Can Taxes and the Free Market Solve Climate Change?

global climate change. Humanity is in a situation where nearly every proposal to fight climate change needs to be taken seriously, and the one we're going to be talking about today is something economists have been touting for a while now. Putting some kind of price on greenhouse gas emissions, either through a tax or some kind of other carbon pricing scheme, could be an elegant and effective way to reduce these

emissions really fast. The thinking here is that if it becomes expensive to burn fossil fuels, individuals will respond accordingly without the need for heavy hand government mandates. It might sound good on paper, but how would it really work in practice. That's what we'll be looking into today with two economists in a bit, we'll imagine what the global situation would look like if different countries have different carbon taxes.

The first we'll start here in the States. Sanj Potneike is an economist director at the brig Institution, nfellow at the Institute for Sustainable Energy Policy at Johns Hopkins University. He spoke with Bloomberg Taxes David Hood about how and even weather a carbon tax could work in the US. So, first of all, we have to break down a little bit of what the current proposals are on the table.

And so first is the infrastructure building was just signed into law by President Biden, and when we look at the climate provisions in there, there is nothing about a carbon tax or any climate related tax in there. They do dedicate almost fifty billion US dollars for climate resilience, which I think is a really big step because we see many more extreme weather events in the United States that have a negative impact communities across the country, that

cause a lot of loss and damage. And then we have the second bill, which is the Reconciliation Bill, which is still under consideration right the latest what I've heard is that that doesn't seem to be enough senators to actually advance a carbon tax, but we will only know

once the package actually passes. It does have a really big dedicated trunk of money to climate which is about five hundred and fifty five billion in the latest proposal that was put on the table, and a lot of that money will go to foster renewable energies, including tax breaks for like a renewable energy electricity producers, for people

to buy electric cars, and things like that. So there we have an important tax angle and there can be a significant impact through these levers, but it's important that those are like I like to see, these are carrots, right, These are positive amounts of money that are being distributed to people, to producers and to consumers in form of tax breaks. These are not a carbon tax that would actually put a price on carbon emissions. I guess taking a step back for our listeners who may not be

familiar with a carbon tax, can you explain how that works? Yes, And that's a really interesting question because we just came off the COP twenty six Climate Conference, and so one important policy tool that countries have to actually achieve the emissions reductions that they promised is to put a price on carbon and so we currently have about sixty five jurisdictions around the world that have some sort of a carbon price, either in place or being implemented or implanning,

and so there is a good dashboard from the word Bank. You can go the carbon pricing dashboard that shows where we have the different programs and so, in effect, there are two ways to put a price on carbon. One way is a carbon tax. That is pretty straightforward. What that means is, let's say you're a factory and you have hundred tons of Cu two emissions per year. With a carbon tax of say thirty dollars per ton, you will have to pay for each ton of Cu two

emissions that you put out in the atmosphere. There is no limit on your emissions. So basically the idea from the regulatory side is because it is more expensive for you to emit now, the firm might have an incentive to try to reduce emissions. The second one, which has been a bit more popular across the world, are carbon markets or cap and trade. It's basically an emissions trading scheme where you have a group of firms or a group of factories and you say, look, you guys have

an emissions limit. As an example, for next year of one hundred tons of CU two. The current level of emissions tres hundred and fifty tons, so we want to achieve reductions of fifty tons. And then the regulator comes in and distributes these permits emissions permits two companies, and companies can then decide, let's say you have one firm that has emissions of sixty and only got forty permits, should I reduce or should I trade on the market.

And the effect is here that you set an emissions limit, so you can control a limit, but then the price is determined by the market for the overview, I guess taking another step back, is taxation an effective lever to curb these emissions and slow down global warming? Climate change? That's a really important question, and the answer is a

clear yes. So as the vast majority of economists have argued for a long time, actually, the most efficient, the most cost effective, and the quickest way to reduce emissions is to put ap price on carbon and that can be either in form of a carbon tax, or it can be in form of, as I've described before, a

carbon market through emissions trading. Why is that the case, because if you think about it, currently in the United States, at least unless we look in California, we are not paying for the negative effects of the carbon we put in the atmosphere, right, And so this is a clear problem of what economy is called negative externality. And in order for someone that produces carbon emissions to internalize those costs,

we need to put a price on that. And so that really reflects the true costs of your operations, either if you drive a car or if you produce something. And so that price in form of attacks or a common price on the market is actually the way that most economists prefer. So if Congress, if Congress is going to fall short of some of these goals, obviously the administration has its goals and members of Congress have their goals.

