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Many economists argue that painful though it might be to consumers, the best way to address climate change is to put a “price” on carbon dioxide and other carbon-based emissions, thereby making fossil fuels more expensive and alternative energy sources more competitive.

The European Union established a trading program for carbon emissions in 2005. In the United States, a proposal for a similar system is at the center of the new administration’s energy ­policy. Under such programs, a regulatory authority sets a cap on total carbon emissions, and tradable emissions allowances are issued or auctioned off to industries. But many economists advocate a far simpler approach: a carbon tax levied directly on the production of fossil fuels.

Over the last several years, Gilbert ­Metcalf, an economist at Tufts University, has calculated the costs and consequences of such a policy. He explains to Technology Review editor David Rotman why a carbon tax is a good idea.

TR: How much revenue would a carbon tax raise in the U.S.? Who would get the money?

Gilbert Metcalf: For an initial tax of $15 per ton of carbon dioxide, I estimate that the tax would raise about $85 billion annually. The U.S. Treasury would get the money. But your real question is, What does the Treasury do with the money? I have proposed creating a tax credit in the personal income tax. That ensures that we don’t raise the overall tax burden during this recession and that we don’t disproportionately burden low-income households.

TR: Why a carbon tax, rather than a cap-and-trade program?

GM: As businesses are planning long-lived investments, power plants that last 50, 60 years or longer, they need to know what price they are going to face to make these plants competitive. With a tax, we know what that price is. It’s the tax rate. With cap-and-trade, we have much less certainty about what the price will be. For example, we’re seeing carbon prices falling [in the E.U.] because the demand for energy is falling as the economy slows down.

TR: Beyond allowing for a more predictable price, why is a carbon tax better than a cap-and-trade scheme?

GM: It’s much simpler. From both an efficiency and an administrative perspective, a carbon tax is a better approach. I think there is a clear consensus on that among economists.

TR: Would I have to pay a carbon tax on my electric bill or at the gas pump?

GM: No. The best way to do a carbon tax would be to tax coal as it comes out of the ground. You can levy the tax where it is most convenient: the coal mine. For oil, at the refineries. It’s pretty easy to catch all the fossil fuels with a small number of taxpayers. Administratively, it is very easy.

TR: Nevertheless, the impact of the tax will, of course, reach the consumer.

GM: Yes.

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Credit: Christopher Churchill

Tagged: Business, Energy

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