When a Carbon Tax Proposal Is Like Goldilocks

A carbon tax is one remedy for global warming but it’s not quite that easy.

Sort of like Goldilocks, we have taxes that are too high, some that are too low, and others that are just right. In his new book, False Alarm, Bjorn Lomborg guides readers through a series of alternatives that take us to (what he believes is) the ideal tax.

A Carbon Tax Proposal

Let’s start with no tax. Then, the benefit of carbon emissions goes to the businesses producing pollution and to the consumers who buy their products. Meanwhile, the cost is divided among a population that breathes polluted air. Economists would say that no tax creates market failure because the market has failed to include the social and dollar cost of the harm from the emissions.

Below, you can see that the lower equilibrium price displays market failure. Then, when supply becomes more costly, it decreases and shifts to the left:

The Tax

When government does decide to levy a tax, its size should depend on how it impacts business activity and climate change. The business side is a cost and the climate impact is a benefit. As economists, we don’t want the cost to exceed the benefit. In False Alarm, Dr. Lomborg takes us through the costs and benefits for alternative temperature goals.

He suggests that limiting the temperature rise to 6.3 degrees Fahrenheit by 2100 would be optimal. The tax would initially be $36 per ton of carbon dioxide and subsequently rise to $270 per ton. At the same time, on the climate change side, we have a decrease in damage from $140 trillion to $87 trillion.

In the following figure (that I copied from his book), Dr. Lomborg hypothesizes the impact of a global carbon tax on all goods:

As Dr. Lomborg reminds us, we have a “….climate change impact cost and the climate change policy cost. Making the temperature rise smaller means making the climate change policy cost bigger.”

Our Bottom Line: Pigovian Taxes

First described by British economist Arthur Pigou, a tax levied on a good or service that created pollution has a dual benefit. Pigovian taxes diminish the supply of the commodity that harms us while generating revenue that a community can use productively.

The locations of Pigovian carbon taxes are shown in blue. Other colors represent where countries have implemented or are planning emissions trading systems:

The result? In its May 2020 109 page report, the World Bank gives us some carbon pricing numbers:

My sources and more: I’ve been reading Bjorn Lomborg’s new book, False Alarm. In a NY Times review, Joseph Stiglitz pans the book. But then do go to Marginal Revolution’s Tyler Cowen for a more balanced but brief discussion that made a lot more sense to me. Next, for an example, Sweden does have a carbon tax that econlife looked at. And finally, for the big picture, the World Bank has an annual emissions report from which I got my map. Please note that some of our bottom line was in a previous econlife post.