Is a Carbon Tax Actually Good for the Economy?

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Over at the Curious Capitalist blog–which I admit has both a better name and logo than Ecocentric—my TIME colleague Stephen Gandel looks at the common assumption that carbon pricing is bad for the economy. We hear rhetoric about carbon pricing being a “job-killing national energy tax” (thanks, House Republican leader John Boehner), but Gandel examines the evidence:

The economic theoretical case for some sort of carbon tax is very simple. Pollution is a negative byproduct of the industrial process that neither the polluters or the people buying the product directly pay for. Instead government in the end has to pick up the bill, and that means general taxpayers, like you and me. Taxing companies directly for polluting can remedy the problem. But in practice, many worry that a carbon tax will hurt our already weak economy, and hasten our decades of decline in our manufacturing base. So the question is whether a carbon tax is good environmental policy but bad economic policy?

In fact, as Gandel shows, there’s evidence that smart carbon pricing might actually help economic growth. And his data isn’t coming from a source with green-tinted glasses; it’s from the solidly Tory—if that actually means anything any longer—Economist newspaper:

With all that in mind, we investigated two different basic scenarios. One applied an economy-wide carbon tax that aimed to raise 1% of GDP in revenue by 2020; the other applied a tax set at a level designed to ensure that Britain meets its commitment to cut emissions by 34%, relative to their 1990 levels, by 2020. In both cases, to keep things simple, we scrapped all the other policies that aim at the same outcome, such as Britain’s membership of Europe’s emissions-trading scheme, subsidies for renewable energy and so on. The results of the first scenario are set out in the print piece, but briefly, electricity prices fall as expensive subsidies for renewable energy are replaced by the carbon tax. That provides an economic boost, the government gets an extra revenue stream, and output is 2.5% higher come 2020 than in the baseline scenario.

As Gandel points out, the data is from the UK, but there’s no reason to think the argument wouldn’t work with the U.S. And as for the case that establishing carbon pricing would lead American companies to flee the U.S. for less regulated shores—well, the biggest carbon polluters are utilities, and it’s unlikely they’re try to sell coal power to China.

Of course, the Economist was examining at a carbon tax, which would directly price carbon, rather than the more baroque cap-and-trade system that Congress has considered. A carbon cap puts a declining limit on carbon emissions, which becomes a de facto carbon price. Just about every economist—especially if they work at the Economist—would prefer a carbon tax because of its clarity, but of course the word “tax” causes Americans to break out in hives or Tea Parties, so cap-and-trade it is. Or most likely isn’t—as the Breakthrough Institute points out, even Democrats are looking beyond a carbon cap now. But Gandel’s post demonstrates that there are perfectly Economical reasons to keep trying.

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