Taxing Away the Problem
In January 2019, more than 40 economists, including 27 Nobel laureates and four former Federal Reserve chairs, signed the Economists' Statement on Carbon Dividends. The statement calls for a tax on carbon dioxide emissions to combat what it describes as the "serious problem" of global climate change. This tax would increase annually and replace "cumbersome regulations," and its revenues would be redistributed to U.S. citizens. More than 3,500 economists have signed the statement since its publication.
The economic logic behind a carbon tax is simple. A majority of published climate scientists believe that human activities, namely emissions of carbon dioxide and other greenhouse gases (GHGs), are primarily responsible for recent global warming. But this cost to society as a whole is not factored into the private cost of GHG emissions, making those emissions an externality.
Almost 100 years ago, the economist Arthur Pigou argued that taxing an externality at the amount equivalent to its marginal social cost would "internalize the externality" by equating marginal social and private costs. By Pigouvian logic, taxing emissions of CO2 and other GHGs would ensure that the price of those emissions reflected their social cost. In theory, this tax would also encourage firms to transition from carbon-intensive to carbon-neutral technologies and energy sources. And it wouldn't just tax carbon dioxide emissions: Other GHGs, such as nitrous oxide and methane, are also included under the umbrella of a "carbon tax."
Central Banks and Climate Risks
Some researchers look at climate change and see economic uncertainty. Central banks are beginning to take notice
But the question of how to move from theory to practice is far from settled. The first area of disagreement is the dollar value of the externality, known as the social cost of carbon (SCC). That amount depends on the discount rate: the interest rate used to determine the present value of future benefits. A higher discount rate indicates a lower value placed on future benefits and a lower SCC. Choosing this rate is difficult, especially since it requires answering the ethical question of how much the present generation's welfare is worth relative to that of future generations.
Some economists also argue that a national carbon tax alone will not be enough. Joseph Stiglitz, 2001 Nobel laureate, wrote in a 2019 National Bureau of Economic Research working paper that because the market is imperfect, optimal climate policy will include other interventions in addition to a carbon tax, such as regulations and differential pricing. William Nordhaus argued in his Nobel Prize lecture last year that because climate change is a global externality, any policy designed to remedy climate change requires international cooperation. Without it, each nation has little incentive to tax CO2 emissions, because other nations will enjoy most of the benefit while the emission-taxing nation bears all of the cost.
As of 2018, despite these differences over optimal policy, 45 national governments have carbon tax initiatives. In the United States, however, the adoption of carbon taxes has made little headway. Washington state attempted to implement one in 2016, but voters rejected it, in part because environmental groups opposed the bill's proposal to redistribute the revenue to businesses and consumers. Instead, they wanted to use the revenue to support green infrastructure projects and help low-income communities.
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