By Jazzy Kerber '20
The New York Times recently called a carbon tax proposal “a rare Republican call to climate action.” How does the plan work, and will the U.S. government respond? At Stanford’s February 23 Carbon Tax Panel, Stanford economics professors Frank Wolak, Mark Thurber, James Sweeney, and Hillard Huntington explained the concept of carbon taxes, contrasted this method with cap and trade programs, and discussed whether a small-scale version of a carbon tax could work at our school.
Why implement a carbon tax?
Right now, there are two main techniques to financially incentivize emissions reductions: carbon taxes (which Ireland, Sweden, and British Columbia use), and cap-and-trade programs (seen in the EU, Quebec, California, New York, and Massachusetts). The U.S. federal government has not adopted either program yet. The professors at the panel, however, believe we should. Substances that harm the environment are negative externalities, or “public bads” that affect everyone in one way or another. So, according to professor Frank Wolak, “Let’s tax the things we don’t want people to do.”
In a cap-and-trade system, the government sets a maximum permitted amount of carbon emissions and distributes “emission allowances” to companies and individuals. Those who emit less can sell their extra allowances to others, keeping net emissions at or below the capped amount. The market demand for buying and selling these allowances determines the price of carbon. According to the panelists, the main issue with cap-and-trade is price uncertainty—market fluctuations affect the price of carbon, which is usually tricky for businesses to handle. Professor Thurber explained that if prices became extremely high, politicians might decide to change or eliminate the whole program.
A carbon tax, on the other hand, places a fixed price on carbon that Professor Wolak describes as a sort of sales tax based on the carbon content of what you purchase. Under a carbon tax system, saving money incentivizes environmentally responsible decisions. For example, if we have two identical shirts and shirt 1 is produced in a highly polluting factory, it costs more than shirt 2, which is produced without causing much pollution. Ideally, people also make greener investments when they know that carbon has a stable price attached to it in the future.
How would a Stanford carbon tax work?
A Stanford carbon tax pilot program would likely follow a model similar to one Yale is currently testing. Through the program, participating buildings across campus get a current carbon emissions screening, then receive a performance target aimed at reducing the university’s overall emissions. Buildings pay a penalty if their emissions are too high and receive a monetary reward if they surpass the target. Across the whole university, revenue could end up neutral. (On a national level, another option would be to make money, then put it towards infrastructure or other needs. Stanford would probably just test the system without changing overall university spending.)
Professor Frank Wolak notes that since Stanford is a well-known institution, implementing a program like this one could attract outside attention and perhaps inspire other organizations to follow suit. He acknowledges, however, that reducing Stanford’s carbon footprint can only make a small difference to the environment. The main goal of a carbon tax pilot program would be education and outreach to promote a larger-scale solution.
Could the U.S. really adopt a carbon tax program?
The professors acknowledged that the current administration does not prioritize lowering federal carbon emissions, but Professor Wolak hopes they might see a carbon tax as a way to raise money for the infrastructure improvements President Trump promised. It’s also a good sign that several prominent Republicans, including former Secretaries of State James Baker and George Shultz, endorsed the program, even if they face opposition within their party at the moment. Professor Huntington suggests that right now, the most likely route to a carbon tax is through a larger tax code revision. Still, we should note that a carbon tax cannot adequately reduce U.S. emissions without the help of federal regulations.
The more municipalities and institutions that financially incentivize low emissions, the bigger the difference carbon fee programs make. If one country drives up the prices of polluting goods and services while another does not, people can simply turn to imports to save money. If more institutions, states, and nations implement carbon taxes (or even cap-and-trade systems), we can take huge strides towards making environmentally-smart decisions affordable and desirable.
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