February 4, 2019
The Tax That Could Save The World
Chicago Booth Review takes a deep dive into carbon pricing, with insight from EPIC Director Michael Greenstone on "The most important number you've never heard of" — the Social Cost of Carbon — and from the results of EPIC's most recent poll on Americans' attitudes toward climate change.
By Michael Maiello and Natasha Guralvia Chicago Booth Review
It was, perhaps, the closest that the economics profession has ever come to a consensus. In January, 43 of the world’s most eminent economists signed a statement published in the Wall Street Journal calling for a US carbon tax. The list included 27 Nobel laureates, four former chairs of the Federal Reserve, and nearly every former chair of the Council of Economic Advisers since the 1970s, both Republican and Democratic.
“By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future,” the economists noted. All revenue from the tax should be paid in equal lump-sum rebates directly to US citizens, they added.
Not all economists agree that the tax should be revenue neutral in this way, but the profession has been coalescing in recent years around the idea of a carbon tax. Most prefer such a tax to the most prominent alternative policy for tackling carbon emissions, cap and trade, according to a recent poll of expert economists.
But a carbon tax seems to be a political nonstarter in the United States. The bipartisan call for action from economists over the years has been echoed by a failure to act by presidents from both parties. President Donald Trump denies the need to confront man-made climate change. But although Barack Obama, his predecessor, in 2015 called a carbon tax “the most elegant way” to fight global warming, he didn’t push strongly for one to be introduced. “One of my very, very few disappointments in Obama when he was president is that he did not come out in favor of carbon tax,” Yale’s William D. Nordhaus told the New York Times last October, days after winning the 2018 Nobel Prize in Economic Sciences for his work on economic modeling and climate change.
Voters, even in the US, may yet come around to supporting carbon taxes. Among the surveys suggesting that Americans have an appetite for confronting climate change, one conducted in November 2018 finds that 70 percent of Americans believe climate change is happening. Moreover, 49 percent of respondents said they would support a carbon tax if the revenues were rebated to households, and 67 percent said they would support a carbon tax if revenues were put toward environmental restoration. “These findings appear to run counter to the conventional wisdom about the most politically appealing version of a carbon tax and to recent efforts by the federal government to step back from environmental protection,” said University of Chicago’s Michael Greenstone, director of its Energy Policy Institute, when the results were released in January. The survey was conducted by the Associated Press-NORC Center for Public Affairs, with funding from the Energy Policy Institute.