We understand that a carbon tax is not an easy sell (taxes that hit most people never are), but our view is that it should be possible to make it politically acceptable by making it absolutely explicit that the carbon tax is not a way to raise revenues. The government should structure the carbon tax in a revenue-neutral way, such that tax revenues would be handed back as a compensation: a lump sum to all those at the lower end of the income scale, who would therefore come out ahead. This would preserve the incentive to conserve energy, drive less or drive electric cars, but make it very clear that the less wealthy would not pay for it. Given that energy consumption is a matter of habit, the tax should also be announced well in advance to give people time to get ready for it. More generally, we are quite aware that it will cost money to prevent climate change and to adapt to the part already on its way. There will have to be investments in infrastructure, and meaningful redistribution to those whose livelihoods are affected. In poor countries, money could help the average citizen achieve a higher quality of life in a way less threatening to the future of the world. (Think of the air-conditioning debate, for example; why doesn’t the world simply pay India to leapfrog to the better technology?) Given that the poor do not consume very much, it would not take a lot to help the world’s poor consume a bit more, but also get better air and produce less emissions. The richest countries in the world are so rich they can easily pay for it. The question is to frame the debate in a way that does not pitch the poor in poor countries against the poor in rich countries. A combination of taxes and regulations to curb emissions in rich countries and pay for a clean transition in poor countries may well reduce economic growth in the rich country, though of course we don’t know for sure, since we don’t know what causes growth. But if much of the cost is borne by the richest in the rich countries and the planet benefits, we see no reason to shy away. In Delhi and Washington and Beijing, it is in the name of growth that policy makers drag their feet when called upon to enact or enforce pollution regulations. Who benefits from this GDP growth remains an afterthought. Economists deserve their fair share of the blame for stoking this rhetoric. Nothing in either our theory or the data proves the highest GDP per capita is generally desirable. Yet because we fundamentally believe resources can and will be redistributed, we fall into the trap of always trying to make the overall pie as big as possible. This flies directly in the face of what we have learned over the past decades. The evidence is clear—inequality has risen dramatically in recent years, with searing consequences for societies across the world.
The taxation of carbon emissions is definitely something that we should be discussing more about when action for climate change is urgent. On theory, it makes sense to tax the negative externalities (carbon emission) of using fuel and electricity and use the revenue to channel towards more sustainable energy sources.
However, probably the biggest barrier, as stated in this excerpt, is the political appeal of adding a tax to someone we all use, and something that the poor will be disproportionately affected by. Electricity and fuel probably take up a larger proportion of expenses of people with lower income. The key is selling this idea as revenue neutral and trying to bring redistribute the surplus of such revenues to the people.
