Boinske 1

Charles Boinske

Ben Henderson

Cas 138

4/14/17

A Carbon Tax For A Cleaner America

The issue of climate change in the United States has been debated for years and years

with a distinct lack of any political compromise. While man made climate change has started to

become widely accepted by both sides of the political spectrum, the perceived consequences and

proposed solutions differ. The current President Donald Trump identifies most modern climate

change solutions as detriments to the U.S. economy with a White House official stating, the

President has been very clear that he is not going to pursue climate change policies that put the

US economy at risk."1 After taking the current political situation into account, a revenue neutral

tax on carbon emissions would be an effective way to help reduce greenhouse gas emissions

while protecting Americas industrial economy.

THE PROBLEM

Before developing this policy proposal it is important to consider what problems this tax

on carbon would be potentially solving. Carbon Dioxide is the most common greenhouse gas

emission from humans. The usual cause of these emissions in American industry involves the

burning of fossil fuels like coal, oil, or natural gas.2 When visible light enters the Earth from the

sun it is absorbed by the land and oceans. This light then transforms into heat as infrared

1
Dan Merica, "Trump dramatically changes US approach to climate change," CNN, March 29, 2017, accessed April
13, 2017, http://www.cnn.com/2017/03/27/politics/trump-climate-change-executive-order/.
2
"Overview of Greenhouse Gases," EPA, February 14, 2017, , accessed April 12, 2017,
https://www.epa.gov/ghgemissions/overview-greenhouse-gases.
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radiation and travels back up into the atmosphere. Greenhouse gases act as a reflective molecule

that gather the infrared radiation and reflect the heat back to the surface.3 This process, while

critical for Earths heating, becomes detrimental if too much greenhouse gas(like CO2) is

released into the atmosphere at once through the combustion of fossil fuels.4 A tax on carbon

could potentially minimize the carbon dioxide released into the atmosphere, and therefore reduce

the intensity of the greenhouse effect.

The environmental impacts of climate change have been discussed and advertised for

decades. Instead of repeating what most news sources and research groups have been reporting

for years, it is just as important to analyze the potential economic consequences of climate

change. One of the most prominent effect of manmade climate change is the conflicts it creates

for Americas agricultural sector. While the US produces roughly 25% of all grains in the entire

world, Americas crop yield could drastically decrease following a change in climate.5 Droughts,

floods, hurricanes, and extreme weather patterns are all expected to increase in frequency with

climate change. These extreme temperatures and weather patterns can result in crop yields

seriously dropping. Only a few years ago in 2012, Michigan lost 220 million dollars worth of

cherries due to higher nighttime temperatures.6 Therefore, promoting policies like a carbon tax

that hopefully can work to reduce the effects of climate change can ultimately protect the

American economy from future long run supply shocks.

3
Marianne Weingroff, "The Greenhouse Effect," Greenhouse Effect: Background Material, , accessed April 13,
2017, https://www.ucar.edu/learn/1_3_1.htm.
4
Weingroff, "The Greenhouse Effect."
5
"Climate Impacts on Agriculture and Food Supply," EPA, October 06, 2016, , accessed April 13, 2017,
https://www.epa.gov/climate-impacts/climate-impacts-agriculture-and-food-supply.
6
"Climate Impacts on Agriculture and Food Supply."
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The economic effects of climate change are not limited to the agricultural sector. A large

percentage of Americas power plants are located on coasts like the Gulf coast. A sudden rise in

sea level or extreme weather events due to climate change can damage these plants and reduce

Americas energy supply.7 For example, Hurricanes Katrina and Rita damaged more than 100

platforms and damaged 558 pipelines in 2005.8 This does not even account for how many

power outages these extreme weather events caused which also reduced energy supply.9 All of

this evidence supports the claim that climate change does have serious economic implications in

a range of sectors from agriculture to energy. Some may see emission reduction policies as a

future investment for later economic turmoil.

THE THEORY BEHIND A CARBON TAX

What economic theory is a carbon tax based upon? A carbon tax creates a price for every

ton of greenhouse gas(GHG) that a company produces which ultimately establishes a price signal

to consumers. When companies stop burning so much GHG or decide to pursue more energy

efficient technologies, then they can offset the costs of the tax.10 Jason Welker, a published

International Baccalaureate textbook author and Economics Professor created these simple

graphs to demonstrate the economic theory behind a carbon tax.11

7
Ibid.
8
Ibid.
9
Ibid.
10
"What is a Carbon Tax?," Ministry of Finance, , accessed April 12, 2017,
http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm.
11
Jason Welker, "Economic arguments for and against a carbon tax," Economics in Plain English, November 9,
2012, , accessed April 13, 2017,
http://welkerswikinomics.com/blog/2012/11/09/economic-arguments-for-and-against-a-carbon-tax/.
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Looking at the graph on the left hand side one can note that the supply of fossil fuel

energy with a tax will decrease as a result of a tax on CO2. This then causes the quantity of fossil

fuel energy to decrease from Qe to Q1 on the X axis because the companies would be forced to

raise their prices. While this change may not seem so meaningful, what is more important is the

impact this development could have on the right graph. The higher prices for fossil fuels will

cause consumers to potentially demand more renewable energies, which would expand the

renewable energy market in the U.S.12 To summarize, the tax increases demand for renewable

energy systems and begins to transform Americas energy industry towards cleaner solutions.