Is there anything that the I R. S can do without Congress's, you know, explicit authority in on these issues.

I think when we look at actually what has been happening over the last twenty years in the US, we have seen that most of the times the major climate actions have come through the agencies, right, because it was so difficult to pass anything through Congress on climate, most of the actions happened either through the EPA or now as we're getting into new terror and the Biden administration has done some really good things in that area through

financial markets and banks, where for instance, their new report by the Financial Stability Overside Committee now came out and kind of like put climate risk at the center, which I think is really critical and that's a very important first step. And we all expect also some regulations to come through the SEC on climate disclosure and climate risk disclosure.

And I think the Biden administration is doing a lot of things in that area because it's a bit more under their control, and especially their whole of government approach I think is really critical. I mean just thinking about their irs, right, like thinking about what climate change will mean for government revenues. Right, it will have a severe impact because companies will be affected by climate change, so their revenues might drop if they are a subject to

certain extreme weather events. Right. We have the same for individuals that might be affected by that, that might lose their homes, all of their wealth. And so I think there are significant implications going forward for tax space and for the revenue we can raise and for the expenditures we have to lay out of our budget to adapt the climate change what's sort of next. What are the things that you're most watching for, both on the international

arena and in the domestic space. So I think on the regulatory side, I'm definitely keeping very close eye on any carbon pricing regulations that are coming out, because frankly, if we look at it, the US is behind most of the rest of the world. Other kindries are moving rapidly to implement the carbon price and that means they will also have a leg up when they're trying to develop new technologies, new industries, and it's not good for

the US to be a laggard in that space. And on the other hand, the other big trend that I'm looking at is really the market forces. We have seen an increased pushed by investors to look at climate change as a risk issue and to force companies to start addressing it and analyzing it, and so we see a

lot of literary action that reinforces those trends. But I believe as more investors are realizing that climate change is a risk issue, it's an economic issue that can actually move the needle quite significantly, and so that's one of the trends that I'm also looking at very carefully. That was the Brook Institution. Sanjay Patnaike speaking with David Hood. Now let's move on to the global perspective. Frank Iceh is an economist with the London based consulting firm CRU.

He's previously worked in the finance ministries of both Germany and the UK, and also spend time at the IMF. I spoke with Blimberg Taxes Michael Rappaport about how a carbon tax might play out across international borders and about the difference between a carbon tax and carbon pricing. When you have a carbon text, you post a price and let the market find supply and mind, or you can

do it the other way around. It's called a cabin trade system where you let a certain amount of supply of carbon emissions allowances into a system and then the market finds its own price. So it's it's two ways of achieving an increase in prices and they both work and they're equally popular around the world. To talk a little bit about what was a camp in that respect at the COP twenty six conference. So we just concluded what they agree on rules for a global trading work

to train emissions reduction credits. So so this was you're absolutely right. In twenty fifteen at the Paris cop A country said, okay, we are now going to move to this next stage. It's the Paris Agreement and having a framework on how countries can trade carbon emissions across borders was one of the major aspects which was discussed and negotiated back then, and they then over the last few years five six years, didn't manage to negotiate exactly how to do that. But at this cop at COP twenty

six No. One class, they said, okay, we now have an idea how we want to actually do that. One problem that hasn't been addressed yet or it's not a problem, but it is. I think part of the solution is hold to actually implement that and how to ensure that it is actually correctly enforced. So countries have agreed on the framework and hold to actually what to do the rules of the game, but they don't need a global agency to actually say you're all playing to the right rules.

You mentioned before that carbon taxes and emission creating or kind of equally in use. There's a consequence disagreement kind of tilt things more toward toward the trading model than the tax model. No, I don't think that's that's the case. They are quite independent. I mean, one of them is about in a way, driving the carbon tax and the cap and trade system. They're about driving up the price.

