Carbon taxes fail---political hurdles and existing regulations and innovations.

Despite its advantages, the U.S. has seen little progress in passing a carbon tax. Some conservatives dislike the imposition of a tax that would likely produce a massive (e.g., trillions of dollars) source of new government revenues that might be used poorly. Conservatives also worry about the harm it would cause to workers in fossil fuel industries and the increased prices faced by consumers. Liberals also object to the higher prices, which could disproportionately harm those with the lowest incomes.

In 2018, a tax designed to fight climate change in France led to weeks of violent “yellow vest” protests against rising fuel prices, among other concerns, causing the French government to back down. A plan for an E.U.-wide carbon tax has never been successful. Recent referenda in Washington State have failed again and again. In fact, no U.S. state has successfully passed a carbon tax (although many U.S. states and the E.U. have passed cap and trade policies).

Because for all of their vaunted benefits, carbon taxes have substantial drawbacks. I suspect that a carbon tax would be less transformative than its advocates promise. Economists Kenneth Gillingham and James Stock find we already have dozens of existing policies that place high implicit prices on carbon reductions: e.g. renewable portfolio standards that regulate electricity (with an implicit carbon price of $0-$190/ton), tax credits for solar power ($140-$2100/ton) or wind ($2-$260/ton), fuel economy standards ($48-$310/ton), corn ethanol standards ($-18 to $310/ton), or subsidies for electric cars ($350-$640/ton). The additional impact of a carbon tax at say the $51/ton social cost of carbon recently adopted by the Biden administration could have a smaller effect on these specific sectors relative to the policies already in place. It is true that a carbon tax would incentivize reductions in other sectors, but there are few major sources of carbon emissions in the U.S. that aren’t already regulated by existing policies.

A carbon tax on its own isn’t even the first best policy option because it doesn’t target other externalities that are potentially more important than the direct damage of climate change. In particular it doesn’t do enough to encourage the benefits that come when new technologies are invented, such as the innovations that have brought the price of solar down by 90% or more in the past 10-20 years. It also does little to address the infrastructure needed for a low carbon economy — infrastructure like a smarter grid, or a network of electric vehicle charging stations. Perhaps we should be focusing on those market failures first. For example, the innovation and network benefits associated with buying an electric car today is far greater than the direct benefit from reduced use of fossil fuels. Buying an electric car today does have a direct effect on reducing emissions, but the indirect effect of making electric cars affordable to all may be far more important.

In many ways, the types of policies that politicians tend to favor — policies that heavily target innovation and then phase out (such as subsidies for solar electricity or electric vehicles) or infrastructure projects like power grid upgrades — are preferable to Pigouvian taxes. Especially since the biggest political hurdle is getting international buy-in — getting countries like India, Nigeria and Saudi Arabia to adopt climate-friendly policies as well. Yes, passing a U.S. carbon tax might encourage other countries to pass similar policies of their own, but a more effective way to get other countries to go green could be to spur innovations like the ones that have made solar one of the cheapest forms of energy in much of the world and electric cars a viable alternative to gasoline-powered ones. While these seemed like pipe dreams not long ago and advocates were derided as techno-optimists, these goals now seem readily within reach (for example, GM just announced it plans to end production of gasoline powered cars by 2035 in favor of electric). Maybe it’s time to redouble our efforts.