While it’s not enough to simply tax carbon and hope that the climate crisis will go away, carbon taxes appear to be a way to not only cut emissions, but also create jobs, a major sticking point for many for cutting down on fossil fuels. Done right, carbon taxes work. Here’s why.
Besides cutting down on carbon emissions, carbon taxes could even boost the economy at the same time. To illustrate this, look at the EU’s Emissions Trading Scheme, the largest carbon market in the world. While the ETS has cut emissions significantly, it is part of a much more comprehensive climate policy package, including direct energy-sector policies and significant national legislation.
Carbon taxes form part of these national climate policies. They typically focus on sectors not covered by the EU ETS. The taxes also vary widely by country, ranging from under USD$0.25 per ton of CO2 covering 4% of Poland’s CO2 emissions, to over $125 per ton covering around 40% of Sweden’s. Norway taxes carbon at $50 per ton which covers 62% of its emissions.
This wide range in levels and coverage could point to the inadequacy of overall climate policy, however it allows economists to estimate the impact of carbon taxes. Gib Metcalf, an economics professor at Tufts University, and Jim Stock, an economics professor at Harvard, have done this, estimating the climate and economic impact of Europe’s carbon taxes. They suggest that taxes should be raised to $40 per ton CO₂ covering 30% of emissions, so that cumulative emissions go down by between 4% and 6%.
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While carbon taxes lower emissions, either significantly or not depending on the level of tax, even ambitious taxes are not enough to significantly tackle emissions, pointing either to the need for significantly higher carbon prices or to complementary policies that go well beyond carbon pricing itself, according to Bloomberg.
A recent analysis conducted by economists Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis from Universities of Oxford, Cambridge, and Victoria, respectively, have analysed the emissions impact of all carbon pricing policies, including carbon taxes and emissions trading systems like the EU’s over several decades. The analysis found that all existing carbon pricing policies, from Poland to Sweden and in 37 other countries, have reduced CO2 emissions by between 1 to 2.5%. The authors call this “disappointingly small,” prompting them to recommend that more comprehensive climate policies that go well beyond carbon taxes and emissions trading alone are implemented.
Another crucial conclusion of the analysis is that carbon taxes, even without any complementary measures like refunding tax revenues by lowering other taxes, do not lower either jobs numbers or GDP growth. In fact, they have a “modest” positive impact on both. They not only come with no overall economic costs, but potentially with positive effects on both employment and GDP growth.
This doesn’t mean that carbon taxes or emissions trading could stand on their own. According to Bloomberg, “they don’t, can’t, and shouldn’t.” However, it is equally clear that supposed economic costs are no excuse not to include carbon taxes as part of comprehensive climate policy.
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