Carbon Taxes Should Be Channeled Into Energy Innovation
A tax on carbon is frequently touted as the best way to reduce greenhouse gas emissions. But a new case study* argues pollution won’t be curbed unless tax revenues are channeled back into industry to encourage innovation.
In an accompanying commentary in The New York Times, Northwestern University associate professor Monica Prasad notes that Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries — in the case of Norway, emissions have actually increased by 43 percent per capita.
“An economist might say this is fine; as long as the cost of the environmental damage is being internalized, the tax is working — and emissions might have been even higher without the tax. But what environmentalist would be happy with a 43 percent increase in emissions?”
“The one country in which carbon taxes have led to a large decrease in emissions is Denmark, whose per capita carbon dioxide emissions were nearly 15 percent lower in 2005 than in 1990. And Denmark accomplished this while posting a remarkably strong economic record and without relying on nuclear power.”
… if we want lower emissions, the goal of a carbon tax is to prompt producers to change their behavior, not to allow them to continue polluting while handing over cash to the government.
Prasad argues that policy makers should be prevented from from turning the tax into a cash cow. “Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue. Reduce the income tax? Give the money to low-income consumers? Use it to pay for health care? Everyone seems to forget that the amount of revenue is directly tied to the amount of pollution that is still going on.”
Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation. Danish firms are pushed away from carbon and pulled into environmental innovation, and the country’s economy isn’t put at a competitive disadvantage, Prasad writes.
“Another lesson is that the carbon tax worked in Denmark because it was easy for Danish firms to switch to cleaner fuels. Danish policy makers made huge investments in renewable energy and subsidized environmental innovation. Denmark back then was more reliant on coal than the other three countries were (but not more so than the United States is today), so when the tax gave companies a reason to leave coal and the investments in renewable energy gave them an easy way to do so, they switched. The key was providing easy substitutes.”
Logical as this argument sounds, much of the political appeal of carbon taxes derives from the opportunity to use the proceeds to solve any number of unrelated fiscal problems. So the likelihood of a tax being imposed diminishes in step with the ability of politicians to spend the proceeds on their pet projects.
Prasad notes that the lessons from the case study of Scandinavian green taxes cannot literally be applied to the U.S. For example, “It is not clear that extending gasoline taxes will be productive in the US in the absence of major investments in public transportation.”
Instead, she suggests that the correct policy is to “tax the industrial production and consumption of coal and other high carbon-content fuels in conjunction with stable or lower tax rates on lower carbon-content fuels and provide the revenue back to the affected industries in the form of tax exemptions or subsidies or investments in alternative energy-sources, cleaner-burning technologies, carbon capture and sequestration technologies, or energy capture and recycling programs. ”
*Taxation as a Regulatory Tool:Lessons from Environmental Taxes in Europe (Monica Prasad, Northwestern University)
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