Where they’ve been tried, the evidence shows, well-designed carbon taxes have succeeded in reducing greenhouse-gas emissions. But that doesn’t necessarily end the debate over their effects – nor should it. The next question is whether that success is bought at the expense of jobs and incomes.
The answer is no. As long as the tax is well-designed, it can cut emissions at little or no economic cost. And that is a conservative assessment: In practice, a carbon tax has been shown to provide an economic boost. The reason is that the revenue raised by a carbon tax can be used to cut other, more damaging, taxes.
In general, taxes make economies less efficient. But some do more harm than others. Taxing “bads,” such as pollution, actually improves the allocation of resources, whereas taxing “goods,” such as labor, reduces the economy’s capacity to produce. In principle, therefore, using the revenue from a carbon tax to cut other taxes can yield a double benefit: reducing pollution and expanding the economy.
There are transition costs that have to be reckoned with. But even making allowances for them, it’s plausible that carbon taxes help the economy, and not just by reducing greenhouse gases.
The evidence shows it’s worked in practice, not just in theory.
A study of countries that tax carbon compared two projections for gross domestic product – actual GDP with the tax in place, and hypothetical GDP with the equivalent revenue raised in other ways. The study found that, typically, GDP was a little higher thanks to the carbon tax.
So much for output; what about jobs? The Netherlands and Britain, which introduced some of Europe’s narrowest and most targeted carbon taxes, saw no net impact on employment. Denmark made greater use of green taxes, and saw employment rise by about 0.5 percent – again, as compared with projections assuming no introduction of a carbon tax. In Germany, employment increased an estimated 0.2 percent. A 2013 review of nine countries by the Institute for European Environmental Policy found none where a carbon tax had led to job losses.
Such estimates come with two warnings – both of which suggest proceeding with caution. First, the economic benefits of a carbon tax can take time to come through. Second, while the economy as a whole may benefit from a carbon tax, that won’t be true of every business or industry.
Energy-intensive sectors will be hit. In some countries, output of metals and minerals fell compared with what would have happened without the tax; in others, production of pharmaceuticals was reduced. In most cases, the drops were less than a tenth of 1 percent – but they were drops nonetheless. And jobs in those industries were affected accordingly.
The debate about a carbon tax shouldn’t ignore the transition costs and the more long-lasting effects on jobs and output. How the tax is phased in and how to help those most affected by it should be part of the discussion, and will be necessary to win public support for the policy. But that’s not an argument against doing it. Carbon taxes can help the economy as well as the environment – as long as the revenue is put to good use. Our next editorial in this series will turn to that crucial question of design.