirect Economic Benefits

A common argument made in favor of carbon taxes is that a carbon tax corrects the negative externalities associated with carbon emissions. A “negative externality” is the cost associated with a good that is not reflected in the price of the item, and must be paid for by someone else or in another way. The negative externalities associated with carbon emissions and its co-pollutants (such as sulfur dioxides and nitrous oxides) include, but are not limited to: climate change; health risks such as lung and heart disease; and soil and ocean acidification. These negative externalities have a very real effect on GDP: climate change will require exorbitant spending on repairs and rebuilding due to extreme weather events; ocean acidification will cost many jobs in the fishing industry; and soil acidification leads to decreased crop output. For simplicity’s sake, if we look at health risks from burning fossil fuels alone, we can estimate the economic benefits of carbon mitigation. The Intergovernmental Panel on Climate Change (IPCC) estimates the “global average monetized co-benefits of avoided mortality of 55-420 USD/ton CO2.”[8]

Looking at carbon pricing in terms of correcting the market failure that exists between carbon emissions and its adverse effects on society and the economy, carbon pricing is more of a correction than a “tax.” In fact, according to a report by New Climate Economy, even without a revenue recycling system (such as the dividend), once the multiple benefits of reducing greenhouse gas emissions are taken into account, the net economic costs are reduced or eliminated.[9]

Counterarguments

Objections to implementing a carbon tax vary widely in type and strength, so I’ll take some time to address some of the most common: employment, trade competition, and cap-and-trade.

On employment, evidence demonstrates there will be a net gain of jobs from a carbon tax that features a system of revenue recycling. This fact provides little solace, however, to the coal miners or oil and gas workers who may see their line of work diminishing due to a carbon tax.

 In response to this, these jobs lost are not really “lost,” they are being transformed into a different kind of job. A carbon tax will not necessarily reduce the net amount of energy that Americans use by that much, but it will change the source of that energy (from high carbon sources to low/no carbon sources) optimizing due to market-efficiency. Oil, gas, and coal companies can respond accordingly, and use their workers to build a solar farm, for example, instead of drill for oil. Additionally, the nature of a gradually-rising carbon tax gives employers the chance to gradually adjust. In “The Conservative Case for a Carbon Tax,” Jerry Taylor writes, “Phasing in a carbon tax over time allows industries and consumers to gradually adjust to the tax while establishing a clear market signal that encourages investments in energy conservation and low carbon energy sources.”[10] Something else to acknowledge on this point is the fact that as technology changes, jobs change—nobody would argue that we should have blocked the development of internal combustion technology because it put the horse and buggy drivers out of work. A switch towards renewable energy technology and away from oil, gas, and coal is one that is already taking place; a revenue recycling carbon tax simply hastens that switch, while stimulating spending and creating other jobs in the process.

Another common argument against a carbon tax is that businesses would simply move abroad to avoid paying the tax, or that the tax would hurt American-made products because foreign goods (made in a country without a carbon tax) would be cheaper than American-made products. This is a valid argument, which is why some sort of border-adjustment is an essential aspect of a successful carbon tax. The Citizens Climate Lobby proposal calls for a tax on imports equivalent to the domestic carbon tax, and a refund on exports so that they remain competitive in foreign countries, to be paid for by the tax on imports.[11] This carbon fee on imported goods will have the added benefit of incentivizing other countries to enact a carbon tax themselves so that they can keep the tax revenue themselves, rather than passing it on to the U.S.

Some people might wonder why the U.S. should adopt a carbon tax instead of cap-and-trade, or are unclear of what the difference is. Cap-and-trade is a system where an overall cap on carbon is set and companies can buy pollution permits and trade among themselves. The cap decreases each year, increasing the price of pollution permits and thereby encouraging a switch to renewable or low-carbon options. While cap-and-trade can work very well, a carbon tax is preferred for a few reasons. The main reason is simplicity: a carbon tax is straightforward, requires very little additional bureaucracy, and is predictable.[12] Additionally, sometimes cap-and-trade doesn’t work: the European Union set up a cap-and-trade system that has largely failed due to excessive permits in the system, leading to low prices on the permits, meaning that companies have little incentive to invest in other sources of energy.[13]

Conclusion

The economic benefits of a steadily increasing, revenue neutral carbon tax are multi-layered. The money gained from the tax and then returned to American citizens will stimulate spending, contribute to the national GDP, and create jobs; the tax will also correct the negative externality of carbon and associated pollutants and decrease mortality, providing additional economic benefits.

The benefits of a carbon tax far outweigh any negative effects, and it’s a long overdue and absolutely necessary step in slowing climate change while boosting our economy.

 

References

  [1] David Pearce. “The Role of Carbon Taxes in Adjusting to Global Warming.” The Economic Journal 101, no. 407 (1991): 938-48.

  [2] “Legislative proposal: Carbon fee and dividend.” Citizens Climate Lobby. https://citizensclimatelobby.org/carbon-fee-and-dividend/. Accessed October 20, 2016.

  [3] “Household Energy Costs Laser Talk.” Citizens Climate Lobby. 2016. https://citizensclimatelobby.org/household-energy-costs/#advanced. Accessed October 20, 2016.

  [4] Grant Allan, Patrizio Lecca, Peter McGregor, and Kim Swales. “The economic and environmental impact of a carbon tax for Scotland: a computable general equilibrium analysis.” Ecological Economics 100 (2014): 40-50.

  [5] Scott Nystrom, and Patrick Luckow. “The economic, climate, fiscal, power, and demographic impact of a national fee-and-dividend carbon tax.” Regional Economic Models, Inc. and Synapse, Inc. for Citizens’ Climate Lobby (2014): 36.

  [6] Kevin Ummel, Scott Curtin Corea, Art Diem, Eric Wilson, Travis Johnson, James Crandall, and Michael Mazerov. “Impact of CCL’s proposed carbon fee and dividend policy: A high-resolution analysis of the financial effect on US households.” (2016).

  [7] Nystrom and Luckow, “The economic, climate, fiscal, power, and demographic impact of a national fee-and-dividend carbon tax.”

  [8] L. Clarke, K. Jiang, K. Akimoto, M. Babiker, G. Blanford, K. Fisher-Vanden, J.-C. Hourcade, V. Krey, E. Kriegler, A. Löschel, D. McCollum, S. Paltsev, S. Rose, P.R. Shukla, M. Tavoni, B.C.C. van der Zwaan, and D.P. van Vuuren “Assessing Transformation Pathways. In: Climate Change 2014: Mitigation of Climate Change.” Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. (2014).

  [9] “Better growth better climate: The new climate economy report.” The New Climate Economy (2014): Chapter 5.

  [10] Jerry Taylor. “The Conservative Case for a Carbon Tax.” Washington, DC: The Niskanen Center (2015).

  [11] “Legislative proposal: Carbon fee and dividend.” Citizens Climate Lobby.

  [12] “Carbon fee vs. cap and trade laser talk.” Citizens Climate Lobby. http://citizensclimatelobby.org/laser-talks/carbon-fee-vs-cap-trade/ Accessed October 20, 2016

  [13] Brad Plumer, “Europe’s Cap-and-trade program is in trouble. Can it be fixed?” The Washington Post. April 20, 2013. Accessed October 22, 2016. https://www.washingtonpost.com/news/wonk/wp/2013/04/20/europes-cap-and-trade-program-is-in-trouble-can-it-be-fixed/.  

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