Two Steps Forward

Is the moment finally ripe for carbon taxes?

GreenBiz photocollage, via Shutterstock

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The conversation about levying taxes on carbon emissions — a controversial one in many countries and practically a third-rail no-no in the United States political arena — is heating up around the world, seemingly in lockstep with the planet itself.

As vast swaths of the Northern Hemisphere sweat out record heat, much as the Southern Hemisphere did this winter, politicians and policymakers seem to be warming to the notion of putting a financial cost on carbon emissions as a means of reducing them.

The outlook for a carbon tax remains cloudy, but lately there are hints of a change in the weather.

In the U.S. Congress last week, no fewer than three bills were introduced by members of both political parties:

  • The Stemming Warming and Augmenting Pay (SWAP) Act, by Reps. Francis Rooney (R-Florida) and Dan Lipinski (D-Illinois), would set a tax of $30 per metric ton, rising by $2 every two years, with the goal of reducing energy-related carbon by 42 percent by 2030 compared to 2005 levels.
  • The Raise Wages, Cut Carbon Act, a second bill from Rooney and Lipinski, would levy a $40-a-ton tax, rising 2.5 percent a year, to reduce U.S. emissions to 20 percent of their 2005 levels.
  • The Climate Action Rebate Act, a bill by three Democrats — Sen. Chris Coons (Delaware), Sen. Dianne Feinstein (California) and Rep. Jimmy Panetta (California) — would price carbon at $15 a metric ton for emissions-heavy companies, rising quickly if the targets (55 percent reduction by 2030, 100 percent by 2050) weren’t met.

Each of these has a slightly different scheme for how to allocate the collected revenues, which can be considerable — the Climate Action Rebate Act aims to generate $2.5 trillion over 10 years — although there’s a common theme: Reduce middle-class taxes or send a monthly dividend to low- and moderate-income households.

That’s just the action in the United States. In the past week or so:

  • Europe’s carbon market neared the psychologically important threshold of 30 euros a ton after indications the region will tighten supplies of emissions allowances, reported Bloomberg. "Crossing 30 euros would be a crucial milestone for the market, since that is the floor price economists and experts have suggested as a minimum needed to prod industry away from the most polluting fuels," the news service explained. The price almost has doubled over the past year, finishing Friday at its highest weekly close since 2006.
  • In that same light, a report from Ireland’s Climate Change Advisory Council argued for raising that country’s carbon tax from the current $22.29 per ton to $39, increasing to at least $89 per ton by 2030.
  • Ontario’s Court of Appeal ruled that Canada’s federal carbon tax is constitutional after a challenge from the province’s Conservative government.

Around 52 countries, from Australia to Zimbabwe, have implemented some kind of carbon-tax scheme, with others in the pipeline. Just last month, South Africa joined the coalition of the willing. Last week, the Financial Express, one of India’s largest business publications, asked, "Is it time to impose a carbon tax?"

Few of these are without opposition, or at least controversy — affected parties railing about job losses, reduced consumer spending and wasteful government spending, among other arguments. Fossil-fuel companies typically lead the charge in fighting such taxes, often aided by the courts.

But the resistance is easing, even if slightly, in large part due to the evidence at hand: an upsurge in severe weather and signs that some of the more severe impacts of climate change could hit us sooner than most experts expected. For example:

  • Glaciers may be melting 10 to 100 times faster than previously believed, new research shows.
  • A report from Morgan Stanley released last week found "(r)ising global temperatures could put an additional 1 billion people at risk of contracting an infectious disease by the year 2080." (It concluded Big Pharma could benefit, via "$125 billion in incremental vaccinations" needed to fight off the additional cases.)
  • A study released earlier this year found that the world’s oceans are heating up about 40 percent faster than previously estimated by the Intergovernmental Panel on Climate Change.

Make no mistake: Carbon taxes are complicated: equal parts art, science and politics. David Roberts, over at Vox, broke down some complexities last month, pointing out that an effective carbon tax needs to be "pretty damn high" to be effective — probably around $50 per ton, far higher than any current levels; that such a tax would, first and foremost, accelerate the decline of coal, along with associated jobs and communities; and that its impact will depend on how the tax revenue is spent, which also will determine how equitable it is across the income spectrum.

Clearly, a carbon tax would be economically disruptive. It would raise the cost of fuels and electricity, along with energy-intensive products such as steel and aluminum. Consumers would complain, potentially upending political alliances. Americans’ threshold for rising energy prices traditionally has been extremely low; politicians have exploited citizens’ concerns about even a few cents' rise in gasoline taxes, for example.

They are also painfully aware of France’s recent "yellow vest" protests, in which a proposed gas tax increase — a rise of about 30 cents per gallon, on top of the roughly $7-a-gallon price — led to violent protests and ultimately a withdrawal of the proposed increase. A cautionary tale, to be sure.

Still, debates over a carbon tax are destined to become part of the 2020 U.S. presidential campaign. Just this week, CNN announced it will hold a climate debate with the Democratic candidates Sept. 4, part of a concerted effort to ensure that climate is part of the 2020 discourse, which it wasn’t in 2016. Taxes will no doubt be on the agenda.

Along with the changing conversation is a shift in the climate calculus, from "Is it happening?" to "How bad will it be?" In other words, a conversation about risk. As Boston University economics professor Laurence Kotlikoff wrote last week in Forbes, there’s a big difference between likelihood and impact: "Things can be highly unlikely and still be very risky. Risk involves not just the chance something will happen, but its impact if it does."

Kotlikoff notes that the probability that our house burns down is about one in 1,000. But the costs, financial and psychological, from this happening are so high that we buy homeowners insurance. Thus, he notes:

Unfortunately, the debate between climate believers and climate deniers is about the probability of man-made climate change, not the size of damages, particularly worst-case damages. But we’ve all heard enough from enough credible sources to know those costs may be enormous. Consequently, if we could buy climate-change insurance, everyone, even President Trump, would run to do so.

That last sentence may seem farfetched. But at some point, economics may trump politics. At least, an economist can dream.

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