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Democracy and Debate

Understanding Carbon Tax

Dr. Catherine Hausman, professor at the Ford School of Public Policy and a faculty research fellow at the National Bureau of Economics Research, explains the concept and arguments for and against a carbon tax.


- You've probably heard about carbon pricing as one way to address climate change. There are different forms of carbon pricing, sometimes called cap and dividend, cap and trade, carbon taxes or emissions trading. Programs like this already exist in the North East region of the US, in Canada, the European Union, California, China, and other parts of the world. So why do so many countries think this is a good way forward? How does it limit damages from climate change and how does it work? Isn't it kind of weird to put a price on this invisible thing that's about the environment? A lot of the things that have market prices are more concrete and easy to think about. Cheeseburgers, t-shirts, concert tickets, stuff like that. So pricing pollution, what the One way to think about pollution fees is that they're asking people to pay their fair share of damages. Kind of like a swear jar. It's like my mom's saying, that every time that I say or bull I've gotta drop a quarter in the swear jar, because my actions are an annoyance towards the people around me and she wants me to remember that and to do it a little less. In a pricing scheme like this, driving your gas powered car, using coal-fired electricity, aren't banned. And I'm allowed keep saying bull as much as I like. But I need to pay up. And it turns out that there's great evidence from economists that people and companies pay attention to these prices. And they lead to all kinds of changes taking place in the economy. Power plants do things like switch from coal to natural gas, which has the added benefit of reducing local air pollution. Some people decide to carpool or to take the bus. Smart scientists and innovators come up with new products that are greener and more efficient. A lot of these changes happen pretty seamlessly. Some of the changes are harder and more expensive. I can pretty easily stop saying what but it's harder to remember not to say it when I stub my toe and that's okay. The price recognizes that a transition to a low carbon economy takes some time and some communities might need extra support. Maybe you can use the funds you've raised to invest in research and development for new products that make the transition easier. Maybe use the funds to retrain workers whose industries are struggling, maybe compensate rural communities who need to do a lot of driving, maybe reduce other taxes like taxes on labor . One of the questions I hear is about its effectiveness. How much carbon dioxide is kept in the ground so to speak depends on the fees level, but there's lots of evidence out there on the effectiveness of existing programs. The other criticism I hear is about fairness but again, there's evidence about how policies can be paired with the distribution of the funds raised to help communities transition away from fossil fuels. So if climate change off, I encourage you to read up on carbon pricing schemes and how they could be implemented where you live.