Eleven teams participated in a recent Stanford Energy Modeling Forum (EMF) project, examining the economic and environmental impacts of a carbon tax. The studies included “revenue recycling,” in which the funds generated from a carbon tax are returned to taxpayers either through regular household rebate checks (similar to the Citizens’ Climate Lobby [CCL] and Climate Leadership Council [CLC] proposals) or by offsetting income taxes (similar to the approach in British Columbia).
Among the eleven modeling teams the key findings were consistent. First, a carbon tax is effective at reducing carbon pollution, although the structure of the tax (the price and the rate at which it rises) are important. Second, this type of revenue-neutral carbon tax would have a very modest impact on the economy in terms of gross domestic product (GDP). In all likelihood it would slightly slow economic growth, but by an amount that would be more than offset by the benefits of cutting pollution and slowing global warming.
The modeling teams examined four carbon tax scenarios, with starting prices of $25 or $50 per ton of carbon dioxide, rising at 1% or 5% per year. These are somewhat modest policy scenarios; CCL proposes a starting tax of $15 per ton rising at $10 per year, and the CLC proposes $40 per ton rising around 4% per year. The most aggressive policy considered by the Stanford EMF teams ($50 per ton rising 5% per year) falls in between these two proposals.
The modeling studies consistently found that for all four carbon tax policies considered, whether the revenue is returned via rebate checks or by offsetting income taxes, the direct economic impact is minimal:
In every policy scenario, in every model, the U.S. economy continues to grow at or near its long-term average baseline rate, deviating from reference growth by no more than about 0.1% points. We find robust evidence that even the most ambitious carbon tax is consistent with long-term positive economic growth, near baseline rates, not even counting the growth benefits of a less-disrupted climate or lower ambient air pollution
The last sentence is critical. The analyses consistently found that coal power plants would be the biggest losers if a carbon tax were implemented, and the costs associated with health impacts from other pollutants released by burning coal (e.g. soot and mercury) are substantial. Phasing out coal power plants results in significant health and economic benefits to society.
So does slowing global warming, of course. A working paper recently published by the Federal Reserve Bank of Richmond concluded that US economic growth would slow by an extra 0.2–0.5% per year if we stay on our current climate path (3–3.5°C global warming) than if we meet the 2°C Paris target. This compares favorably to a less than 0.1% per year slowing of the US economic growth rate under the carbon tax scenarios.
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In economics, it is a general principle that we need taxes to pay for collective goods like justice, police, local roads, etc. We should therefore choose better taxes over worse taxes. So we tax alcohol and cigarettes but not green veggies. From that point of view, a carbon tax is a good tax, especially if it is introduced slowly so that the economy has time to get used to it, because it slows global warming and reduces pollution. If the proceeds of the carbon tax are distributed to the populace via, say, a quarterly cheque, it will have no macro-economic effect and will in fact be slightly re-distributive, because the poor spend proportionately less (and therefore proportionately less on stuff made with fossil fuels) than the rich do, while the carbon tax "dividend" will be an equal amount per capita. It also means that every member of the public can see their compensation for higher petrol and gas prices.
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| The carbon price each year 2020–2050 in proposals by Citizens’ Climate Lobby (blue), the Climate Leadership Council (red), and the four approaches modeled by the Stanford EMF teams (green). Illustration: Dana Nuccitelli |
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