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November 25, 2014
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Taxing carbon

Jon Clark

With the latest Intergovernmental Panel on Climate Change being released lately, scientists are as sure that we are causing the planet to warm by burning fossil fuels as they are that cigarettes kill. We can now see the negative effects of climate change right out of our windows. From extreme floods and mega-droughts affecting our food supplies to sea level rise and higher and more powerful storm surges devastating coastal communities, climate change is costing our economy dearly.

Economists call climate change “the mother of all market failures” for good reason. Our dependence on fossil fuels is costing society much more than what we pay at the pump. We as a society, bear many costs that economists say should instead be borne by the fossil fuel industry. Some examples are your child’s dependence on an inhaler to breathe, your taxpayer dollars going towards FEMA disaster relief from the latest climate-change-induced mega-storm, or our military spending to protect overseas oil supplies.

Many economists including Greg Mankiw, who was Mitt Romney’s economic advisor, and Art Laffer, who was Ronald Reagan’s economic advisor, agree that a tax placed on carbon-based fuels is the best way to make up for these hidden costs on society. A tax on something you want less of is referred to as a Pigouvian Tax. An example of an effective Pigouvian tax would be taxes on cigarettes. Fifty percent of Americans once smoked; now we’re down to 20%.

We can apply the Pigouvian tax solution to climate change. The problem is too much carbon pollution in the atmosphere, trapping energy from the sun and causing the planet to warm with serious consequences for all of us. A carbon tax would be a simple and fair, small-government, market-based solution to reduce the amount of carbon pollution. A revenue-neutral, steadily-rising tax on per-ton CO2 emissions would be placed on fossil fuels at the source (mine, well, or port of entry).

Increased costs for the fossil fuels industry would be passed to consumers through higher fossil fuel prices. Placing the tax at the source ensures that emissions are reduced economy-wide, rather than targeting certain sectors (transportation, electric generation), as EPA regulations do. By returning 100% of the revenue collected to American households equally, we would protect lower and middle-class families from the costs associated with a carbon tax and provide the financial incentive to remove fossil fuels from their everyday lives. Making the tax steadily-rising means the dividend returned would be steadily-rising as well. Consumers could actually make money by removing fossil fuels from their everyday lives as they continued to receive dividends. The Carbon Tax Center estimates that two thirds of households would break even, or come out ahead with their dividends.

The tax would signal to businesses that if their products or services were carbon-intensive, they should be removing fossil fuels from the equation in order to lower costs. They would substitute alternative forms of energy or materials in their business model, because surely their competitors would do the same to gain the competitive edge.

Investment money would shift from fossil fuels to clean, renewable forms of energy, lowering the cost of clean energy to consumers. A study by Mark Jacobson of Stanford University found that we can power the world with 100% clean, renewable energy in as little as 20 years, using technology available in 2009. We just need smart public policy to get us there. The barriers are political, not technological. We should be taxing carbon instead of letting carbon tax our future.

[Jon Clark is Mid-Atlantic Regional Coordinator for the Citizens Climate Lobby. He lives in Pennsylvania.]