The Economics of Preventing Global Warming

In the same week in October of 2018 that a UN climate report was released outlining the devastating future effects of climate change, Bill Nordhaus, an economics professor at Yale, was awarded a Nobel Prize in Economics for his work designing an effective carbon tax model that could be used to slow, and even prevent, further global warming. The UN climate report warned of dire consequences stemming from climate change that could arrive much sooner than scientists previously anticipated if the world does not reverse the current trend of rising temperatures¹. Nordhaus’ work however, provides some hope among the consistently doomsday-like coverage of climate change. His carbon tax model offers a financial incentive to both individuals and corporations to limit emissions and in turn halt the current global temperature increase². While Nordhaus himself is not particularly optimistic about the successful implementation of his research in the United States due to the current state of its politics, governments such as that of British Columbia in Canada and California in the United States, have shown that Nordhaus’ carbon tax can be used successfully, and both states have the potential to serve as models for the eventual effective use of a carbon tax on a national scale.

The earth’s average temperature has already increased by 1° celsius since the start of the Industrial Revolution in the early 1800s. The UN Report, commissioned by leaders as part of the 2015 Paris Climate Accord and released in October 2017, details what would happen if global temperatures increased on average by another half of a degree. Previous studies had focused on the effects of a 2° celsius increase as scientists believed this change would bring about the most dire effects of climate change. The new report, however, demonstrates that many of these consequences will occur with only the 1.5° rise in temperatures, a full half degree lower than previously thought³. Droughts will increase in severity, ocean levels will rise, the frequency of heat waves will increase, biodiversity will decrease, and crop yields will go drastically down⁴. All of this is expected to happen as early as 2040 if we continue to release greenhouse gases at the same rate we do now, which is easily within the lifetime of much of the population on earth⁵. If there is any hope to stop this temperature increase, drastic changes must be made. These include increasing the use of renewable energy to 67% of all energy use up from its current rate of 20%, as well as decreasing coal use to between 1% and 7% of all energy use from 40% currently⁶. While this may seem like an unrealistic goal, there are some strategies to reduce carbon emissions that have been proven to work. Specifically, the 2018 winner of the Nobel Prize in Economics, Bill Nordhaus, has done research and created plans to show that carbon taxes along with an international body to keep countries accountable might just help reverse this problem.

On its face, Nordhaus’ economic model is simple – tax carbon emissions per ton released into the atmosphere. The idea is that when you give corporations a financial incentive to change their behavior, they will start to find more cost-effective ways to harness clean energy without the government having to regulate or cap their emissions. Today, one ton of carbon emissions costs about eight dollars to produce at its raw cost⁷. But, if that number were to be raised through taxes, consumers would begin to demand that corporations use cleaner energy because it would lower the cost of goods and services. Nordhaus believes that $30 per ton would be enough, while the UN report on Climate Change advocates for a higher price, closer to $155 per ton^8,9. The number must be high enough to incentivize companies and consumers to change their habits while simultaneously being low enough that businesses do not suffer excessively while they are making the transition to cleaner fuel sources. Nordhaus acknowledges that there is likely to be political pushback in the US against a carbon tax, especially from energy corporations and citizens who do not wish to see an increase in cost of living. But he points out that other large programs that required tax increases such as Social Security and Medicare once evoked fierce opposition, but now see widespread support. The taxes, he argues, can not only reduce carbon emission, but can also be used to help pay for essential services to citizens while also cutting down on carbon emissions¹⁰. Some places that have implemented carbon taxes such as British Columbia have actually returned the revenues back to their citizens in the form of income tax rebates¹¹. He also mentions that most other countries would encounter fewer problems with this tax than the US, stating “in other countries, people are grown-up, and they can live with taxes”¹². The US, however, given its status as an economic power and the largest greenhouse gas emitter per capita, would likely have to be assume a leadership role in implementing and pressuring countries to similarly implement a carbon tax for the model to effectively curb global warming due to the country’s large economy.

