I wrote yesterday about the uncanny level of agreement I recently witnessed at a gathering of influential economists over the need for a carbon tax. There is widespread recognition in the economics profession that a carbon tax could be an effective tool to fight climate change. The next question is what the policy would mean for businesses and consumers.
The bright entrepreneur would embrace a carbon tax in a heartbeat . Yes, a carbon tax is a tax on sin and aims to reduce carbon generation by lowering consumption. But getting prices right with a carbon tax would also create better investments, steering capital more towards alternative and renewable energy solutions.
Why not just use regulations instead of taxes, like mileage standards for cars? Economists know regulation is complicated. Regulations by nature have to sort between what is a target and what isn’t. The regulatory process contains numerous opportunities for lobbyists to get their particular interest excluded.
Fuel economy standards are a perfect example. The miles-per-gallon rules first applied to motor vehicles in 1978 (Corporate Average Fuel Economy or CAFE) were subject to massive lobbying by automobile companies, who succeeded in having light trucks (mostly pickups) given a lower standard. This exclusion meant less effective reduction of pollution, and also helped feed the growing market share of pickups and SUVs while helping to kill off station wagons and other car models.
Carbon-producing industries have successfully lobbied for lots of benefits, not just reduced CAFE standards for trucks. Despite the logic compelling a carbon tax, the federal government has instead devoted billions of dollars of subsidies to the oil, gas, and coal industries. We could cut a lot of carbon production and help steer investments to alternative energy just by taking away costly tax and regulatory subsidies, forcing fossil fuels to compete more fairly in the market. In the U.S. alone, we spend more than $27 billion annually in subsidizing fossil fuels, mostly through tax subsidies.
It is economically rational for fossil fuel companies to hire expensive lobbyists, provide campaign contributions, and work to capture regulatory agencies. Between 2000 and 2016, the fossil fuel industry spent an estimated $370 million just in federal lobbying. Companies spend so much on lobbying because they see ways to “buy” regulatory advantages. Individual industries care deeply about subsidies, while consumers and voters are focused on other issues economically and politically. Over time, this “rent-seeking” distorts tax and regulatory policy, shaping where investment goes and how political decisions are made. As Nobel laureate Joseph Stiglitz points out, this means that markets are shaped by politics, not economics.
Incidentally, major fossil fuel companies including Exxon Mobil and BP have thrown their support behind the carbon tax, perhaps seeing a way to avoid more costly regulations of their business. But that doesn’t mean they won’t continue to fight for their own privileges.
When it comes to ordinary people, taxes are simply unpopular. Gas taxes hit consumers every time they fill up their tank, and they don’t like it. A carbon tax that would affect a much broader range of products could be even less popular. The state of Washington has twice failed to pass a carbon tax by statewide citizen vote. Thus the suggestion, in another part of the letter signed by more than 3,500 economists, that tax revenue be rebated to consumers, who can then use that rebate for their own spending.
Of course, this call to action and taxation by economists doesn’t encompass all economic ideas. Many economists think a carbon tax won’t be enough to halt or limit the increasing damage from carbon. They want more aggressive steps on climate change, including calls for a Green New Deal.
The Green New Deal is more a set of aspirations than a list of specific policies. Its framework aims to deal with two wicked problems: the long term costs of climate change and under-investments in health and education caused by wealth, income, and power inequality. Needless to say, that discussion goes far beyond that of the carbon tax.