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The Case for a Carbon Tax: Getting Past Our Hang-ups to Effective Climate Policy
There's a simple, straightforward way to cut carbon emissions and prevent the most disastrous effects of climate change-and we're rejecting it because of irrational political fears. That's the central argument of The Case for a Carbon Tax , a clear-eyed, sophisticated analysis of climate change policy.
Shi-Ling Hsu examines the four major approaches to curbing cap-and-trade; command and control regulation; government subsidies of alternative energy; and carbon taxes. Weighing the economic, social, administrative, and political merits of each, he demonstrates why a tax is currently the most effective policy. Hsu does not claim that a tax is the perfect or only solution-but that unlike the alternatives, it can be implemented immediately and paired effectively with other approaches.
In fact, the only real barrier is psychological. While politicians can present subsidies and cap-and-trade as "win-win" solutions, the costs of a tax are immediately apparent. Hsu deftly explores the social and political factors that prevent us from embracing this commonsense approach. And he shows why we must get past our hang-ups if we are to avert a global crisis.
Shi-Ling Hsu examines the four major approaches to curbing cap-and-trade; command and control regulation; government subsidies of alternative energy; and carbon taxes. Weighing the economic, social, administrative, and political merits of each, he demonstrates why a tax is currently the most effective policy. Hsu does not claim that a tax is the perfect or only solution-but that unlike the alternatives, it can be implemented immediately and paired effectively with other approaches.
In fact, the only real barrier is psychological. While politicians can present subsidies and cap-and-trade as "win-win" solutions, the costs of a tax are immediately apparent. Hsu deftly explores the social and political factors that prevent us from embracing this commonsense approach. And he shows why we must get past our hang-ups if we are to avert a global crisis.
248 pages, Hardcover
First published September 15, 2011
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October 20, 2021
The thesis of this book is that the Carbon Tax is an underappreciated and misunderstood climate policy alternative. The author presents an excellent case for his thesis and I agree with him.
This in depth analytical book written by an expert in the field compares a carbon tax with its policy alternatives. The conclusion is that a carbon tax is the most effective policy in reducing emissions, avoiding harm to the economy, and it is superior for a long list of other reasons as well. Most economists on both the left and the right support it, and so do climate scientists, and yet it is unpopular among politicians and the public. In my personal experience it is especially unpopular among the economically illiterate progressive left and the economically illiterate (far) right. One big problem is that it is a transparent tax with the word “tax” in the name itself, whilst all other policy alternatives (cap-and-trade, subsidies, regulation, etc.) are hidden or indirect taxes. People seem to prefer hidden taxes to transparent ones.
The book compares the carbon-tax with cap-and-trade (emissions trading systems), subsidies and command-and-control. Command-and-control are regulations, laws, commands and restrictions like must-install-scrubbers, what EPA does, and the clean-air-act, etc. The author presents ten considerations for a carbon tax and then four common objections to carbon taxes, which as it turns out, for the most part do not hold up.
For example, a carbon tax is efficient. If set correctly it is a “Pigouvian” tax levied to make the emitter pay for the externalities (harm not included in the market price) caused by its emissions. The goal of a Pigouvian tax is an economically efficient outcome. It corrects a market failure and perfects the free market. The harm from carbon dioxide emissions probably constitutes the most pervasive externality ever created. A carbon tax avoids excessive formation of capital, it incentivizes innovation, raises revenue, and does not create international problems.
The author also discussed four common arguments against carbon taxes. The first argument, political economy considerations, is probably the most serious objection to carbon taxes. Carbon taxes have a bad reputation in North America. Sweden, my home country, instituted a carbon tax in 1991 and it has been quite successful in reducing emissions without impacting the economy negatively. The book gave stated the result from 1990 to 2005, but I am giving you a more recent update. During the period between 1990 and 2017 real GDP increased by 78%, while domestic GHG emissions decreased by 26% in the same time span. In general Swedes are accepting of the carbon tax, so the strong dislike for carbon taxes may be a mostly North American problem.
A common criticism of carbon taxes is their perceived regressiveness. As it turns out carbon taxes may not be regressive to start with, whilst the alternative policy alternatives often are regressive (but rarely criticized for it). Furthermore, you can address that by returning the proceeds to households equally, which would benefit lower income households. The carbon tax in British Columbia (province in Canada) is a prominent example of revenue recycling to reduce regressiveness. Regressiveness is also not clearly defined and difficult to measure. Carbon taxes has also been criticized for ineffectiveness, something that surprised me, but apparently some people think so. The author explained why that critique is misguided. Lastly, “crowding out”, or the carbon tax reducing the effectiveness of other approaches if the carbon tax is implemented first. There seem to be some truth to it, people may feel that they’ve “done enough” after one policy has been enacted. However, people also understand that no single policy currently known can serve as a comprehensive response to the problem of climate change.
