The October 2018 UN annual report on climate change issues the sternest warning yet that climate change caused by human activity is accelerating. This series of reports has triggered two meaningful responses. First, the Green New Deal called for government command-and-control measures that would phase out all fossil fuel-based energy over the next 11 years. The other favored new regulatory efforts, such as the carbon tax, that would use price incentives to induce market participants to reduce their greenhouse gas emissions.
Can these two seemingly irreconcilable approaches actually complement one another? Finding that complementarity would help kick-start the urgently needed response to this threat.
THE GREEN NEW DEAL IS A CRY FOR HELP. The deal proposes to eliminate the use of fossil fuels in the industrial, agricultural and transportation industries, as well as in all residential and commercial activity. This "resolution" was introduced by U.S. Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sen. Ed Markey, D-Mass. Moreover, it has been endorsed by several presidential hopefuls in the Democratic Party.
The New Consensus, a group of professional organizers, is credited with the design of the deal. This group has successfully focused attention on our climate change threat. As its most energetic proponent, Ocasio-Cortez exclaimed "it is time to do something. Something." What is needed is for scientists, engineers, economists and policy makers to heed this call for action by preparing viable proposals capable of attracting the support of voters.
THE CARBON TAX. In 2017, a pro-market group, the Climate Leadership Council, recommended a $40 per ton carbon tax be assessed on firms that pollute. They recognized that without such an action these profit-driven firms will have very little incentive to abate their greenhouse gas emissions. Society suffers while firms profit. It is standard economics that goods and services whose production generates costs that are external to the firm will be over-produced and underpriced. It is this market failure that the carbon tax is designed to remedy.
THE CARBON TAX RE-DIRECTS MARKET FORCES. Reducing carbon emissions costs money. Without a carbon tax, a firm that incurs abatement costs places itself at a profit disadvantage relative to competitors that do not abate their emissions. When a carbon tax per unit of carbon is in effect for all firms, each faces the same price for their emissions; they can reduce their costs and the amount of their carbon tax bill by reducing emissions. The carbon tax reverses the competitive advantage: Without the carbon tax, a firm can gain a competitive advantage by emitting more carbon; with the carbon tax, a firm can gain a competitive advantage by emitting less carbon.
As the carbon tax is passed on to consumers, they will perceive a change in the relative prices of different energy sources. For example, due to their relatively high carbon content per unit of energy, the carbon tax for coal would be roughly twice that for natural gas, providing coal users with a strong incentive to switch to gas. Energy buyers would perceive still lower relative prices for non-fossil energy, like wind and solar. To help gain voter acceptance for a carbon tax, the Climate Leadership Council proposed redistributing the revenue generated by the tax in the form of an equal per-person "citizen dividend." At $40 per ton, that annual dividend is estimated at roughly $2,000 per family of four.
THE CARBON TAX IS NOT A "FREE-MARKET SOLUTION." Despite the advantages of the carbon tax, many Green New Dealers remain opposed to it. Ocasio-Cortez asserts that the market had 40 years to fix this problem, and yet it got worse. It did so because the powerful forces of the market were working with the wrong prices. The Climate Leadership Council is proposing to get the prices right and re-direct those powerful forces in favor of a sustainable human habitat.
The carbon tax is not sufficient to solve the climate change threat, but both groups should agree that it is a good component in the large set of proposals that will have to work. To help gain that agreement, the Climate Leadership Council should stop boasting that the carbon tax is a "free-market solution." While this term is agreeable rhetoric in the business community, its use repels many Green New Dealers who regard the market as a culprit. Moreover, it is not true: A carbon tax is a correction of market prices, organizing the incentives of 340 million ideologically mixed citizens. The carbon tax gives them all an incentive to act in ways that save the planet, even though, as Adam Smith taught, that is "no part of their intent."
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."