A Carbon Tax is Essential

A Carbon Tax is Essential

July 10 2021

When President Nixon signed the landmark Clean Air Act into law in 1970, there was only one ‘nay’ vote in all of Congress. The country recognized that unrestrained free enterprise was destroying the air Americans breathed and something had to be done.

The Act was a significant achievement, but in hindsight it was flawed. Rather than “REGULATING” the emissions of pollutants down to acceptable levels, the law should have made emitters pay to pollute (with the rate increasing over time) until the air became clean. In the 1970s, the idea of imposing a ‘pollution tax’ rather than a regulatory framework, was unprecedented. Thus, the law required the Environmental Protection Agency to develop and mandate unique pollution control technologies for each class of hundreds of different types of polluters. The additional costs and complexities of the Clean Air Act helped to make certain American industries uncompetitive. They shut down and the jobs moved offshore where no regulation existed. The government’s foray into developing technological solutions, rather than just taxing emissions into submission, caused massive delays and heavy burdens on our economy.

It took the EPA decades to administer the project, while battling hundreds of lawsuits, but fifty-one years later we have cleaner air. Just spend a few days in Beijing and you will appreciate the Clean Air Act.

Today, we face a global climate crisis due to CO2 and other greenhouse gas emissions. President Biden’s climate proposal would reduce emissions from the electric grid and vehicles, but does little to cut emissions from industry, buildings, and agriculture, which account for over 50% of CO2 emissions. Policymakers, business leaders, and investors agree that a carbon tax on all emissions (with increases each year) is the most effective way to accelerate the transition to net-zero. For example, if households know the cost of gasoline will double or triple in 10 years, gasoline SUV purchases will plummet in favor of electric cars. Carbon intensive business and industry will make the same calculations. The tax can automatically start to increase faster if emissions don’t go down fast enough. Vulnerable populations, most likely to be affected by the regressive nature of a carbon tax, could be compensated with a tax rebate or “dividend.”

Complementary to a carbon tax, a border adjustment tariff should be imposed to penalize imports from countries, like China, with higher embedded emissions. The US would be rewarded for its emission innovations and an aggressive path to net-zero which would make low emitting US products more competitive on global markets. Other countries would follow suit to make their products competitive on foreign markets. More to come on this topic in future CAPM2.0 memos.

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