Select your localized edition:

Close ×

More Ways to Connect

Discover one of our 28 local entrepreneurial communities »

Be the first to know as we launch in new countries and markets around the globe.

Interested in bringing MIT Technology Review to your local market?

MIT Technology ReviewMIT Technology Review - logo

 

Unsupported browser: Your browser does not meet modern web standards. See how it scores »

{ action.text }

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.

35 comments. Share your thoughts »

Credit: Christopher Churchill

Tagged: Business, Energy

Reprints and Permissions | Send feedback to the editor

From the Archives

Close

Introducing MIT Technology Review Insider.

Already a Magazine subscriber?

You're automatically an Insider. It's easy to activate or upgrade your account.

Activate Your Account

Become an Insider

It's the new way to subscribe. Get even more of the tech news, research, and discoveries you crave.

Sign Up

Learn More

Find out why MIT Technology Review Insider is for you and explore your options.

Show Me