Is a Carbon Tax Sufficient at Dealing With the Threat of Climate Change?
Many people have forgotten what life was like before the crisis caused by COVID-19. Back when wearing masks and social distancing were not normalities. Yet, many people have also forgotten the threat of climate change that once dominated the news. In a time where there are many horrid things going on, it becomes easy to underestimate just how bad the issue of climate change is. Many leaders underplay the issue, stating that it is “a hoax”. However, the UN has warned that humanity has 12 years to limit this catastrophe. What this means is that once these 12 years have passed, climate change is inevitable and, in this inevitability, lies destruction capable of eliminating the human race. Now even despite this threat to human existence, not much is being done to fight against it. Governments across the world have introduced a carbon tax — “a fee that governments impose on any company that burns fossil fuels”.¹ However, the carbon tax is not sufficient enough.
The Problem
In order to understand why the proposed solution to this problem is insufficient, one must first understand what the problem is. According to the United Nations (UN), climate change is “a change of climate which is attributed directly or indirectly to human activity that alters the composition of the global atmosphere”. Put simply, climate change is when human activity affects the make-up of the world. The biggest contributor to climate change being global warming; a rise in the world’s temperatures due to an increased amount of carbon dioxide emissions which trap heat, preventing it from leaving the atmosphere. To deal with the challenge of climate change, the best thing to do is to lower carbon emissions. To make this a reality, governments across the world have implemented a carbon tax; a levy imposed by the government on firms to reduce the amount of carbon emissions in the air and by doing so, hoping to reduce the impacts of global warming.
A carbon tax is a Pigouvian tax — returning the costs associated with global warming to its producers. It aims to reflect the true cost of burning carbon by taking into account the negative externalities associated with its usage. It ensures that consumers as well as firms pay for the externalities that they impose on society as a whole.
How It Works
Before determining the value of the tax to be added, the government must first determine the external cost for each tonne of greenhouse gas emissions. However, estimating the environmental costs of carbon emissions differ between economists and scientists and there can be a variance between the two. When a value is agreed upon by both parties, it is added as a tax to each tonne of carbon used.
Benefits of a Carbon Tax
Although a carbon tax is not sufficient enough on its own to deal with the challenge posed by climate change, it does have benefits. The most prominent one being the increase in tax revenue. In 2011, the Congressional Budget Office of the United States of America looked at the possibility of implementing a carbon tax and saw that the return of doing so would be “$120 billion each year”.²
An increased tax revenue is a benefit to the government as it means a greater annual operating budget. It also has the potential to benefit citizens as the increase in budget can be used to subsidize renewable energies and technologies, making it easier and more affordable for consumers to make the switch from fossil fuels to renewable sources of energy.
In the April 25th, 2019 report, Canada’s Parliamentary Budget Officer estimated that the federal government would “generate $2.43 billion through the fuel charge”³ and an additional “$197 million to be generated through output-based pricing”.³
Although the plan with this additional revenue was to redistribute it to citizens, a better use would be to subsidize cleaner sources of energy — making them more cost-competitive and thereby providing incentive for consumers to make the switch.
Problems with a Carbon Tax
Before a carbon tax can be implemented, economists and scientists must first agree on how to quantify the externalities that carbon emissions have. They must take into account immediate externalities (i.e. the cost of using carbon to society currently), as well as the effect of these same externalities on future generations.
However, quantifying the impacts on future generations becomes difficult. Assumptions must be made on important factors such as the projected growth rate of a country’s population and the effect this will have on employment levels. Trying to then determine the effect of said externalities on these numbers becomes a matter of personal opinions. Some may believe that these externalities may not affect future generations greatly and as a result, support a lower carbon tax. The opposite is true too. As demonstrated, it becomes incredibly difficult to determine the right price of a carbon tax and if implemented incorrectly, can lead to market failure.
Another issue with implementing a carbon tax is related to the price elasticity of demand (PED) of goods and services. A carbon tax aims to punish the big polluters for their pollution and as a result, incentivizes them to be more sustainable. However, the price elasticity of demand for fuel to power vehicles is highly inelastic — meaning that a change in price will not cause a proportionate change in demand for the good. This means that implementing a carbon tax which increase prices will not cause demand to decrease significantly and that in order to decrease the demand for these goods, a dramatic price increase would be needed.
