(3 minute read)
In a previous post, I said that to address climate change we need to make it socially unacceptable to do certain things. However, if we put a high price on carbon, those who drive petrol SUVs or fly long haul will be contributing to society through extra taxes. There’s no longer any need for guilt or shaming, something that many (I suspect most) would welcome.
To tax carbon, a government simply needs to collect money every time fossil fuels are imported into the country or taken out of the ground. Also, to be fair, they also need to tax all imported goods coming from countries that don’t have their own carbon tax. (Where rich countries are taxing imports from poor countries that have done little to cause climate change but will be hit harder then the proceeds could be used to fund clean energy projects in those countries.)
Low-carbon activities on average cost about the same as high-carbon activities in the long term, but this varies and some of the low carbon options (such as solar panels or electric cars) require most of the cost right at the start. People (and businesses) prefer to continue doing what they are used to until they have a real clear incentive to change. I suggest that incentive needs to be to make the low carbon option the cheapest by a clear margin in almost all cases.
A high carbon tax could in theory be used to fund any number of worthy social programs. However, such policies would never get support from right wing governments or people. Therefore, I think a carbon tax should probably be “revenue neutral” in places that already have high taxation (e.g. the US, UK and Europe).
There are at least two ways to achieve this. The first is that you reduce or cancel other taxes, such as income tax and VAT/sales tax. A slight downside is you’d have to be constantly tweaking the income tax and sales tax every year or two to make it balance out the carbon tax income which would rise at first as the carbon tax gradually increases, and then decline as society decarbonizes.
I’ve come to prefer a fee and dividend approach instead. Under this system, the proceeds of the carbon tax are simply sent back to the people (which arguably makes it not a tax at all). If in a country of 50 million people the fee raises £10 billion in a month then every person (whether rich or poor) gets £200/month. Getting money land in your account every month is psychologically pleasing and will create positivity around the fee.
The rich lose and the poor win on this plan but that’s fair since rich people are causing more climate change.
In simple terms, under a fee and dividend plan, you have more money, but the price of almost everything is higher. In particular, gas, petrol, diesel, concrete, steel, flights and meat would become significantly more expensive.
Some carbon taxes already exist, but are too low, only cover some countries, and typically only cover certain sectors (sometimes electricity only). Many economists and policy experts seem to favour a tax of about £100/ton of carbon dioxide (€115 or $138) because they claim this will cut emissions to keep the maximum warming to about 2C above pre-industrial levels. However, given the uncertainty, and how serious climate change is, and the fact that say 1.7C is greatly preferable to 2C, I personally would prefer between £200-£500/ton.
Surveys suggest that this policy would already have popular support. Most economists support it. Governments need to think carefully about which groups will lose out (perhaps taxi drivers and goods delivery companies for example), anticipate how they will react, and listen and negotiate with them in advance of launching the policy. In my view, the mistake made by Emmanuel Macron in France was to go ahead with carbon taxes without sufficient public debate and consultation and support, and without the benefit of the dividend.
If you decide you support this policy, please tell your local politician and vote accordingly in the next election.
Here is a good talk on fee and dividend (13 minutes).