While this occurs, firms dependent on CO2 emissions can still remain in business by either

reducing their emissions or developing more efficient technologies.

REAL WORLD SUCCESS

While the theory does seem logical, the real world examples of a successful carbon taxes

add to the plausibility of this policy. For example, the Canadian province of British Columbia

instituted a tax on carbon in 2008. They started at 10 Canadian dollars(C$) per metric ton of

carbon emitted and increased by C$5 each year until 2012 when the tax was C$30 per metric ton.

12
Welker, "Economic arguments for and against a carbon tax.
 Boinske 5

13
British Columbia was worried that their tax could hurt their industry so they decided to make it

a revenue neutral policy. A revenue neutral policy means that the Canadian government would

not collect any revenue from the tax. Instead, the tax revenue would go directly towards tax cuts

to Canadian businesses and consumers.14 This was an excellent way to advocate for climate

policy while also promising economic benefits to British Columbian businesses.

What were the results of British Columbias tax? By 2012 the province was generating

roughly C$1 billion a year in revenue that all went to cutting taxes. The small price build up

allowed the tax to be integrated easily and generate larger and larger amounts of revenue over

time. These tax cuts even increased the demand to start businesses in the province.15 Much like

the theory graphs showed, the companies with the cleanest energy experienced a net profit from

the tax and were able to benefit from the policy.16 This encourages a switch to cleaner

technology in British Columbia and benefits the environment. In British Columbia specifically

there was a 12.9 percent decrease in CO2 per capita emissions when comparing data from

2008-2013 to data from 2000-2007. On the other hand, the rest of Canada only reduced its

carbon emissions by 3.7 percent in that same span of time.17 The larger decrease of CO2 in

British Columbia provides proof of the carbon tax policy helping to reduce carbon emissions at a

faster rate.

13
Clare Demerse, How To Adapt a Winning Carbon Price (Clean Energy Canada, 2015), PDF, 6.
14
Demerse, How To Adapt a Winning Carbon Price, 7.
15
Ibid., 8.
16
Ibid., 26.
17
Charles Komanoff et al., "British Columbias Carbon Tax: By the Numbers," Carbon Tax Center, December 17,
2015, , accessed April 13, 2017,
https://www.carbontax.org/blog/2015/12/17/british-columbias-carbon-tax-by-the-numbers/.
 Boinske 6

The gradual increase in the carbon price allowed British Columbia to move from a

non-threatening carbon tax to a more stringent one with less pushback than it would

have faced had it proposed a sudden, and unexpected, jump in tax rates.18

While the economic benefits were not necessarily revolutionary, they were ultimately a net

positive which counters a large amount of the economic criticism of the policy.

If another North American country can have this much economic and environmental

success, then America should be able to institute a similar plan. The tax was gradual enough to

fend off political criticism but ended up generating economic growth and influenced cleaner

technologies in the province.

POLICY RECOMMENDATION FOR THE US

After considering British Columbias success, it seems the most logical path for the U.S.

when developing a carbon tax would be to use a similar process. The Canadian tax started at

C$10 per metric ton of carbon emitted. The current exchange rate from Canadian dollars to U.S.

dollar is 0.75 USD for every 1 Canadian dollar.19 Using simple math one can adjust the U.S.

carbon tax to reach a similar value that was used in British Columbia. The starting rate for the

carbon tax in the U.S. should be $7.50 per metric ton. This is a low enough tax rate that it could

avoid some criticism from conservative politicians. Just like British Columbia, America will then

gradually raise the rate by $3.75 every year until 2021. The final tax rate should be targeted at

roughly $22.50 per metric ton by 2021.

The price is not the only important aspect of this policy though. This policy should also

be revenue neutral because that fits well with President Trumps opinions about giving tax cuts

18
Demerse, How To Adapt a Winning Carbon Price, 15.
19
"Daily Currency Converter," Bank of Canada, , accessed April 13, 2017,
http://www.bankofcanada.ca/rates/exchange/legacy-noon-and-closing-rates/daily-converter/.
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to industry. Every dollar in revenue that the American government receives will be used to lower

taxes on businesses. This part of the policy should be heavily advertised to the American people,

so that they know exactly what the money is being used for, and why the tax will not seriously

harm the fossil fuel industry in the short run. These tax cuts should spark industry growth and

foreign investment in American companies just like it did in British Columbia, which are clear

positives for a Republican controlled congress.

