#Question: Climate Change — What is the best economic solution to the problem of climate change?
Hamilton Place Strategies

IT’S PROFITABLE TO POLLUTE — Carbon Taxes Are The Best Economic Solution To Climate Change

Yahoo Finance

The S&P 500 (Red) outperforms the S&P Sustainability Index (Blue).

I’m not saying the only reason that some companies are more profitable is because they pollute — there could be a host of other factors causing the broader S&P 500 index to outperform the sustainability index. But it’s pretty interesting, isn’t it?

It makes sense because environmental costs are implicit.

They are not expensed on an income statement. Mitigating them are expensed. There is a cost with being environmentally friendly. Hidden, non-expensed costs are an externality.

In economics, externalities are costs borne to people that did not choose to incur them. These costs are not borne to the companies that pollute, but to society at large. That’s why a tax is the best solution.

A majority of economists agree that carbon taxes are the best solution.

Carbon taxes are target and the most efficient and less expensive way to reduce carbon emissions. They can also increase innovation. Companies are likely to invest in new technologies to avoid the costs, which can create new products and lower the overall cost of doing environmentally friendly business.

Chicago Booth’s IGM Forum

Markets are responding.

They are ahead of politicians when it comes to providing solutions to the pollution problem.

Encouraging the market to innovate is also a solution. Encouraging innovation through grants and offering tax incentives to develop new products can help. However, taxing the externality directly will always be the most efficient, best solution.

My colleague Russ Grote has a great point in his post:

In the United States, CO2 emissions are down below levels seen in the late 1990s, despite an economy that’s roughly doubled in nominal terms and country with 50 million more people.

Read more responses from our colleagues on HPS’s Medium publication.

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