The next chapter was on carbon tax psychology and why people, at least in North America, are so reluctant to support a carbon tax. As mentioned the name itself; “carbon TAX”, notice the word “TAX”, is an obvious problem, but there are also misinformation and biases that add to the misconception. People prefer hidden taxes to transparent taxes (they may not know that they do though), the “do no harm effect”, the “identifiability effect”, and the “endowment effect”. Another side of the puzzle is that command-and-control (regulation) seem attractive to many environmentalists (on the left) because they incorrectly assume that only large industrial polluters are responsible and that costs (of the regulation) will not get passed down to consumers.
The author is also mentioning a number prominent people who support a carbon tax, the great climate scientist James Hansen, libertarian politician Grover Norquist, Leon Panetta, Paul Krugman, conservative economists Arthur Laffer, Gary Becker and Greg Mankiw, Charles Krauthammer, Rex Tillerson, former Republican congressman Bob Inglis.
As a side note I would like to mention the on-line En-Roads simulation. This is a climate change policy simulator developed by scientists and economists at Climate Interactive, Ventana Systems, and MIT Sloan. Using this tool you generate best guess scenarios on emissions and the global temperature increase by 2100. Using this tool you clearly see that worldwide subsidies for renewables, will not make a big difference (0.1 degrees Celsius), while a sufficient carbon price, on its own, will reduce temperatures by 2100 by 1.0 Celsius. The trick to get the temperatures down even more, is of course is to use multiple approaches, but notice the power of the carbon tax, En-Roads is certainly vindicating the author.
A variation of the carbon price that has recently become popular but which the author may not have known about at the time of the writing of this book, even though he hinted at it, is the carbon dividend (with border adjustment). A carbon dividend is essentially a carbon tax with the difference that all of the revenue is recycled back to households, which makes it not a tax. If the government is not raising any revenue it is not a tax but a fee. This allows for rebranding, and why not? A subsidy is paid for by raising taxes (or deficit spending) yet we don’t think of a subsidy as a tax. Since the revenue is returned to households it solves regressiveness problems. It also comes with a border adjustment which protects American businesses and allows us to take advantage of our carbon advantage Vis a Vis, for example China. We produce steel emitting less carbon than China and the border adjustment pays US businesses for that advantage, and the WTO is fine with it. It also protects US businesses for the upcoming EU CBAM. Border adjustments work with carbon prices and are only allowed with carbon prices. There are currently several bills that do this in the house and the senate. It would be sweet for our children if they became law.
In summary, the author tries his best to be objective, and he shows no clear political or ideological leanings. He is a fact oriented expert of his field. He is extremely knowledgeable. He backs up his claims with analysis, studies, data, some anecdotes, and thoughtful arguments and he presents them lucidly. It may kill off some of your presumptions and reduce some of your biases, which may not be pleasant but is a good things. I highly recommend this book.
This in depth analytical book written by an expert in the field compares a carbon tax with its policy alternatives. The conclusion is that a carbon tax is the most effective policy in reducing emissions, avoiding harm to the economy, and it is superior for a long list of other reasons as well. Most economists on both the left and the right support it, and so do climate scientists, and yet it is unpopular among politicians and the public. In my personal experience it is especially unpopular among the economically illiterate progressive left and the economically illiterate (far) right. One big problem is that it is a transparent tax with the word “tax” in the name itself, whilst all other policy alternatives (cap-and-trade, subsidies, regulation, etc.) are hidden or indirect taxes. People seem to prefer hidden taxes to transparent ones.
The book compares the carbon-tax with cap-and-trade (emissions trading systems), subsidies and command-and-control. Command-and-control are regulations, laws, commands and restrictions like must-install-scrubbers, what EPA does, and the clean-air-act, etc. The author presents ten considerations for a carbon tax and then four common objections to carbon taxes, which as it turns out, for the most part do not hold up.
For example, a carbon tax is efficient. If set correctly it is a “Pigouvian” tax levied to make the emitter pay for the externalities (harm not included in the market price) caused by its emissions. The goal of a Pigouvian tax is an economically efficient outcome. It corrects a market failure and perfects the free market. The harm from carbon dioxide emissions probably constitutes the most pervasive externality ever created. A carbon tax avoids excessive formation of capital, it incentivizes innovation, raises revenue, and does not create international problems.
