Conservatives rediscover climate remedy
The "law of demand," the most accepted principle of economics, states that if the price of something increases, the quantity demanded will decrease. For over a century, economists have proposed using price to require users and abusers of the environment to pay for what they use; their recommended approach is to impose an “effluent tax” on polluters. Unfortunately, at present, this type of solution lacks the support of many in Congress. A number of Progressive lawmakers resist the carbon tax believing that it “puts the atmosphere up for sale,” while several of their conservative counterparts refuse to admit that climate change is real or that any action now is called for.
The Climate Leadership Council, a group of prominent economists and politicians, recently targeted this bipartisan logjam. Led by conservative political giants, former Secretaries of State George Schulz and James A. Baker, a series of editorials in support of the carbon tax have appeared in our nation’s leading papers. The Council proposes using pro-market principles to remedy the impending catastrophe that scientific studies are predicting. They note that for profit-seeking firms, it is often cheaper to emit greenhouse gases than to prevent their escape into the atmosphere. Applying the law of demand, they propose to reduce emissions with a tax on polluters of $40 per ton, adjusted as experience dictates.
Such a hefty tax would induce investment in abatement methods that are estimated to keep our emissions far below the levels agreed to in the Paris accords. However, the tax would withdraw substantial revenue from the economy; to avoid recession that money must get re-inserted back into the nation’s spending stream. So, a sweetener is added to the tax proposal: redistribution of the tax revenue in the form of an equal per-person “citizen dividend.” They estimate that a $40 per ton tax would return a dividend of roughly $2,000 per family of four.
Other applications: Water and congestion
The principle applied in their proposal that “people should pay for what they use in an amount that sustains the resource for the use of others” is not new; it is simply bedrock conservative policy applied to a public good (in this case, the atmosphere). Markets in private goods do this automatically; for public goods, regulation must intervene. There are many other examples of how an incentive provided by prices can be utilized in managing public goods. Let’s consider two: water usage and highway congestion.
Water usage
Traditionally, we respond to a perceived need for more water by seeking additional sources and arranging delivery to where it is needed. Then, we typically underprice the water, disregarding the impact that our overuse has on the depletion and quality reduction facing future water users. To take those impacts into account, today’s price would have to be increased, which would induce users today to consume less water. Of course, the higher price would generate additional revenue which could be targeted for improvements to the waterworks infrastructure as well as to the same kind of citizen dividend fund contemplated by Schulz and Baker.
Congestion
The capacity of our road network is fixed, but the demand to use that capacity fluctuates throughout the day. During congested periods, each driver adds to the time cost of all other drivers behind them. The user-charge remedy for rush hour congestion is called a congestion tax. Faced with a congestion tax, drivers must determine for themselves whether the cost of driving during peak rush hour is worth the travel time plus the tax. Some will decide to travel before or after the rush hour, shifting some travel to off peak times and thus reducing travel time during rush hour for those willing to pay the tax. Like water infrastructure, the state of disrepair of our roads dictates that the revenue from the congestion tax be used to finance the repair and maintenance of our road network, with any surplus distributed back to the citizens.
The Climate Leadership Council should gain a serious hearing in Congress. They are applying a general economic principle that should be applied whenever the users of public goods can be identified and their use can be measured and taxed per unit. The revenue from the tax should first go to sustain the environmental resource, with any surplus distributed to citizens to gain acceptance of the tax.
William L. Holahan, PhD, is Emeritus Professor and former Chair of the Economics Department at the UW-Milwaukee. Charles O. Kroncke, PhD, served as Dean of Business at Auburn University, UW-Milwaukee, and UT-Dallas. They are co-authors of "Economics for Voters."
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