There has been a great deal of backlash from fiscally conservative entities or individuals when rational discussions attempt to determine further linkages between such human-caused disasters such as oil spills, coal ash spills, coal combustion particulates and asthma, death, or natural disasters. As President Obama cleared up in his 2014 State of the Union, “Climate change is a fact.” Secretary Kerry declared climate change to be perhaps the most world’s most fearsome weapon of mass destruction earlier this year as well and stating that it is “the greatest challenge of our generation.” With overwhelming support from both administrations and scientific communities around the world, it is difficult to understand to motives of climate-denying entities.
From an economic standpoint, however, it is easy to see that for climate-denying entities (private and public sector)—and those with ties to such entities— the potential threat of incorporating externalities is at the heart of this issue. There are increasing number of externalities that are not being accounted for by entities who sit idle as their business consumes or produces material that in turn creates external, or “social”, costs (costs to our health, environmental, infrastructure, etc.). In the free market these entities are allowed to alleviate themselves from incorporating the rapidly increasing social costs, and they may simply apply individualistic private costs. Well, to this I remind everyone that we are a collection of unique individuals in a causal nexus. The decisions of these (corporate/transnational) entities are not practiced in a vacuum. Their actions have real effects on real people for better or for worse. It is up to regulator agencies to enforce the proper inclusion of these social costs of fossil fuel extraction, production and combustion, which would otherwise be ignored by private entities.
How is this possible? The Carbon Tax Center gives a basic run-through that is pretty easy to get on board with. A carbon tax would effectively tax the carbon dioxide emissions from burning fossil fuel. Since the carbon content of every form of fossil fuel is precisely known a carbon tax presents few if any problems of documentation or measurement. Economists and policy-makers believe that the tax could be effective if it is paid far “upstream,” at the point where fuels are extracted from the earth or imported from suppliers and put into the stream of commerce. Such a tax would obey the proportions of fossil fuels that emit different amounts of carbon per unit of energy. For instance, a unit of energy from coal produces 30% more carbon dioxide than a unit of energy from oil, and 80% more than from natural gas.
To avoid runaway climate destabilization we must procure a method to rapidly reduce our carbon emotions. Climatologists like Dr. Jim Hansen suggest destabilization will result in severe weather events, inundation of costal areas, spread of diseases, failure of agriculture and water supply, infrastructure destruction, forced migrations, and international conflicts. A tax on carbon pollution will create the broad incentives to encourage decision-makers at all levels of society to reduce carbon emissions through conservation, substitution and innovation. As I have previously mentioned, prices of gasoline, electricity and fuels in general include none of the long-term social and private costs associated with devastating climate change. The omission of these costs oppress incentives to develop and deploy carbon-reducing measures such as energy efficiency (high-mileage cars), renewable energy (wind turbines, solar panels) and conservation-based behavior such as bicycling, recycling and overall mindfulness toward energy consumption. Conversely, taxing fuels according to their carbon content will infuse these incentives at every link in the chain of decision and action — from individuals’ choices and uses of vehicles, appliances, and housing, to businesses’ choices of new product design, capital investment and facilities location, and governments’ choices in regulatory policy, land use and taxation.
In order to maximize incentives to reduce emissions while avoiding “income” effects normally associated with taxes that would drag down the economy a carbon tax should be revenue-neutral. Revenue-neutrality, says the Carbon Tax Center, is a “politically savvy way to blunt the ‘No New Taxes’ demand that has held sway in American politics for generations.” There are two methods in which this may be enforced. The most promising way to tax in a revenue-neutral fashion would be, as the Carbon Tax Center states, for “each dollar of carbon tax revenue would trigger a dollar’s worth of reduction in existing taxes such as the federal payroll tax or state sales taxes. As carbon-tax revenues are phased in (with the tax rates rising gradually but steadily, to allow a smooth transition), existing taxes will be phased out and, in some cases, eliminated.” Reducing payroll taxes could also stimulate employment. This method is known as tax-shifting.
The other method, which Dr. Hansen supported at the recent Congressional Foreign Policy Committee Hearing on the Keystone XL Pipeline, would be one that would return revenues directly through regular equal “dividends” to all U.S. residents. In effect, every resident would receive equal, identical slices of the total carbon revenue “pie.” The amount of every individual’s carbon tax would be proportionate to his or her fossil fuel use, creating an incentive to reduce. But revenue return “dividends” would be equal and independent of individuals’ energy use, preserving the conservation incentive.
Despite the extensive work we must undertake this theory can be practically applied. In Canada a carbon tax isn’t just an idea; it is a reality. Five years ago, the Canadian province of British Columbia joined a small group of local and national governments (still fewer than 20 overall) that have created a carbon tax—setting a price on carbon in an effort to reduce emissions. Today, the tax brings in $1 billion a year in revenue that is returned to British Columbia taxpayers. This is returned through a system that is similar to the one Dr. Hansen describes.
A tax on carbon emissions isn’t the only way to “put a price on carbon” and thereby provide incentives to reduce use of high-carbon fuels; a carbon cap-and-trade system is an alternative approach. Recent evidence from the EU’s ETS suggests, however, that price volatility and gaming by market participants has largely undermined the effectiveness of this complex, opaque indirect cap-and-trade system for pricing carbon pollution.
If we are to effectively regulate companies, from an economic efficiency standpoint, then the EPA and other agencies must assist entities internalize the externalized “social cost.” The method of internalization, I suggest, is this carbon tax. To battle the climate patterns and threatening ecosystems that result we need to slow the amount of carbon we are emitting; we should not increase the extraction and combustion of more fossil fuels to create jobs or boost the economy in the short-term. If the cost of carbon is not soon internalized by all entities, then there will be uncontrollable events for my generation and the future generations of our families.
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