The author also discussed four common arguments against carbon taxes. The first argument, political economy considerations, is probably the most serious objection to carbon taxes. Carbon taxes have a bad reputation in North America. Sweden, my home country, instituted a carbon tax in 1991 and it has been quite successful in reducing emissions without impacting the economy negatively. The book gave stated the result from 1990 to 2005, but I am giving you a more recent update. During the period between 1990 and 2017 real GDP increased by 78%, while domestic GHG emissions decreased by 26% in the same time span. In general Swedes are accepting of the carbon tax, so the strong dislike for carbon taxes may be a mostly North American problem.
A common criticism of carbon taxes is their perceived regressiveness. As it turns out carbon taxes may not be regressive to start with, whilst the alternative policy alternatives often are regressive (but rarely criticized for it). Furthermore, you can address that by returning the proceeds to households equally, which would benefit lower income households. The carbon tax in British Columbia (province in Canada) is a prominent example of revenue recycling to reduce regressiveness. Regressiveness is also not clearly defined and difficult to measure. Carbon taxes has also been criticized for ineffectiveness, something that surprised me, but apparently some people think so. The author explained why that critique is misguided. Lastly, “crowding out”, or the carbon tax reducing the effectiveness of other approaches if the carbon tax is implemented first. There seem to be some truth to it, people may feel that they’ve “done enough” after one policy has been enacted. However, people also understand that no single policy currently known can serve as a comprehensive response to the problem of climate change.
The next chapter was on carbon tax psychology and why people, at least in North America, are so reluctant to support a carbon tax. As mentioned the name itself; “carbon TAX”, notice the word “TAX”, is an obvious problem, but there are also misinformation and biases that add to the misconception. People prefer hidden taxes to transparent taxes (they may not know that they do though), the “do no harm effect”, the “identifiability effect”, and the “endowment effect”. Another side of the puzzle is that command-and-control (regulation) seem attractive to many environmentalists (on the left) because they incorrectly assume that only large industrial polluters are responsible and that costs (of the regulation) will not get passed down to consumers.
The author is also mentioning a number prominent people who support a carbon tax, the great climate scientist James Hansen, libertarian politician Grover Norquist, Leon Panetta, Paul Krugman, conservative economists Arthur Laffer, Gary Becker and Greg Mankiw, Charles Krauthammer, Rex Tillerson, former Republican congressman Bob Inglis.
As a side note I would like to mention the on-line En-Roads simulation. This is a climate change policy simulator developed by scientists and economists at Climate Interactive, Ventana Systems, and MIT Sloan. Using this tool you generate best guess scenarios on emissions and the global temperature increase by 2100. Using this tool you clearly see that worldwide subsidies for renewables, will not make a big difference (0.1 degrees Celsius), while a sufficient carbon price, on its own, will reduce temperatures by 2100 by 1.0 Celsius. The trick to get the temperatures down even more, is of course is to use multiple approaches, but notice the power of the carbon tax, En-Roads is certainly vindicating the author.
A variation of the carbon price that has recently become popular but which the author may not have known about at the time of the writing of this book, even though he hinted at it, is the carbon dividend (with border adjustment). A carbon dividend is essentially a carbon tax with the difference that all of the revenue is recycled back to households, which makes it not a tax. If the government is not raising any revenue it is not a tax but a fee. This allows for rebranding, and why not? A subsidy is paid for by raising taxes (or deficit spending) yet we don’t think of a subsidy as a tax. Since the revenue is returned to households it solves regressiveness problems. It also comes with a border adjustment which protects American businesses and allows us to take advantage of our carbon advantage Vis a Vis, for example China. We produce steel emitting less carbon than China and the border adjustment pays US businesses for that advantage, and the WTO is fine with it. It also protects US businesses for the upcoming EU CBAM. Border adjustments work with carbon prices and are only allowed with carbon prices. There are currently several bills that do this in the house and the senate. It would be sweet for our children if they became law.
In summary, the author tries his best to be objective, and he shows no clear political or ideological leanings. He is a fact oriented expert of his field. He is extremely knowledgeable. He backs up his claims with analysis, studies, data, some anecdotes, and thoughtful arguments and he presents them lucidly. It may kill off some of your presumptions and reduce some of your biases, which may not be pleasant but is a good things. I highly recommend this book.
June 1, 2020
A very clear and concise argument for a carbon tax. The author carefully compares all of the currently discussed variations on the theme of carbon pollution control and supports his statements quite well. Strongly recommended for anyone interested in the subject.
August 19, 2014
A revenue neutral carbon tax (tax money recycled back to the citizens) is widely considered to be the best solution for curbing greenhouse gas emissions. The only thing standing in its way is our misconceptions. Once we correct these biases, politicians won't be afraid to show their support. This will be a critical step toward meeting the world's goal of preventing global warming over 2 degrees C.
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