Revenue-neutral carbon fee is a market-based way to address climate change
By Tony Giordano
As we seek new technologies to avert the catastrophic effects of climate change, there are economic actions we can take now to reduce the greenhouse gas emissions behind the Earth’s warming pattern. First, we need to look at the economics underlying our overuse of fossil fuels, which is at the crux of the problem.
In a competitive market economy, we can generally depend on the free market to do an efficient job of allocating resources and setting fair and sustainable prices. But economists have identified the existence of market imperfections and failures that in some situations produce inefficiencies and distortions.
One such situation is an “externality,” which occurs when all the true costs or benefits are not factored into the price of a product or service. A prime example of an externality, a negative one in this case, is pollution. One enormous externality that has existed for so long that we’ve come to ignore it is that all the costs of burning carbon-based fossil fuels are not captured by the market and these costs become external to market pricing. The costs are borne unfairly by others or by society overall.
The social costs of burning carbon fuels are enormous — estimates are upward of $60 per metric ton of carbon dioxide — and they are devastating. Some examples are adverse impacts on the health of millions of people, destruction of Earth’s life-support systems, increasingly extreme weather and sea-level rise due to climate change. The failure to capture all the costs also leads to the price of the product being artificially low, causing it to be over-consumed and thus compounding the problem.
This is exactly the situation the U.S. has had for some time with fossil fuels: oil, natural gas and coal. We know that burning fossil fuels produces a growing concentration of the greenhouse gas carbon dioxide, which leads to warming of the atmosphere and climate change, but we have never adjusted the pricing to capture these costs — at least not yet.
Public policy has long recognized the need for correcting these market failures through regulation or by building the social costs into the pricing of the product. The latter represents a market-based solution to the problem, which in many ways is more efficient and more widely acceptable than establishing additional regulation.
A revenue-neutral carbon fee is a market-based way to adjust for this market failure and to build all the true social costs of carbon fuels into the price. Although a carbon fee would raise the price of fossil fuels somewhat, the revenue would be returned to consumers, compensating them for the higher prices. Among other benefits, such as incentives for greater conservation efforts, this would make clean, renewable forms of energy more price-competitive, stimulating their development and ultimately reducing greenhouse gas emissions.
Proposals for a carbon fee are receiving increasing bipartisan support, including endorsements from former Republican Cabinet members. Implementing the fee in stages would allow business and consumers time to adapt. One reason the market-based approach of such a carbon fee appeals to many conservatives as well as liberals is the widespread disdain for additional regulation.
I hope that members of Congress will be able to come together in the fall and pass this much-needed legislation.
Tony Giordano, adjunct instructor at Brookdale Community College and research consultant in social science, is a volunteer member of the Citizens Climate Lobby.