The United States tax code is a complicated mess of differing rates, loopholes and subsidies. Regardless of what side of the political aisle you are on, I think it’s safe to say that tax reform is a bipartisan issue. One way that the U.S. government could help consumers and the environment is to impose a carbon tax on emissions and use the revenues gained from a carbon tax to partially or fully offset taxes on income and consumption. In other words, the tax would disincentivize CO2 emissions – an enormous negative externality projected to cost trillions of dollars – while allowing workers to retain more of their earnings and pay fewer taxes on the goods and services needed to better their lives. The carbon tax would be a far more efficient method of taxation, as it would properly tax externalities – just as Pigouvian tax theory recommends – while also stimulating the economy by encouraging consumption and spending. Of course, it’s unlikely that a carbon tax could provide enough new revenue to entirely eliminate more inefficient taxes, but it would certainly go a long way in reducing deadweight loss in the economy.
A carbon tax would also offer a powerful supplement to renewables subsidies. Indeed, it would work almost exactly like a subsidy, as it would increase the cost of dirty energy like coal and oil, making cleaner options like nuclear and renewables more competitive. This is particularly important in the context of nuclear energy because currently, nuclear energy generation is simply not price competitive with coal and oil. This wouldn’t seem like a huge problem because thanks to the Obama administration’s subsidies, renewables like wind and solar have increased by almost 400%. The problem, however, is that renewables don’t generate electricity constantly. Intermittent power generation due to varying wind strength and the day/night cycle impedes efficient and constant energy production. Thus, coal and nuclear reactors must be idled in the background in order to compensate for drops in renewable energy generation. Currently, coal is the preferred backup system due to its lower cost: It doesn’t require all of the regulatory and safety features a nuclear plant does, for example. However, this creates a paradoxical situation in which renewable energy is actually harmful to the environment because it requires coal plants to idle constantly, producing enormous amounts of pollutants and greenhouse gasses. By levying a carbon tax, however, the government would be able to level the playing field between coal and nuclear power, minimizing the number of coal plants used to supplement renewable energy and thus expediting the transition to an entirely clean power grid.
Some advocates of pricing carbon argue that “cap and trade” represents a better system for regulating carbon emissions. Cap and trade is interesting in that it basically creates a market for carbon. The government caps the level of carbon that can be produced in a given region over a certain amount of time and then allows companies to sell their carbon to more energy intensive industries. So if a small cafe has installed solar panels and thus requires less carbon-generating electricity, it can sell some of its “dirty” megawatt hours to a nearby factory to generate some extra earnings. This is advantageous because instead of a government-mandated tax, market prices essentially determine the value of carbon emissions being bought and sold. It is also superior to a carbon tax in that it caps the total amount of CO2 being emitted, thus preventing emissions levels from rising. However, carbon taxes are far simpler to administer, as they are based on straightforward tax calculations. Moreover, they avoid some of the perverse incentives of cap and trade. For example, in Europe – where a cap and trade system exists – companies intentionally increased carbon-intensive energy consumption before cap and trade was enacted so as to raise the cap above the level it should have been set at and thus reap the economic benefits of selling megawatt hours that were never needed to begin with. Therefore, I prefer carbon taxing to cap and trade. It is easier to administer – meaning less government bureaucracy – and it can be far more easily applied to things like automotive transportation. Moreover, it does not generate the same perverse incentives that a cap and trade system does, leading to more accurate pricing of CO2 emissions.
Not everyone will support a carbon tax. Vested interests like those in the coal industry will argue vehemently against the imposition of anything that lowers their earnings. However, it’s important to remember that a carbon tax benefits all of society by minimizing environmental degradation and lowering taxes on income and consumption. There are always winners and losers when macroeconomic changes occur. Were a carbon tax to be imposed, though, there would be far more winners than losers.