20 October 2014

Time to Tax Carbon

Time to Tax Carbon (Harvard Magazine, September-October 2014)

Next year, representatives from nations around the world will meet in Paris to discuss a global climate-change agreement that would take effect in 2020. Central to those discussions will be setting a price on carbon and its equivalents—a figure that captures the social costs of releasing greenhouse gases into the atmosphere. The impacts of those emissions range from the health effects of burning fossil fuels, to inundation and adaptation of coastal cities threatened by rising seas, to extinction of plant and animal species as a consequence of rapidly changing environmental conditions. These costs amount to nearly $1.6 trillion annually worldwide, based on Yale scholars’ estimates of the damages at $44 per metric ton of CO2 and 2013 emissions of 36 billion metric tons.

As the no doubt fraught scientific and political discussion in the French capital nears, the work of Morris University Professor Dale Jorgenson, an economist known for his ability to marry theory and practice, is especially important. Jorgenson has studied the factors that drive economic growth, the relationship between energy and the environment, and the effects of tax policy on both. His 2013 book, Double Dividend: Environmental Taxes and Fiscal Reform in the United States, is the first to examine what would happen if revenues from a carbon tax—based on the price of carbon that will be the subject of debate in Paris—were recycled into the nation’s economy. After examining four strategies for deploying the revenue from a carbon tax, Jorgenson and coauthors Richard J. Goettle of Northeastern University, Mun S. Ho, Ph.D. ’89, a visiting fellow at Harvard’s Institute for Quantitative Social Science, and Peter J. Wilcoxen, Ph.D. ’89, of Syracuse University, found that one strategy in particular—reducing taxes on capital—leads to an increase in economic efficiency that improves economic well-being despite greater inequality, as well as a decrease in carbon emissions: the “double dividend” of the book’s title. Jorgenson has also studied economic growth, energy utilization, and environmental quality in China, the world’s largest emitter of carbon. There, and in other developing countries, he projects a triple dividend, because a carbon tax would also lead to major improvements in human health.