According to the United States Energy Information Administration, “it would take a 25–50 percent increase in the price of gasoline to reduce automobile travel by just one percent”.⁴ As stated by Ross McKitrick (Canadian economist and senior fellow of the Fraser Institute), in order to get a 30 percent reduction in emissions from motor vehicles in Canada, a gasoline tax of “$975 per tonne of carbon dioxide”⁵ would need to be implemented. To put into perspective how drastic this is, the “current gasoline tax in British Columbia is $40 per tonne”.⁶
Even if this price increase somehow happened, consumers would bear the burden of the tax — not firms. Knowing that the demand for fossil fuels is inelastic, firms will push the tax onto consumers in the form of higher prices, undermining the purpose of the carbon tax. Consumers suffer the burden of the tax and although some consumers with greater disposable incomes may choose to switch to other forms of energy causing overall emissions to decrease, they will not decrease in proportion to the increase in price. As a result, the decrease will be statistically insignificant.
Moreover, as consumers bear the burden of a carbon tax, firms will see an increase in revenue as the tax will result in higher prices being charged to consumers. Consequently, as a company’s revenues rise, so will profits — leading to higher bonuses and other financial rewards for top executives. As the saying goes, “the rich get richer whilst the poor get poorer”. This is exactly what will happen in this scenario. The income inequality in the country will become worse, resulting in fewer people earning majority of the wealth, causing there to be a higher Gini coefficient.
Furthermore, due to the fact that many low-income households “consume a more energy-intensive basket of goods compared to wealthier households, a carbon tax would be regressive; it would eliminate a greater percentage of their disposable income compared to wealthier households”.⁷ As seen in the UK through the implementation of a VAT, those with lower disposable incomes are affected the most as they have no choice but to pay this tax and by doing so, have a lower disposable income. A lower income to spend means that many families will not be able to purchase goods and services that can be deemed necessities, placing them at a higher risk of poverty.
Subsidizing Cleaner Energy and Technologies
There is no doubt that a carbon tax on its own cannot reduce global emissions. However, it does generate tax revenue. The additional tax revenue can be put directly towards subsidizing cleaner technologies that produce less emissions, thus reducing the negative externalities that occur from the production of fossil fuels.
Still, the viability of such technology depends on three factors:
1. How quickly can the technology be developed?
2. What is the cost of implementing the technology?
3. Do the positives of administering the technology outweigh the negatives?
Nuclear Energy
The main cause of global warming is carbon dioxide emissions trapping heat and by doing so, preventing it from leaving the atmosphere. Nuclear fission is a method of energy production that “splits heavy atoms into smaller atoms, releasing energy which in a power plant, boils the water, producing steam, driving a steam generator which in turn, produces electricity”.⁸ Nuclear fission “produces little to no greenhouse gas emissions”⁹ and is “as safe or safer than any other form of energy available”.¹⁰ As a result, energy generated through the use of nuclear fission may be a better way of dealing with the challenge of climate change. The technology that allows for the process of nuclear fission to occur has already been developed and so it can be implemented into society almost immediately. Though it can be argued that the cost of administering such a policy is high, the government can reduce these costs by using the tax revenue gained from the current carbon tax to subsidize the production of nuclear power plants, reducing implementation costs. In addition, the benefit to the environment is that the energy produced from nuclear fission produces little to no pollution, ultimately decreasing the amount of carbon emissions.
However, nuclear energy does have its downsides. Building nuclear reactors requires importing uranium. However, as the threat of a nuclear war looms, countries may secretly “enrich the uranium to create weapons grade uranium and harvest plutonium from uranium fuels rods for use in nuclear weapons”.¹¹ This is not to say that every country building nuclear reactors will do this, however, historically some have and the risk of other countries doing the same is high. Moreover, there is also the chance of a meltdown. To date, “1.5% of all (nuclear) power plants ever built have melted down to some degree”.¹¹ Though this is a low percentage, meltdowns have been catastrophic as demonstrated through Chernobyl in 1986 and Fukushima in 2011. The effects of a meltdown are felt for many years after the incident, damaging economies in the process. As a result of such disasters, general public opinion is that nuclear energy is not ideal.
