What’s a carbon tax? What difference could a global carbon tax make for the economy and the environment?
Beyond general strategies to combat climate change, Bjorn Lomborg also endorses specific policies in his book False Alarm. In particular, he argues that we should implement a global carbon tax.
Read more to discover the benefits of a carbon tax.
The Benefits of a Carbon Tax
A carbon tax offsets the carbon emissions of the goods we buy. For example, we would pay a tax on Amazon packages proportionate to the carbon emitted in production and delivery. According to Lomborg, the benefits of a carbon tax are both economic and environmental.
(Shortform note: Although we haven’t yet implemented a global carbon tax, the European Union (EU) successfully implemented a carbon tax on its constituents. This tax even applies to imported goods; manufacturers that import products to EU countries must pay a fee equal to the carbon tax that domestic producers pay. So, there’s already precedent for a successful international carbon tax.)
Lomborg believes that a carbon tax is necessary to correct market failure. Put simply, market failure occurs whenever we inefficiently distribute goods or services—in other words, whenever the market doesn’t reflect the inconspicuous costs of certain products. For instance, market failure occurs if the cost to buy a pack of cigarettes doesn’t reflect the pollution they create.
Similarly, Lomborg asserts that market failure is occurring because prices don’t reflect the carbon emissions created by many products. For example, when we purchase beef, prices reflect the cost of rearing the cow, packaging the beef, and shipping it to a deli. But they don’t reflect the carbon emissions created via this process. A carbon tax would correct this failure.
(Shortform note: Although a carbon tax can correct market failure, cap-and-trade programs provide an alternative approach, in which governments sell a limited number of carbon emissions to the highest bidders. Because consumers can simply pay the carbon tax indefinitely, whereas cap-and-trade systems allow for a finite number of allowances, proponents of cap-and-trade systems note that they provide more certainty about the amount of carbon emissions. However, because cap-and-trade programs use auctions to distribute allowances, they provide less certainty about the cost of those emissions.)
To determine the ideal carbon tax, Lomborg returns to DICE, which predicted that climate change will cost 3.6% of GDP—$140 trillion—by 2100. He concludes the optimal carbon tax would reduce the temperature from 7.4°F to 6.75°F. Although this tax would cost about $20 trillion to implement, it reduces the cost of climate change from $140 trillion to just over $100 trillion. In other words, it would save us $22 trillion overall.
(Shortform note: In 2020, other researchers argued that DICE, which grounds Lomborg’s predictions, inaccurately accounted for climate damages. After adjusting for these alleged inaccuracies, they found that the Paris Agreement’s original goal—3.6°F—aligned with the economically optimal approach to climate change. So, the ideal carbon tax could be higher than Lomborg suggests.)