This blog was written ahead of Earth Day and was originally published by the Wharton Risk Center as a part of thier Student Solutions to Climate Risk Management Challenges series.
The consensus among today’s economists is that a carbon tax is one of the most effective tools for reducing carbon dioxide emissions. Among many Americans, however, concerns over cost-of-living and the competitiveness of American manufacturing trump the recommendations of policy experts. A 2019 Pew Research study found that two-thirds of Republicans and Republican-leaning independents, who largely oppose carbon taxes, believe that scientific experts are worse or no different at making science policy decisions compared to other people. Popular reluctance to support a carbon tax has, in turn, sapped Democratic eagerness to campaign on such a strategy: emails from the 2016 Clinton campaign called a carbon tax “lethal” in the general election out of fear of alienating potential swing voters. Polarization and political hesitation on carbon taxes have stalled to little advancement of this policy idea, despite the support from economists.
In order to increase popular support for a carbon tax, the proposal should focus on the effects on Americans, not the views of academics. Raising support for a carbon tax hinges on countering narratives that such policies could raise cost-of-living and render American manufacturing uncompetitive.
To successfully redefine and broaden the popular appeal of a carbon tax, three accompanying measures that do not reduce a carbon tax’s effectiveness should be taken. These measures should be made explicit and emphasized to voters. The first is that the tax would be revenue-neutral and that all revenues raised would be transferred directly back to American citizens in equal lump-sum rebates. The second measure is using a carbon tax as a means to reduce the need for future carbon emission regulations, allowing private American firms to innovate more freely under a price signal instead of more command-and-control requirements. The third is an introduction of a carbon adjustment tariff from international imports, protecting American manufacturing from carbon-intensive international competitors and boosting the competitiveness of American firms that are becoming less carbon-intensive.
1. A revenue-neutral carbon tax could reduce individual tax burdens.
To soothe fears that a carbon tax would be costly to families, a carbon tax must be revenue-neutral. The full return of raised revenues as a transfer to every individual or household would preserve incentives for each citizen to reduce their carbon consumption, while not increasing their financial burden necessarily. This would help combat an effective point brought up by carbon tax opponents: that a carbon tax would increase Americans’ costs of electricity, gasoline, and groceries. The rebate of carbon tax revenues also appeals to progressives, who note that a carbon tax could be regressive, disproportionately impacting poorer Americans. In Canada, a federal carbon-tax has been implemented in six provinces, where households receive 90% of the revenues from carbon pricing. The Canadian Parliamentary Budget Office estimates that most households will receive higher transfers than amounts paid in the carbon tax. In most provinces, only the highest quintile is financially worse off because of the policy, primarily stemming from them owning larger homes and consuming more products.
2. Less regulation, more choice by private business.
A carbon tax should be promoted as an alternative for future carbon emission regulations. In recent years, eliminating cumbersome regulation for American firms has become a common refrain among Republicans to help firms. This refrain is often extended to a carbon tax, which is seen as a further obstacle, hurting firms and the employment they provide. A deregulatory accompaniment to a carbon tax would counter this narrative since the tax can be presented as a cheaper and more economically efficient substitute for future command-and-control regulation. An adequately robust and gradually increasing carbon tax would also make the need for some of today’s carbon regulations redundant, allowing them to be phased out. A carbon tax would reduce regulatory uncertainty and give private businesses more flexibility to come up with and implement solutions that work well for them. Furthermore, there would be a new incentive to go beyond limits set by control and command regulation.
3. Protect American manufacturing.
A carbon tax can also be designed to protect American manufacturing’s domestic competitiveness by using a border carbon adjustment. Such an adjustment would not give products that are produced in countries without a carbon tax an unfair price advantage by requiring a tax to be paid on imported goods if carbon dioxide was emitted in a good’s manufacture in another country. This would ensure that foreign firms that operate in countries without carbon emission regulations would be unable to undercut American firms who need to price with a carbon tax in mind. The more carbon-efficient American firms could become, the more competitive against foreign, carbon-intensive firms they would be. If other jurisdictions, such as the European Union, also propose border carbon adjustments, it would allow American firms to be competitive there, even more so if an American carbon tax is implemented earlier. This aspect of a carbon tax can be promoted as a measure to protect American manufacturers and manufacturing jobs.
Convincing Americans to adopt a carbon tax cannot hinge on simply that it is recommended by experts. Instead, it must allay the fears that opponents have promoted and emphasized gains, especially concerning cost-of-living and American firms’ competitiveness. Adopting the policies described and emphasizing them to American voters will help build support that this policy needs to be legislated.