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Freitag ’14: The tax we can agree on

 

“We can choose to believe that Superstorm Sandy, and the most severe drought in decades, and the worst wildfires some states have ever seen were all just a freak coincidence,” said President Obama. “Or we can choose to believe in the overwhelming judgment of science and act before it’s too late.” In the summer of 2012, if you asked a Wall Street executive, Washington insider or television pundit what Obama’s re-election would mean, most would have said three words: climate change reform. Since then, the concentration of CO2 in the atmosphere has reached 400 parts per million — the highest level in the last 650,000 years. But the United States has not come any closer to seriously reducing greenhouse gas emissions.

Any politician who says we need to improve energy efficiency standards, increase funding for research and development of alternative energies and eliminate subsidies for fossil fuels but ignores the need for a carbon tax is only hijacking the conversation and avoiding a serious discussion on how to realistically reduce GHG emissions today.

But why, as a Brown student, should you care? This discussion is relevant to us because our actions today will have a profound effect on all generations to come. It is our responsibility to become fully informed on both the science and the economics of climate change and to urge our leaders before it’s too late to have a real discussion on how to combat climate change.

Though the natural sciences might be central to understanding how climate change works, economics provides a framework for climate change policy discussion. In economics, a negative externality occurs when an individual or firm commits an action but does not have to pay for the full cost of the result. Instead, those external costs are passed on to others. After all, nothing is free.

In industry, producers pay for material costs and other factors of production, emitting carbon as a byproduct, free of cost, regardless of the effect it may have on the environment. When negative externalities like the emission of carbon dioxide occur, the free market cannot resolve the problem. Fortunately, economics provides a solution.

Applying a tax can correct for an externality by placing a surcharge on carbon-intensive fuels in the industrial process. A higher tax will make it costlier to produce goods, resulting in higher prices and lowered demand and sales. A tax therefore incentivizes transitioning to cleaner energy sources, making green technologies more affordable. Furthermore, a carbon tax serves as a signal to consumers, revealing which products have a high carbon footprint, so green-minded consumers can avoid these products. Many industrialized nations, such as Sweden, have seen much success in the implementation of a carbon tax.

But without an explicit target for reducing emissions, critics doubt whether a carbon tax will actually work. The Obama administration has therefore centered its own climate change plan around a cap and trade system.

A cap and trade system is an environmental policy tool that sets a ceiling on maximum emissions, while letting companies buy and sell government-allocated permits for the right to emit carbon. In theory, a cap and trade system will increase efficiency, allowing cleaner companies to buy permits from dirtier companies, all while staying under the mandated ceiling. In the 1980s, a cap and trade system was largely successful at reducing sulfur dioxide — and therefore acid rain — in the atmosphere. More recently, the European Trading Scheme, a type of cap and trade, was created to reduce GHG emissions in Europe. But the ETS has largely failed because not all countries participated, as well as because of loopholes inherent in the system. Though a hard cap may satisfy environmentalists, who are skeptical of a tax alone, the trading of permits in a cap and trade system is susceptible to corruption and other harmful practices.

Our generation will have to confront a number of serious issues, but none is more serious than climate change. Though often neglected in the public discussion of climate change, economics should provide the framework for this debate. Informing ourselves about the different economic policies proposed will allow us to elevate the dialogue on reducing GHG emissions from catchy political talking points to an intelligent discussion on real issues and solutions.

Climate change will not cause the end of the world tomorrow or even next year. But as we’re starting to see now and we will continue to see in the future, the effects of climate change — rising sea levels, increased disease and changing ecosystems — will displace millions of people, lead to the extinction of species and result in a drastic, permanent reduction in global economic output. Developing alternative energy may be the only long-term solution, but a carbon tax is essential to mitigate the short and medium-term effects. As college students, it is our duty to learn as much about climate change as possible, form an opinion, get involved in a project or debate and be more cognizant of our actions — because the future of our way of life may very well depend on it.

 

Scott Freitag ’14 specializes in current economic issues. He can be reached at scott_freitag@brown.edu.

 

Due to an editing error, a previous version of this column stated that not all companies in Europe participated in the European Trading Scheme. In fact, not all European countries participated. 



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