China Plans Carbon Tax: Is it time for the U.S. to catch up on climate change?

The United States has historically lagged behind much of the world on climate change policy, exemplified by our refusal to sign and ratify the Kyoto Protocol. Even now, policy makes, lobbying groups, and people argue over climate change: Is it real? How bad is it? What can or should we do? Largely, and unfortunately, these arguments tend to divide along partisan lines. The end result is a stagnant political atmosphere that has yielded no results.

Aside from arguments about the veracity of climate change (it’s real, by the way), there is a good deal of discussion about the most effective means of reducing greenhouse gas emissions: cap-and-trade, government set limits on CO2 production, or carbon taxes. Among economists, carbon taxes are widely favored. They do a number of things that other solutions would not: they provide incentive for companies to reduce CO2 emissions by investing in alternative energies or more efficient scrubbers, they raise revenue (a particularly interesting opportunity in the current funding situation), and most importantly, they allow a free market solution to CO2 emissions without government mandated limits or dicey cap-and-trade systems. It’s generally considered that a carbon tax of about $40/tonne CO2 is the right amount to provide sufficient incentive for CO2 reductions and to stabilize atmospheric CO2 concentrations.

A recent MIT report found that, if all regions of the world implemented a $10/tonne CO2 tax that increased by 5% per year, temperatures would rise by only 3 degrees C by 2100. A tax starting at $30/tonne would be even more effective. Compared to the ‘status quo’ option of a 6 degree C increase by 2100, these taxes are great solutions.

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Data from Paltsev et al. (2012)

China has been standing with the United States as particularly reticent to address climate change. Despite ratification of the Kyoto Protocol in 2002, China has done nothing to curb emissions and has been burning exponentially more coal every year. In fact, in 2006 China has surpassed the U.S. as the world’s largest emitter of CO2.

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Carbon dioxide emissions of the 5 countries that produce the most CO2.

Therefore, the top two countries that account for about 40% of the world’s CO2 emissions have steadfastly refused to address climate change.

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It’s so bad you can see it from space.

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A beautiful day in Beijing.

Cut to the present. Rampant health problems in China’s largest city due to declining air quality have forced officials to reconsider their stance on climate change. China is planning a carbon tax of roughly $8/tonne of CO2. Although not ideal, this is pretty close to the estimated necessary tax by MIT of $10/tonne.

Is it time for the U.S. to catch up?

This means that the United States now stands alone as one of the world’s largest CO2 emitters in the developed world that has not introduced or ratified any legislation to deal with climate change.

There is hope. A new bill, introduced by Bernie Sanders (I – VT) and Barbara Boxer (D – CA), proposes just the kind of carbon tax economists would favor. For the first calendar year, the carbon tax would be $20/tonne. Over the next decade, the tax would rise by 5.6% each year to a maximum of roughly $40/tonne. There are numerous exemptions and rebates built into the bill such that it targets only the largest producers of CO2. The bill would raise $1.2 trillion over 10 years (this should enter the national deficit conversation). Importantly, 3/5 of the revenue would be refunded to U.S. citizens, like a tax refund. Alaska does something similar for its citizens, who all receive a share of the revenue the state receives from its natural resources.

Naturally, this bill will see significant opposition in Congress and across the country. Personally, I think we should give it a shot. Carbon taxes provide revenue, allow the free market to operate without government mandated limits, and would reduce CO2 emissions effectively. It’s certainly better than the alternative.