Furthermore, there are political difficulties that arise with the implementation of nuclear energy. Politicians that support the idea of switching to nuclear energy may find it difficult to attract voters that do not believe in the idea, making it harder to get elected into office. On the contrary, politicians who initially do not support nuclear energy during their campaign but change their stance once elected, may find it difficult to be re-elected for a second term.
Alternative Meat Production
One of the reasons that carbon emissions are so high is because “about a quarter of the global emissions come from feeding the world’s 7 billion people”.¹² Recently, plant-based company Beyond Meat became the first company to produce the first meat burger sourced entirely from plants. As meat production is one of the causes of global warming, an increase in the productivity and sustainability of this process could lead to the problem of climate change being dealt with. Turning to greener, more sustainable technologies when producing food; particularly meat, leads to less carbon emissions. As demonstrated by Beyond Meat, this technology has already been developed and is now available on the market. Thus, the cost of developing the technology and the time frame in which it can be developed are not issues. This technology paired with a successful advertising campaign can increase the consumption of sustainable meat, helping reduce the carbon emissions associated with meat production.
However, according to industry watchers, “the premium prices of plant-based meat alternatives could be a problem for the industry going forward”.¹³ As stated by Will Sawyer, lead economist of animal protein at CoBank, “When I go to the grocery store and I see the alternative product at $12 or $11 per pound and then I can go into the meat case and find a ton of traditional meat products at under $3 per pound, that’s a big ask for the US consumer to realize that kind of difference”.¹³ This illustrates one of the problems with producing plant-based meat alternatives – the price can be a deterrent for consumers with lower disposable incomes.
One explanation for the premium price is due to the supply chains for ingredients used such as yellow pea protein. Compared to supply chains for traditional animal protein, these are much less established and so higher prices for these ingredients are charged. In this case, government intervention may be key. Using the additional tax revenue generated through the carbon tax to both subsidize plant-based meat alternative production and invest into the research and development of less-established supply chains, the government can reduce unit costs which translates to lower prices for consumers. As a result, these products become more affordable for consumers of all incomes, incentivizing them to decrease their carbon footprint and make the switch to more sustainable food.
The Vegan Market
The emergence of the vegan market signified the introduction of a market with the potential to continue expanding for many years to come. In the United Kingdom, the number of vegans “quadrupled between 2014 and 2019”¹⁴ totalling “600,000 vegans”¹⁴ or “1.16% of the population”¹⁴ and given the current growth rate, aims to account for “a quarter of the British population in 2025”.¹⁴ With the increase in the number of vegans, there is sure to be a growing market for vegan goods as well. The amount of meat substitute sales in the European market grew by “451% in the four years to February 2018”¹⁴ leading to a decrease in fresh meat sales which fell by “£328 million throughout 2016”¹⁴ with “beef sales down £72m, pork losing £62m, sausages sales decreasing by £51m as well as poultry and lamb decreasing by £49m and £21m”¹⁴ respectively. In response to this emerging market, “Ben & Jerry’s, Breyers and Häagen-Dazs all now offer vegan ice cream”.¹⁴ American fast-food giants McDonald’s and Burger King have also introduced vegan options. As demonstrated through the responses of firms to the emergence of the vegan market, the market for vegan products is one that is trending with the potential to grow for years to come.
Nuclear Energy or Plant-Based Meat Alternative Production?
Both nuclear energy and an increase in plant-based meat alternative production used alongside a carbon tax have the potential to reduce global carbon emissions. However as mentioned previously, both have their downsides. In my opinion, the conversion to plant-based meat alternatives is a much more widely supported movement compared to that of the transition to nuclear energy. As a result, governments should capitalize on trends such as the modern-day vegan movement and invest the tax revenue from a carbon tax into subsidies for plant-based meat alternative producers as well as into research and development of unestablished supply chains pertaining to this industry.
