"I am hearing so much about taxes during this election year, and now the idea of a carbon tax is resurfacing. What is it? And is it really going to be helpful, or just another messy issue?"
- Amy from Los Angeles -
Far be it for me to ever suggest that something will not be a messy political issue, but the concept of a carbon tax comes from a sound economic principle: the business model for a product or service should include all of the costs associated with that product or service. Then, when the market sets the price, the industry will succeed or fail based on the merits of the product. When this scenario happens, economists refer to it as externalizing costs, but we might call it getting someone else to pay for your responsibilities. In a society that prizes personal responsibility, we should do all we can to hold both business and government to do the same.
The basic concept of a carbon tax is simple. Any business or entity that generates carbon dioxide as a byproduct of combustion and allows the carbon to enter the atmosphere must pay a fee based on the amount of carbon released. These businesses will pass that cost on to their customers, and thus, will include the proper cost of their product. The taxes could go to any one of the following: direct rebate to all tax payers (shrinking the annual deficit), cover the costs of drought relief to farmers and fighting of forest fires, or fund health care costs associated with increased emissions (such as asthma). Any of these solutions would reduce the tax burden on typical taxpayers, and create a proper marketplace for products and ideas. These types of targeted taxes funding specific sources already exist (federal gas taxes pay directly for road construction).
It should be noted that other options exist for accomplishing this goal: cap and trade, or emissions reduction regulation. Neither of these accomplish the goal adequately, but for different reasons. Cap and trade will price carbon into the marketplace, but instead of including it at the cost to society, it will include it at the price industry will pay for the reduction. If these reductions get priced under the true cost to society, then they will not actually drive the necessary change. Emissions reduction regulation can set targets, but if those targets are set politically, they may undershoot the necessary level, or force the marketplace to use more expensive means to accomplish the reduction.
The interesting thing about a carbon tax is that it has support from all political corners. Conservatives like the use of market forces to solve social problems and personal responsibility, and progressives like that solutions for environmental action come from those causing them. It is a rare opportunity to make progress on the economic, social and environmental front in bipartisan fashion.
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