In order for a carbon tax to effectively halt carbon emissions and ease global temperatures increases all countries would have to implement one. To enforce worldwide implementation of the tax, Nordhaus proposes an international regulatory body or alliance should be created, something that he calls the “Climate Club”¹³. Those countries that are not in the “club” or that fail to meet the taxation and regulation standards would be subject to tariffs on goods from all the countries in the climate club. He argues that current climate agreements, which are essentially voluntary and lack an enforcement mechanism, do not provide the necessary incentives for nations to reduce their carbon emissions¹⁴. Similar to the carbon tax, Nordhaus’ “climate club” also uses capitalist market forces to motivate countries to tax and regulate their carbon emissions.

The carbon tax itself is not an untested idea. So far, Australia, Portugal, British Columbia, and California, among others, have all implemented a version of the policy with varying degrees of success. Successes and failures of carbon pricing in these isolated incidences can demonstrate how a similar policy could be implemented nation-wide or even globally.

California, for example, uses what is called a cap and trade system, which sets a “cap” on the total amount of carbon emissions per ton that can be produced in a year in certain sectors of the economy or for the geographic region as a whole¹⁵. Businesses then purchase allowances or credits equal to the number of tons of carbon they intend to emit and can buy and trade for these credits up to the limit if they pollute more or less. Although California’s current price per ton is around $15, lower than both Nordhaus and the UN recommend, the plan has been lowering carbon production in the sectors it covers, which is mainly concerned with the creation of power¹⁶. The state is hoping to both raise the price of carbon and expand the tax to cover carbon emissions from cars – the largest emission source in the state. Currently, revenue generated from the cap and trade program is being spent on increasing the use of electric cars, clearing brush out of forests at risk of catching fire, grants for “Climate Smart Agriculture”, and replacing high-pollution motors with cleaner ones¹⁷. While the tax has been fairly popular in California, there are concerns about similar ones being implemented nationwide because California tends to lean more liberal than the rest of the US.

In addition to California, British Columbia has also implemented a successful carbon tax program, in terms of both reduction of carbon emissions and popular support from citizens and businesses. British Columbia has a “flat tax” system that does not put a cap on yearly carbon emissions but instead taxes polluters after the fact. The tax, which charges around 20 US dollars per ton of carbon pollution, has reduced carbon emissions between 10-15 percent since its inception in 2008¹⁸. Starting this year, the tax will go up 10 Canadian dollars (about 7.5 US dollars) a year every year indefinitely in an attempt to combat falling gas prices¹⁹. While there was initial skepticism and dislike of the tax, in 2016, only 32% of British Columbians opposed it. The province managed to gain this support by ensuring that carbon tax dollars were given back to the people in the form of cuts to corporate and personal income tax rates²⁰. Business owners in the region have expressed support for the tax as a less invasive way for the government to regulate carbon emissions. British Columbia’s economy has also grown faster than its neighbors while this policy has been in place, quashing fears that the tax would harm the economy. Moreover, British Columbia’s carbon tax may be the broadest in the world. Unlike the EU and California, the policy taxes all carbon emissions, not just those from specific sectors of the economy. It is likely that this type of tax – a flat rate on all emissions – rather than a cap and trade system that requires an accurate prediction of future emissions or a flat rate that only focuses on emissions from specific sectors, would be the most successful in lowering carbon emissions and creating a market force for companies to innovate and transition towards clean energy.

It is unlikely that the Trump Administration, being led by a president who pulled the United States out of the Paris Climate Accord in 2017 and has repeatedly denied or downplayed the threat of climate change, will enact any meaningful climate change legislation. The United States however, as one of the leading polluters in the world, needs to lead the way in advocating for the implementation of Nordhaus’ carbon tax and “climate club”. If the US, along with its European allies, managed to establish a “climate club”, their tariffs would have tremendous influence on non-complying countries due to the sheer size of the American and European economies.

Additionally, in terms of policy creation, this issue is both bipartisan and would benefit both sides of the political aisle. Even Republicans could be persuaded to support the tax if it is framed as a way to deregulate businesses by imposing a tax rather than government being more involved in dictating to the private sector how much they can pollute. Moreover, the most effective tax would likely be a blanket tax on all carbon emissions for people and businesses alike rather than a cap and trade program. As stated in the UN Climate Report, the amount per ton of carbon may need to be quite high to effectively curb carbon emissions, but it does not necessarily have to start that high if it would help the policy generate public support. Lastly, the taxes collected need to be given back to the people directly, whether that be through health care vouchers, a lower income tax, or even education rebates, so that the policy has popular support from the American people. If the US can lead the way on climate policy, it is likely that the rest of world would follow, and that we might have a chance to reverse the effects of global warming.

