Op-Ed by NATHAN INKS
In recent weeks the prospect of adopting a carbon tax to combat the negative effects of climate change has received renewed attention. Although the plans proposed thus far have little chance of being adopted in the current political climate, it is noteworthy that market-driven climate solutions, like a carbon tax, are receiving increased support from conservatives.
A carbon tax would function as a type of Pigouvian tax, named after British economist Arthur Pigou, who first introduced the concept of economic externalities and proposed that they could be corrected through the implementation of a tax. A negative externality occurs when an activity negatively impacts an unrelated third party; pollution is a negative externality because its harms extend to people who are neither producers nor consumers of the good or service causing the pollution. Negative externalities can have a localized impact, such as noise pollution from a factory affecting only those nearby, or a global impact, such as with carbon dioxide, which travels through the atmosphere and has a global impact on the Earth’s climate.
A Pigouvian tax corrects a negative externality by increasing the marginal private cost of the offending good or service by an amount equivalent to the harm inflicted on third parties. As a result, producers are incentivized to reduce output or utilize cleaner technology or processes; if they are unable to do so, consumers will be incentivized to seek out different goods or services.
There are two options the federal government would have regarding what to do with the revenue collected from such a tax. The government could allocate the revenue to cover expenditures, perhaps specifically allocating the collected money to climate or environment-related departments and agencies. Alternatively, the proceeds from a carbon tax could be returned to consumers through a dividend. A dividend back to consumers would compensate them for the additional cost of carbon-emitting goods and services while still maintaining the economic incentive to purchase and utilize more environmentally friendly goods and services.
A carbon tax with a dividend program was the solution proposed by a group of conservative economists, statesmen, and business leaders last year. That proposal has received increased attention in recent weeks, but it is unlikely to receive significant traction in the House or Senate any time soon.
That is unfortunate. History has shown that market-based solutions are an efficient and effective means of combating pollution and that they are a better alternative than the command and control regulatory schemes that have dominated environmental policy over the last couple centuries. Climate change is a real problem, and market-based solutions like a carbon tax are the most viable means of effective abatement at the national level.
With Republicans in control of Congress and the White House, they have the unique opportunity of proving the superiority of market-based solutions. For the sake of the environment—and the economy—now is the time for Congress to support passage of a carbon tax.