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Time for a Carbon Tax?

April 22, 2013 by Ike Brannon

The New York Times reports that the E.U. Parliament has elected to not remove carbon tax credits from the market, despite the price plunging from a peak of nearly €30 per ton to below €3 at present.

The reason for the decline in price is that economic activity in the E.U. has decreased markedly since the onset of the Great Recession. In addition, the broader sectoral shifts in the economy have concomitantly reduced employment in the manufacturing sector across the globe. Meanwhile, the surviving manufacturing jobs have migrated to lower-cost locales in southeast Asia.

As a result, the demand for carbon permits — the right to emit one ton of pollution — has fallen precipitously on the continent. And the low price for emitting carbon means that it is completely ineffectual at reducing emissions.

The E.U. parliament’s inability to address this issue suggests that Europe is not going to be able to muster the political will to fix its system until the U.S. at least dips its toe in the water by either adopting some form of cap and trade, or instituting a carbon tax — the likelier option politically.

On the other side of the world, China has intimated that it is considering a carbon tax as well, both as a way to deal with its pressing smog issue, as well as making an attempt to play nice with Europe, since reducing smog will also result in lower carbon emissions.

Doing something just because others are doing it makes about as much sense for countries as it does for 8 year olds, but in this context it’s worth asking what other benefits would result from the U.S. imposing some sort of carbon tax.

As it turns out, the benefits are compelling. A carbon tax would help to reduce the deficit in a manner that’s better for the economy than directly taxing capital or labor. An ancillary benefit is the opportunity to leverage U.S. reductions in carbon emissions by incentivizing Europe and China to move forward on the issue as well.

I attended an international climate change conference in 2009, shortly before Copenhagen, and came away feeling utterly disgusted with the process. It felt like nothing so much as a shakedown by the developing world of the Western European countries earnestly trying to implement a global system. The developing countries expected the developed countries to contribute the bulk of revenues collected from any such system — which could total in the trillions of dollars — directly to encourage them to participate. This circus is not going to result in any progress.

A simple agreement — sans the professional climate trade mandarins — that China, the E.U., the U.S., and Japan adopt a uniform carbon tax is the extent to which we could, and should, proceed with any international negotiations. We remove China as a locale for heavy emitters to go to evade a carbon tax, decrease carbon emissions both here and abroad, and the U.S. has a new source of revenue to pay down the deficit and/or reduce other taxes, which will be necessary to achieve true comprehensive tax reform.

The confluence of events makes it a uniquely propitious time to introduce a carbon tax.


Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

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