With the right guiding principles, carbon taxes can work

Like most economists, I favor taxing carbon dioxide to cut carbon pollution.

A carbon tax makes fossil fuels like oil and coal more expensive. That, in turn, leads consumers and industries to use less of them. At the same time, it boosts demand for alternative energy sources like wind and solar powered electricity.

With the anti-regulatory Trump administration in power and a Republican majority controlling the Senate, however, no such national policy is imminent. Prospects for statewide efforts may look bleak too, after ballot initiatives in Washington state that would have created the nation’s first carbon tax failed in 2016 and 2018.

But other states may move in this direction. Having conducted extensive research about how climate policies are working around the world over the past decade, I believe that the effort to enact a carbon tax is worth it.

The headwinds

Based on my experience serving as the deputy assistant secretary for environment and energy at the U.S. Treasury Department for two years during the Obama administration, I recognize it won’t be easy to enact tough climate policies. Recent events in France underscore this fact. There, President Emmanuel Macron has backed down on the taxes on gasoline, diesel and heating oil that led to waves of so-called yellow vest protests that rocked France and left six protesters dead by mid-December.

Fairness is central to the French protests, which sprang from objections to what came across to many voters as an elitist, out-of-touch central government that has lowered taxes on the rich while hiking taxes on the poor. The 2018 French budget, enacted last December, cut corporate tax rates and wealth taxes while increasing a social levy on all income similar to our payroll taxes. This change skewed taxes away from the rich and made the poor pay more.

This law had already stirred discontent. The hike in fuel taxes, part of a carbon tax initially enacted in 2014, poured fuel on those flames. Framing the increase as an environmental tax did nothing to assuage rural and low-income voters. “We’re not anti-environmental,” a movement organizer said. “This is a movement against abusive taxation, period.”

Meanwhile, the failure of the Washington State ballot initiative illustrates the risks of trying to enact controversial policies at the ballot box. When vast amounts of money poured into the state from big oil corporations like BP to finance a campaign against a carbon tax, thoughtful policy debate was forced to compete with a slick media campaign. Supporters also had to overcome the legacy of a previous failed referendum that pitted climate policy advocates against each other.

The benefits

Designed correctly, a carbon tax can do more than reduce carbon pollution. It can also make tax codes more fair. Research by a group of economists demonstrates that carbon taxes can be progressive – meaning higher income households pay more in tax per dollar of income than lower-income households.

A carbon tax can also create jobs. Although instituting one in the U.S. would surely speed up the disappearance of U.S. coal mining jobs, that shift would continue no matter what while also expediting the creation of new employment opportunities. As of today, there are more than twice as many jobs in solar technology than in coal mining.

Finally, taxing carbon is unlikely to hurt the economy. Despite a roughly $135-per-ton tax on carbon dioxide, Sweden is doing just fine. Its GDP has grown by nearly 80 percent since it enacted a carbon tax in the early 1990s, while its emissions have fallen by one-quarter.

Sweden’s growth rate has actually exceeded that of the U.S. since 2000 despite high taxes on carbon pollution, in part because Sweden uses the revenue to cut other taxes. And the World Economic Forum finds the two economies to be about equally competitive.