What is a carbon tax? And could it work?

✅ All InspiredEconomist articles and guides have been fact-checked and reviewed for accuracy. Please refer to our editorial policy for additional information.

What is a carbon tax?It seems a perfect storm of events has lined itself up to create a political environment that *should* push forward a carbon tax. Will it happen, what would it do, and could it work?

Let’s start with a quick definition. A carbon tax, in its simplest form, is simply a tax on polluting carbon emissions. In essence, the government would levy a tax on certain kinds of emissions that are near universally believed to be a significant contributor to climate change. Right now, there is no price on carbon emissions like methane and carbon dioxide, and as a result, coal and other polluting energy sources are less expensive than cleaner sources of energy like solar and wind. So a carbon tax is a way to accurately price the negative externalities associated with the combustion of fossil fuels.

Make sense? In other words, since fossil fuel combustion causes a global “pain” (climate change), but doesn’t pay for the consequences of that pain, a carbon tax is one way to incur a price on that pain. The pain is what economists refer to as a negative externality, that is, a cost that is externalized by a company or industry, but that negatively affects others.

What happens to the pain itself? Well, it goes from being borne by the public to being borne by the company/industry that creates it. And once that company/industry feels pain, it does what it can to remove that pain.

Thomas Friedman opined about a carbon tax this week. In his article, Friedman says, “experts believe that the mere signal of a carbon tax would get companies to become more energy efficient. And that’s the point.”

What would happen?

There would be intended consequences of a carbon tax, and unintended consequences. The intended consequences would be higher cost of doing business in a “dirty” industry, such as coal, natural gas, oil and the like. That would make companies become more energy efficient, as Friedman points out, but also encourage them to invest in cleaner technologies and begin an inevitable shift away from the dirtier business units in their company.

The unintended consequences, however, are that the companies would pass those costs along to their customers. While that should create market demand for cleaner goods by increasing the price of pollution, it’s not that simple an economic equation. First, the main form of energy use is through public utilities, meaning that, realistically, people have no option but to buy energy from their utility, and therefore a carbon tax would mean higher utility bills. Also, the price of gasoline would go up. People who are dependent on their cars would be incentivized to take public transit or carpool, but realistically, for many people, these options might be difficult, especially in places with lots of sprawl and poor urban planning. So the main unintended consequence of a carbon tax would be that people would pay more money for energy and transportation (disproportionately hurting the poor more than the rich), which is one main reason a carbon tax has not achieved any significant political momentum.

According to a study by Professor Theda Skocpol of Harvard University (pdf), this has always been the rub. It’s simply too easy for politicians aligned with the fossil fuel intensive industries to scare people with the idea that, well, their bills will go up. According to the study, many Americans are ok with that, but the average that people would be willing to pay extra on their utility bills to help combat climate change is an amount a) insufficient to substantially reduce greenhouse gas emissions, and b) highly correlated to those folks’ income.

Climate change stats.001


The report shows that 38% of Americans with household income above $150,000 are willing to pay an extra $25 per month on their utility bills, but only 22% of those earning less than $30,000 would be willing to do so.

So…’nuff said, right? No one would ever want to levy a tax that negatively affects the poor more than other demographic brackets. But Skocpol suggests there’s an answer, and this answer just might be enough to make a carbon tax a reality sooner than we think.

This article continues… 

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top