The carbon tax, a price regulation for the control of human-produced CO2 emissions, should have broad appeal, both to those skeptical of government regulation and to those skeptical of market forces. It should even appeal to those skeptical that humans contribute to climate change. But the carbon tax is based on an idea over 100 years old, so why hasn't it gained sufficient support to be implemented? Part of the answer lies in the commonly held, non-rigorous opposition to tax increases, whether of general taxes or of user fees like carbon taxes, that retards careful discussion of this promising approach to a serious public policy problem.
What Does the Interposition of a Carbon Tax Accomplish?: The atmosphere is a "common access resource." Consequently, an unregulated "free market" cannot require payment when polluters emit CO2 into the atmosphere. This absence of a price encourages excessive discharges of these heat-trapping gases. The implementation of a carbon tax will insert the missing price, reducing the incentive to emit CO2. Profit-seeking firms will direct their engineers and scientists to continually seek emission-reducing methods that are cheaper than paying the tax.
Recognition of the potential of this tax to curtail climate-altering CO2 emissions is growing, and support for it is gaining ground on both sides of the aisle. Recently, Sens. Sheldon Whitehouse, D-R.I., and Brian Schatz, D-Hawaii, proposed charging polluters $49 per ton for their carbon emissions. Ehe Climate Leadership Council (CLC), a group of top Republicans co-chaired by George Schultz and James A. Baker III and economist Gregory Mankiw, endorsed a fee of $40 per ton.
The Carbon Tax is Helpful but not Sufficient: Many "small government conservatives," who recognize the need to reduce CO2 emissions, overestimate the "free-market solution" offered by the carbon tax. It has great appeal for them because, as a complement to market forces, they mistakenly regard it as a substitute for the heavy hand of government command and control actions (quotas, bans, equipment requirements, measurement techniques, inspections, and compliance rules that restrict managerial prerogatives). However, while a carbon tax reduces the scope of the required regulatory oversight, it does not eliminate the role of regulation altogether. As it complements the market, a carbon tax also complements the regulator's role in reducing emissions. The regulatory authorities will still be required to continually monitor carbon emissions to determine how high to set the tax — the higher the tax, the lower the emissions. Moreover, the government must also monitor compliance.
Insurance for Climate Skeptics: Even climate skeptics can find the carbon tax appealing as insurance against the disaster that looms if the scientists are right. Baker, a self-described skeptic, backs the carbon tax as insurance against the immeasurably bad climate outcome if he is wrong.
Policy Stability is Essential: If polluters expect policy to flip-flop with every change of dominant political party in Washington, they will make less of an investment in expensive abatement equipment. Bipartisan acceptance of the carbon tax is a key step in assuring investors of a stable policy.
Closing the Sale: How to Spend the Carbon Tax Revenue: This measure would generate considerable revenues (e.g., the CBO estimates that the Whitehouse/Schatz proposal would generate more than $2 trillion per decade). Many opportunities present themselves. First, the money could be spent partially offsetting the increase in the national debt following the recent debt-financed tax cut. Or, the money could be spent to beef up safety net programs for the poor, shore up the national retirement and health programs, fix the nation's crumbling infrastructure, or as the CLC proposes, distribute the revenue by sending each citizen a dividend check, essentially using the revenue to sell the proposal to the voters.
William L. Holahan is emeritus professor of economics at the University of Wisconsin at Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, is also retired from USF. They are co-authors of "Economics for Voters."