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Energy Economics Weekly Briefings

Economists’ Letter In Support of Carbon Tax

Written by: Ellen Hughes-Cromwick

On Wednesday, January 16, 2019, many famous economists signed a letter to the Wall Street Journal in support of a carbon tax.  To be sure, many proposals have been made in the past, to no avail here in the U.S.  If you want a concise look at the political economy of the carbon tax, please take a look at Barry Rabe‘s latest book, Can We Price Carbon?  wherein he describes the vexing complexity of what economists portray as relatively simple to implement.  I also refer you to a piece that Andrew Hoffman and I wrote for The Conversation on William Nordhaus’ award of the Nobel Prize in Economic Science for his work on understanding the costs of climate change and advocating the use of a carbon tax to curb global warming.

Back to this week’s letter.  The top economists who signed this letter are Nobel laureates, former Federal Reserve officials, and economists who worked in prior administrations, at the Treasury Department and the Council of Economic Advisers.  Their proposal is quite simple and has two major components.  First, they propose a tax on carbon emissions every year until the emissions reduction targets are met.  Second, they argue that the tax should be revenue neutral, i.e., not add to the total tax revenue for the country, by rebating the full amount of the tax back to American consumers.  They assert that this tax and rebate scheme will allow for proper economic incentives to capture the social cost which carbon emissions imposes on the public.  With such a price, households may decide to emit less carbon.  In turn, they will receive a rebate for the tax they pay, a sort of “dividend.”

As of 2017, the per capita CO2 emissions in the U.S. stood at 15.8 metric tons.  These data are reported by the Energy Information Administration (EIA) at the U.S. Department of Energy in their Monthly Energy ReviewThankfully, the EIA received Fiscal Year 2019 appropriations and is not part of the partial government shutdown.  Financial markets, economists, and anyone working in the energy sector relies heavily on the energy statistics published by EIA.  The chart below show the per capita emissions in the U.S. since 1995.  Per capita emissions has fallen by 24% since 2000.  Total CO2 emissions (not shown in chart) has declined 14% since its peak of 6.0 billion metric tons in 2007, the last year before the financial crisis began.

 

 

At a carbon price of $40 per ton, the tax payment for the average person would be $632 per year (higher if we only included taxpayers in the denominator).  According to the plan, every taxpayer receive a lump sum payment to compensate for this tax cost, and will likely be much better off with this “dividend” as compared to most upward fluctuations in energy prices.  A more detailed description of the proposal is included in the Carbon Dividends Plan and the founders of the Climate Leadership Council.  Using the likely taxpayer population estimate of 206 million, then the per capita emissions rises to an average of 24.9 metric tons for those sending checks to the IRS.  At $40 per ton, the annual payment of nearly $1,000 would be the rebate amount.

There is more to learn about this proposal.  It is interesting to note that William Nordhaus himself did not sign the letter; the politics and economics of a carbon tax scheme remain elusive.