The Problem of Using Carbon Taxes to Combat Global Climate Change

June 15, 2006

An editorial appearing in the most recent Forbes magazine advocates the implementation of taxes on carbon emissions in an effort to combat global warming while at the same time trying to keep our lives simple. From Forbes (free registration required):

An inconvenient truth, not adequately addressed by Al Gore in his movie, is that environmentalism makes life complicated. If SUVs are bad and wind power is good, then we must levy a tax on gas-guzzlers and hand out tax credits for windmills. Those in the business of selling windmills are very happy with this arrangement (see story by Naazneen Karmali), but in no time our fears of global warming have caused our economy to become littered with subsidies, credits, deductions, tax surcharges, earmarks and research boondoggles. Here's a way to make life simpler: Chuck out all energy legislation, replacing it with a one-sentence statute that levies a tax on carbon emissions. Let's do it big–30 cents a pound. So that people can adjust, start it at 1 cent and increment the tax by a penny a year from now to 2036. (Full Story)

If the goal of a carbon tax is to combat global warming, there exists one major problem: enforcement. In the global marketplace, a healthy climate would be a public good where all countries benefit. Therefore, even if the entire world may benefit on net from a global carbon tax, without a proper enforcement mechanism, each autonomous country may have an individual incentive to not sign onto the tax given that everyone else has signed on. This tragedy of the commons is solved only by an allocation of property rights or via government enforcement. But who owns the rights to the global climate? And would some governments have authority over other governments, and if so, how? Would this enforcement be via military force, trade sanctions, or merely diplomacy?

All of these questions need to be addressed before any serious attempt at combating global warming through tax policy, or even through a cap and trade system, is made at the individual country level.


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