The UN report released in October details catastrophic results affecting the entire world if we fail to eliminate or drastically reduce our greenhouse gas emissions. This is a global issue, and the problem must be addressed on a global stage. Bill Nordhaus’ carbon tax and a “Climate Club” model would be an effective mechanism to do so. The United States, with its historic global influence and large economy, is the most logical leader for this international push to reduce greenhouse gas emissions. While it is unlikely that the current administration will be willing to enact legislation to save the planet, there is hope that as the effects of climate change become more apparent, Americans, and citizens from around the world, will push for climate policies like these and our leaders will follow.

1. Intergovernmental Panel on Climate Change (IPCC). Special Report: Global Warming of 1.5℃. United Nations, 2018.
2. Gleckman, Howard. “Bill Nordhaus, The Nobel Prize, Climate Change and Carbon Taxes.” Forbes, 10 October 2018. Accessed 14 January 2019.
3. Intergovernmental Panel on Climate Change (IPCC). Special Report: Global Warming of 1.5℃. United Nations, 2018.
4. Plumer, Brad & Popovich, Nadja. “Why Half a Degree of Global Warming Is a Big Deal.” The New York Times, 7 October 2018. Accessed 14 January 2019.
5. Davenport, Coral. “Major Climate Report Describes a Strong Risk of Crisis as Early as 2040”. The New York Times, 7 October 2018. Accessed 14 January 2019.
6. Davenport, Coral. “Major Climate Report Describes a Strong Risk of Crisis as Early as 2040.” The New York Times, 7 October 2018. Accessed 14 January 2019.
7. Plumer, Brad. “New U.N. Climate Report Says Put a High Price on Carbon.” The New York Times, 8 October 2018, Accessed 14 January 2019.
8. Gleckman, Howard. “Bill Nordhaus, The Nobel Prize, Climate Change and Carbon Taxes.” Forbes, 10 October 2018. Accessed 14 January 2019.
9. Intergovernmental Panel on Climate Change (IPCC). Special Report: Global Warming of 1.5℃. United Nations, 2018.
10. Davenport, Coral. “After Nobel in Economics, William Nordhaus Talks About Who’s Getting His Pollution-Tax Ideas Right.” The New York Times, 13 October 2018. Accessed 14 January 2019.
11. Porter, Eduardo. “Does a Carbon Tax Work? Ask British Columbia.” The New York Times, 1 March 2016. Accessed 19 January 2019.
12. Davenport, Coral. “After Nobel in Economics, William Nordhaus Talks About Who’s Getting His Pollution-Tax Ideas Right.” The New York Times, 13 October 2018. Accessed 14 January 2019.
13. Gleckman, Howard. “Bill Nordhaus, The Nobel Prize, Climate Change and Carbon Taxes.” Forbes, 10 October 2018. Accessed 14 January 2019.
14. Gleckman, Howard. “Bill Nordhaus, The Nobel Prize, Climate Change and Carbon Taxes.” Forbes, 10 October 2018. Accessed 14 January 2019.
15. Johnson, Nathanael. “California makes big money from its carbon pricing program. Who gets it?” Grist, 31 January 2018. Accessed 14 January 2019.
16. Ball, Jeffrey. “Why Carbon Pricing Isn’t Working.” Foreign Affairs, July/August 2016. Accessed 13 January 2018.
17. Johnson, Nathanael. “California makes big money from its carbon pricing program. Who gets it?” Grist, 31 January 2018. Accessed 14 January 2019.
18. Porter, Eduardo. “Does a Carbon Tax Work? Ask British Columbia.” The New York Times, 1 March 2016. Accessed 19 January 2019.
19. Porter, Eduardo. “Does a Carbon Tax Work? Ask British Columbia.” The New York Times, 1 March 2016. Accessed 19 January 2019.
20. Porter, Eduardo. “Does a Carbon Tax Work? Ask British Columbia.” The New York Times, 1 March 2016. Accessed 19 January 2019.