Despite decades of work showing that it is economically optimal, and therefore in our collective best interest to establish a carbon price, very little has been accomplished on this front. One explanation for the inaction related to carbon pricing is that the policy places costs onto today’s society, while future generations accrue benefits.
A new paper published in Environmental Research Communications attempts to establish at which point an optimal emission reductions policy (e.g., a global carbon price) would confer net benefits to society. Using the DICE model created by William Nordhaus, the authors find that the break-even year–that is, when economically optimal policy produces global mean net economic benefits–would occur around 2080 for a policy beginning in the early 2020s. That late break-even time implies that people born before 2025 would need to live 120 years or more to see net increases in their personal consumption. These results reinforce the idea that tradeoffs between economic growth and emissions reductions are very much real and can persist for some time.
Unlike other mitigation approaches, a carbon tax is unique in its ability to raise revenue and fund tax reform that would lessen the overall burden on the economy without significantly altering government size. Acting on climate without growing the size of government should appeal to conservatives. Still, the pro-growth side of carbon tax reform appeals to the challenge of immediate costs and delayed benefits (for the whole economy). A report from Columbia’s Center on Global Energy Policy found that a $50/ton CO2 tax, with all revenue used to reduce payroll taxes would, in fact, increase GDP by roughly 0.3 percent just five years after the policy is implemented, relative to a no-carbon tax scenario. This study did not account for additional economic benefits of a carbon tax replacing current EPA GHG regulatory authority, which is a feature of recently introduced carbon pricing legislation. Nor did it include co-benefits of reduced air pollution, which have been found to produce economic benefits within a year of policy implementation. A similar study from the Tax Foundation echoed the results of the Columbia report, finding that a $50/ton CO2 tax, with revenue used to reduce the payroll tax rate, would increase GDP by 0.1. By reducing the marginal tax rate on labor income, a carbon tax paired with a reduction in the payroll tax would increase hours worked equal to 102,000 full-time equivalent jobs.
There will undoubtedly be tradeoffs and costs associated with implementing a price on carbon. As the paper demonstrates, these costs will primarily fall on today’s generation, but pro-growth tax reform offered by carbon pricing can, in fact, improve near-term economic outcomes. As Congress continues to debate the best approach to mitigating climate change, policymakers should take seriously how carbon pricing can be designed to lessen costs of the policy, and encourage near-term economic growth, all while maintaining the same size of government.