Is a carbon tax the best way for the U.S. to fight climate change?

Yes: Earth-saving tax makes economic sense

It’s just two simple words, but the term “carbon tax” manages to represent two ideas rather unpopular with most Republicans: controlling carbon emissions and imposing a new tax.

But for those who believe the U.S. should contribute to combating climate change, a carbon tax incentivizing renewable energy consumption has many merits. In fact, it’s the least costly way of meaningfully reducing greenhouse gas emissions.

That’s because a tax delivers just the right amount of a market signal.

Suppose you’re a manufacturer.

Your reactions to a carbon tax might include switching to a less carbon-intensive fuel source or altering your manufacturing process to reduce the amount of energy you use. If you discovered such changes would cost more than simply paying the tax, you could of course just pay the tax. But if it made business sense, and your operations were easy enough to change, you’d adapt, thereby contributing to the reduction of emissions.

This approach minimizes the total cost to the economy by changing the behavior only of businesses with low-value, carbon-intensive activities.

Secondly, rather than restricting a market activity we want to encourage, a carbon tax takes aim at pollutants we want to eliminate. It’s a good alternative to heavier taxes on labor, personal income and business profits.

A third reason economists like carbon taxes is because unlike regulations, renewable portfolio standards, or mandates, they generate revenues for governments. The $125 billion experts estimate could be raised each year by a carbon tax in the U.S. could be committed to useful purposes.

While some skeptics might not trust the government to make good use of such funds, legislation could be crafted to mandate that carbon tax revenues go toward causes with bipartisan support, like deficit reduction or shoring up the Social Security system.

Some countries have even studied providing what’s called a carbon dividend, a lump sum refund of carbon tax revenues to every household.

Finally, with carbon taxes, you’re able to avoid the process of selecting winners and losers among industries and companies caused by other forms of regulation.

The Environmental Protection Agency’s Clean Power Plan rules, for example, are focused on the power industry. The rules would increase electricity costs while doing little to actually reduce emissions.

A carbon tax looks more broadly, spreading out economic impacts while making the maximum impact on emissions.

No: Raising taxes won’t stop climate change but will slow economic growth

By Merrill Matthews

Tribune News Service

Taxing carbon emissions has long been supported by environmentalists and the political left. More recently, though, the idea has found support among some establishment Republicans — and perhaps even President Trump.

But those who think we’ll stop climate change by making energy more expensive are ignoring several problems.

Most importantly, there is no viable alternative to carbon-based fuels.

In economics, when studying the “elasticity of demand,” students often discuss what might happen if the price of a product like coffee shot up significantly. Most likely, consumers would seek out substitutes like tea.

Coffee, therefore, is elastic. Fossil fuels, on the other hand, are one of the most inelastic products around. There just aren’t any viable and scalable alternatives.

If gasoline prices went up because of a carbon tax, some people would carpool or take public transportation. Others might buy smaller, less-safe cars. But most would just pay the higher price.

The price of everything, in fact, would rise.

Because we would still have to use fossil fuels for the vast majority of our manufacturing, transportation and power generation, companies would simply price the tax into every product and service they sell.

Though many power-generating plants are fueled by wind and solar power, the two sources cover only 7 percent of the nation’s power needs – and that’s after hundreds of billions of dollars in taxpayer subsidies.

In Norway, where a carbon tax was passed in 1991, researchers concluded that the tax — described as “among the highest in the world” — had a “modest” effect on emissions while significantly increasing the price of certain fuel types.

Meanwhile, in 2014, Australia became the first country to repeal its carbon tax, even though it had been considered model legislation. Prime Minister Tony Abbott called the tax “a useless destructive tax which damaged jobs, which hurt families’ cost of living and which didn’t actually help the environment.”

What happened in those countries is a good reminder that we live in a global economy in which American companies must compete with those around the globe. That’s why the corporate tax reforms being proposed by Trump and House Speak Paul Ryan are so important. A carbon tax raising the cost of production across the economy would have the opposite effect, making it harder for businesses to compete.

The good news is that the U.S. has been reducing energy-related carbon emissions in large part because fracking has made natural gas a cleaner and more affordable option than coal.

The country needs policies that help it become more competitive, not less so. Lowering the tax burden, not raising it with a carbon tax, is the best way to achieve that goal.

This story was originally published April 14, 2017 at 4:35 AM with the headline "Is a carbon tax the best way for the U.S. to fight climate change?."