The potential results of this policy are significant when considering Americas current

emission statistics. In the industrial sector alone government emissions data from as recent as

2014 stated that Americas industry roughly 967.8 million tons of CO2.20 Even at the starting

rate of $7.50 the U.S. government could potentially generate billions of dollars every single year

in revenue that could then be used to give tax cuts to businesses. These economic benefits should

not be overlooked when considering this policy.

POTENTIAL CRITICISM AND COUNTER-ARGUMENTS

With any economic policy there will likely be political backlash and criticism. The

arguments against this particular carbon tax usually focus on the ineffectiveness of government

intervention. Whenever businesses are regulated some may argue that this could make American

industry less competitive and worsens the economy. Economically conservative politicians might

argue that the solar and wind industry could potentially steal jobs from the coal and fossil fuel

industry, because these renewable energy companies would not be burdened by the tax. Just like

the economic theory graphs showed earlier, a carbon tax could increase demand for renewable

energy and decrease the demand for fossil fuel energy.21

20
"U.S. Energy Information Administration - EIA - Independent Statistics and Analysis," U.S. Energy Information
Administration (EIA), , accessed April 13, 2017, https://www.eia.gov/environment/emissions/state/.
21
Jason Welker, "Economic arguments for and against a carbon tax."
 Boinske 8

Proponents of the tax would claim that these potential drawbacks are not nearly as

significant as the potential benefits of the policy. While regulation could impact the fossil fuel

energy industry, the cuts to corporate income tax are supposed to minimize this flaw. In addition,

as the problem of climate change grows more and more severe, some argue that America and

other developed countries will be forced to adapt and evolve their energy sectors. America has in

fact adapted their industry before as technology progressed. Examples of this include the

industrial revolution and the technology boom of the 1990s. No solution can be perfect but this

carbon tax is specifically designed to push America in the right direction in regards to climate

change while also protecting Americas industry through tax cuts.

OVERALL

After analyzing these potential economic and environmental consequences of a revenue

neutral carbon tax, three main arguments become clear. A carbon tax can reduce CO2 emissions

and progress climate policy forward in the United States. The tax is plausible when consulting

the economic theory behind the tax and British Columbias successful carbon tax can be used to

confirm the theory. Third, the policy is gradual enough to avoid some political criticism and

could encourage businesses to use cleaner technology, while protecting American industries with

tax cuts. For all of these reasons, a revenue neutral carbon tax creates a unique opportunity for

America to take preventative measures against climate change, and not put the U.S. economy at

risk.

Word Count: 1968

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Bibliography

"Climate Impacts on Agriculture and Food Supply." EPA. October 06, 2016. Accessed April 13,

2017.https://www.epa.gov/climate-impacts/climate-impacts-agriculture-and-food-supply

"Daily Currency Converter." Bank of Canada. Accessed April 13, 2017.

http://www.bankofcanada.ca/rates/exchange/legacy-noon-and-closing-rates/daily-conve

rter/.

Demerse, Clare. How To Adapt a Winning Carbon Price. Clean Energy Canada, 2015. PDF.

Komanoff, Charles, Stephen Rees Says, BART_R Says, and Neil Heesterman Says. "British

Columbias Carbon Tax: By the Numbers." Carbon Tax Center. December 17, 2015.

Accessed April 13, 2017.

https://www.carbontax.org/blog/2015/12/17/british-columbias-carbon-tax-by-the-number

s/.

Merica, Dan. "Trump dramatically changes US approach to climate change." CNN. March 29,

2017. Accessed April 13, 2017.

http://www.cnn.com/2017/03/27/politics/trump-climate-change-executive-order/.

"Overview of Greenhouse Gases." EPA. February 14, 2017. Accessed April 12, 2017.

https://www.epa.gov/ghgemissions/overview-greenhouse-gases.

"U.S. Energy Information Administration - EIA - Independent Statistics and Analysis."

Environment - U.S. Energy Information Administration (EIA) - U.S. Energy Information

Administration (EIA). Accessed April 13, 2017.

https://www.eia.gov/environment/emissions/state/.
 Boinske 10

Weingroff, Marianne. "The Greenhouse Effect." Greenhouse Effect: Background Material.

Accessed April 13, 2017. https://www.ucar.edu/learn/1_3_1.htm.

Welker, Jason. "Economic arguments for and against a carbon tax." Economics in Plain English.

November 9, 2012. Accessed April 13, 2017.

http://welkerswikinomics.com/blog/2012/11/09/economic-arguments-for-and-against-a-c

arbon-tax/.

"What is a Carbon Tax?" Ministry of Finance. Accessed April 12, 2017.

http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm.