Tax bads, not goods

According to The Economist

This newspaper has long advocated a carbon tax as the best way to deal with a warming climate. This month we asked Cambridge Econometrics, an economic-modelling firm, to assess the impact of a carbon tax on the economy. To keep things simple and allow for gradual adjustment, we proposed that it should raise revenues equal to 1% of GDP by 2020, and that other policies with similar objectives (fuel duty, subsidies for renewable energy, Britain’s membership of the European emissions-trading scheme—the ETS—and so forth) would be abolished or cut back.

The results are surprising. A frequent worry about carbon taxes is that they will hurt business and the economy. But in our simulation Britain’s economic performance would improve. Despite raising an extra £11 billion in net revenue by 2015 and £18 billion by 2020, our carbon tax (£31 a tonne in 2015) would help economic performance, not hamper it. Output would be 1.2% higher by 2020 than under the current arrangements.


The principle—that polluters pay for the damage they cause—is easily grasped, and it is politically attractive to tax “bads” such as pollution instead of “goods” such as work and entrepreneurship.

A carbon tax would be good for the US economy, too. And making polluters pay for the damage they cause just seems common sense. If the public were allowed to consider the issue on its merits, minus the fog of lies from Rupert Murdoch, it would be politically popular with the majority of voters.

But the more important political question is — would a carbon tax help or hurt the profits of the most powerful US corporations? Given that a carbon tax is not a seriously considered option in the US, I’d guess that those corporations believe it would eat into their profits.

They might be wrong about that.


1 Comment

  1. According to Australian Prime Minister, Julia Gillard,

    clean energy will open up opportunities we are only just beginning to imagine. Those opportunities begin with that simple but momentous decision: Putting a price on carbon.

    Friends, a price on carbon is the cheapest way to drive investment and jobs. A low carbon economy will be more efficient and more productive. It will change behaviour right across the economy, driving innovation and creativity. Like the dynamic benefits of tariff reform, a market in carbon will not only cut carbon pollution but make the economy more efficient as a whole. The countless decisions needed to transform our economy cannot – and should not– be made by government decree. They can only be made by individual firms calculating how best to position themselves for a low carbon future.


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