These actions will drive down prices of products, increasing competitiveness with their meat-based counterparts. As a result, consumers will be given incentive into switching from meat products to plant-based meat alternatives — decreasing both their own carbon footprint as well as overall carbon emissions. Furthermore, government subsidies and investments will encourage more firms to enter this market, increasing the amount of research and development done which will translate into new products and lower unit costs. This will encourage competition amongst firms, resulting in more choice available for consumers as well.
We have 12 years to fix our actions and fight against climate change. Left unchecked, human activities will continue to impact the environment negatively, leading us closer to a global catastrophe. Governments across the world must put it upon themselves to set an example and lead the fight against climate change. The technologies to solve this problem do currently exist, it is just a matter of implementing them in a way that benefits everyone.
Sources
¹ Amadeo, Kimberly. “How a Carbon Tax Can Solve Climate Change.” The Balance, 1 Aug. 2020, www.thebalance.com/carbon-tax-definition-how-it-works-4158043.
² Ayres, Crystal. “14 Advantages and Disadvantages of Carbon Tax.” Vittana.org, www.vittana.org/14-advantages-and-disadvantages-of-carbon-tax.
³ Fiscal and Distributional Analysis of the Federal Carbon Pricing System. Office Of The Parliamentary Budget Officer, 25 Apr. 2019, www.pbo-dpb.gc.ca/web/default/files/Documents/Reports/2019/Federal Carbon/Federal_carbon_pricing_EN.pdf.
⁴ “U.S. Energy Information Administration — EIA — Independent Statistics and Analysis.” Gasoline Prices Tend to Have Little Effect on Demand for Car Travel — Today in Energy — U.S. Energy Information Administration (EIA), 15 Dec. 2014, www.eia.gov/todayinenergy/detail.php?id=19191.
⁵ Ontario’s ‘Carbon Tax’ Offers No Benefit , Fraser Institute , www.fraserinstitute.org/article/ontarios-carbon-tax-offers-no-benefit.
⁶ Environment, Ministry of. “British Columbia’s Carbon Tax.” Province of British Columbia, Province of British Columbia, 7 July 2020, www2.gov.bc.ca/gov/content/environment/climate-change/planning-and-action/carbon-tax.
⁷ Marron, Donald, et al. “Taxing Carbon: What, Why, and How.” Tax Policy Center, 25 June 2015, www.taxpolicycenter.org/publications/taxing-carbon-what-why-and-how.
⁸ EUROfusion. “Research for Tomorrow’s Energy Supply.” Fusion vs Fission- EUROfusion, www.euro-fusion.org/fusion/fusion-vs-fission/.
⁹ Jiang, Ziying. “Nuclear Power Development for Greenhouse Gas Emission Reduction in China.” Advances in Climate Change Research, Elsevier, 24 Feb. 2015, www.sciencedirect.com/science/article/pii/S1674927811500188.
¹⁰ “Top 10 Myths About Nuclear Energy.” Top 10 Myths About Nuclear Energy , ANS Center for Nuclear Science and Technology Information, nuclearconnect.org/know-nuclear/talking-nuclear/top-10-myths-about-nuclear-energy.
¹¹ Jacobson , Mark Z. “The 7 Reasons Why Nuclear Energy Is Not the Answer to Solve Climate Change.” The Leonardo DiCaprio Foundation, 20 June 2019, www.leonardodicaprio.org/the-7-reasons-why-nuclear-energy-is-not-the-answer-to-solve-climate-change/.
¹² Gray, Alex. “5 Tech Innovations That Could Save Us from Climate Change.” World Economic Forum, 9 Jan. 2017, www.weforum.org/agenda/2017/01/tech-innovations-save-us-from-climate-change/.
¹³ Reinicke, Carmen. “Beyond Meat Costs More than Traditional Meat, but Data Show Consumers Are Willing to Pay the Premium Price — for Now (BYND) | Markets Insider.” Beyond Meat Costs More than Traditional Meat, but Data Show Consumers Are Willing to Pay the Premium Price — for Now (BYND), Business Insider, 11 July 2019, markets.businessinsider.com/news/stocks/beyond-meat-sales-are-high-but-so-is-price-2019–7–1028346898.
¹⁴ “Statistics.” The Vegan Society, www.vegansociety.com/news/media/statistics.