The other one is about let's allocate in the most efficient way the carbon allowances across countries, So that's not about driving prices. And they're the two. I mean they both of them are very very useful and crucial to achieving climate change targets around the world, but they are

quite independent of each other. So I don't think that carbon taxation or cabin trade is affected by this agreement on or what role do you see these carbon taxes specifically playing going forward in this So the cabin trade system, I mean, the EU is the biggest they established already in the mid nineties, the biggest emission trading scheme, and

that has become ever bigger. They are they just moved at the beginning of this year and to what is called the Phase four, so they're releasing less and less of the allowances into the market. The price goes up, and the price has gone up tremendously over the last half a year. We are now one ton of carbon gas emissions allowance is now I think trading at sixty sixty five euros and that's I think seventy eighty dollars.

Maybe the global price I think it's around three dollars, So you can see the EU is so much more expensive for emissions. China created set up now in the summer late summer, its own trading scheme. They had something on the regional level, they were dry running it for a long long time, and now they started on a national level as scheme. And China as the biggest carbon emitter in the world, obviously, once they set up as such a scheme that could be a tremendous policied to

to make a difference. They set their prices at the moment very low, but they now got the infrastructure to to change it if they want to. So this is now from now audits policy and they say, okay, we want to we want to start withdrawing free allowances. We want to drive up the price. And I mean that's

that's two big regions. California has it. They are not as a country, they are a state in the United States, but they have one of the largest global cap and trade systems, and they are they are popular, but I mean, as I said earlier on their taxation versus cap and trade, I think it's equally balanced. Is what is implemented in

countries and regions. And then relating to all this is you know, the EU, if you wants ago adapted a proposal for a carbon border adjustment mechanism to to place taxes on an uncertain imports in order to try to equalize things with countries where the regime might not be a strict and the US has had discussions about this idea. Also, what do you think cbams do they have a role

to play in all of us? Absolutely? If you if you let's say, the whole word does nothing and you're the only country or region that introduce US and text. We've just seen that with the OECD organized Global Solution to and Minium Corporation text. If you increase the text, you are worried as a country, as a government that you lose international competitiveness. Businesses will move away, they go

to the cheaper location. And in order to in a way stop that, you need to bring the prices up again so that important domestic producers and import us and face similar prices. That is what this border adjustment mechanism is all about. As an economist, I would say this is at most second best solution. It really is very good because it's very very complex and potentially impossible to

implemented in practical terms. When you import something, let's say a European country import something from the US, the US product will not be entirely made in the US. We have global supply chains, so something will come from China, something will else come from South Africa. All of these countries have different carbon regimes. It's nearly impossible to get

that right. And that's why countries have already moved on, or international organizations have moved on and said, okay, that this order adjustment mechanism is really is dealing with an issue which is a really big issue, but it's not a good way of dealing with it. There should really be a minimum global carbon price and then the countries should sign up to that. That could be different across

advanced countries and emerging countries. Emerging countries probably need lower energy prices carbon prices because they're still developing, so but but countries should agree. Big countries, the big emitters, the ones which have which are responsible for most international trade, they should agree to set some minimum standard which would make that adjustment mechanism at the border redundant. That was Frank Issh, an economist with CRU speaking with Michael Rappaport.

Before that, you heard Sanjia at Potnit with Brookings speaking with David Poot And that's it for today's episode of Parts pervillion. If you want more environmental news, check us out on Twitter. We used the handle at environment just that at Environment. Today's episode of Parts per Billion was produced by myself, David Schultz, with special help from Patrick game roseo. Pars per billion was created by Jessica Coombs and Rachel Dagle and is edited by Rebecca Baker and

Chuck McCutcheon, and our executive producer is Josh Block. Thank you everyone so much for listening. The number of words in the tax code is estimated to be one million, about the same length as the entire Harry Potter series. Add in i RS, REGs, rev rulings and case law and it can be a lot. We all need a little help to sort it out. Each week on the Taxgral podcast, I talk to the best in the business. And these aren't crazy technical dives. They're interesting and easy

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