Frank Bernheisel: The View From Here
Frank Bernheisel
Frank Bernheisel
Posted 06.11.14
Just Outside Washington


Carbon taxes, and why

Research indicates the production of carbon dioxide (CO2) contributes to environmental and health problems. The Supreme Court recently upheld the authority of U.S. EPA to regulate CO2 as a pollutant.

This pollution is a negative externality -- that is, it is a cost imposed on the whole of society and not just the individual who consumes a certain product. For example, if you drive a car, the pollution generated in building and driving the car affects everyone, drivers and non-drivers alike.

Carbon-intensive industries create negative externalities with a high social cost of production. Because pollutants, including CO2, disperse throughout the atmosphere, everyone gets an equal share of them. Some may feel a greater impact. Assuming CO2 causes global warming and rising oceans, the impact is high if your beach house is submerged.

In a free market, these negative externalities are not included in the price of energy or products, which leads to over-consumption and social inefficiency. We can say there is a missing market, because the external cost of carbon emission is ignored.

The purpose of a carbon tax is to adjust the final price of energy and products to include the external cost and not just the private cost.

This is internalize the externality and it is similar to the polluter pays principle. It simply means those who cause environmental costs should be made to pay the full social cost of their actions.

A higher price of carbon emissions will encourage firms and consumers to develop more efficient forms of energy generation and manufacturing processes that lower carbon emissions. For example, with a carbon tax, solar power and nuclear generation will be more competitive because they have no CO2 emissions.

A carbon tax can be used to make American products more competitive. For example, a car made in a U.S. factory using solar power and other low CO2 technology would have a lower carbon tax than one made in a country with high polluting power generation and manufacturing.

Also, the carbon tax would be levied on the pollution caused by overseas shipping. This could turn around the movement of U.S. manufacturing overseas to avoid the cost of pollution cleanup.

In theory, a carbon tax could be revenue neutral. This means the tax raised from taxing carbon emissions can be used to reduce other taxes, i.e., there could be no overall increase in the tax burden.

The goal of the carbon tax is to increase social efficiency by making people aware of the full social cost. However, it does not have to be revenue neutral. The revenue could be used to fund the military, social programs, or pay down the National Debt.