Carbon Tax, Beloved Policy to Fix Climate Change, Is Dead at 47
It reshaped how the world thought about climate change. But its prized trait—bloodless economic efficiency—won it few friends on the right or left.
The American carbon tax, an alluringly simple policy once hailed by environmentalists, scholars, and politicians as a cure-all for climate change that, for all its elegance in economic models, could not overcome its enduring unpopularity with the American public, died last month at its home in Washington, D.C. It was 47.
The death was confirmed by President Joe Biden’s utter lack of interest in passing it.
The carbon tax aimed to reduce carbon-dioxide pollution—which heats the air, acidifies the ocean, and causes climate change—by applying a commonsense idea: If you don’t want people to do something, charge them money for it. The tax would have levied a fee—ranging from $5 to, in some estimates, more than $150—on every ton of carbon released into the atmosphere. Such a cost would have percolated through the economy, raising gasoline and jet-fuel prices, closing coal-fired power plants, and encouraging consumers and companies to adopt cleaner forms of energy.
It was a straightforward, perhaps even beautiful, idea—a bid to apply the economic precepts of the 19th century to one of the great problems of the 21st. Its poise was matched by its elite support. The carbon tax won acclaim from self-described socialists and red-blooded libertarians, Democratic senators and Republican secretaries of state, Elon Musk and Janet Yellen.
It was a particular favorite of the economics profession. Some 3,589 economists once declared it “the most cost-effective lever to reduce carbon emissions”; in 2018, it helped William Nordhaus, a Yale professor and the author of several books about the policy, win the Nobel Prize in Economics.
Yet for all its credibility on campus, the carbon tax could not triumph in the real world—that is, on Capitol Hill. In 1993, and again in 2009 and 2010, Congress considered bills that would have put a price on carbon pollution nationwide. Both efforts failed in the Senate. And while a handful of liberal states, including California, New York, and New Jersey, have succeeded in pricing some of their carbon pollution, none has passed an out-and-out carbon tax. Even evergreen Washington State could not implement an economy-wide carbon tax by ballot referendum—and it tried twice.
The policy’s health had been declining for years, supporters said, and it never completely recovered from a gunshot wound sustained a decade ago. In a campaign ad in October 2010, Joe Manchin—running a grueling race for one of West Virginia’s Senate seats—fired a rifle at a draft version of the Obama administration’s carbon-price bill.
Although that bill already stood little chance of passage, the attack entered the realm of Washington fable and left the policy permanently weakened.
By this spring, when Democrats began debating their first major climate bill in 11 years, the carbon tax could find no purchase in congressional negotiations. Only a handful of senators—chiefly Sheldon Whitehouse, a Democrat from Rhode Island—regularly talked it up. Most ignored it.
But the carbon tax’s condition significantly worsened last month, when an ExxonMobil lobbyist revealed that his employer, which had claimed to support a carbon tax since 2009, only did so knowing that it could never pass.
“Carbon tax is not going to happen … It is a nonstarter. Nobody is going to propose a tax on all Americans,” the lobbyist, Keith McCoy, said in a secret recording made by the left-wing activist group Greenpeace. “But it gives us a talking point. We can say, ‘Well, what is ExxonMobil for? Well, we’re for a carbon tax.’”
Darren Woods, Exxon’s chief executive, denied the assessment and claimed that the company’s support was genuine. But the words had been said. The carbon tax died several hours later.
The carbon tax ended life as an emblem of climate policy. But it was born and raised to resolve a very different crisis.
In 1973, David G. Wilson, a 45-year-old engineer at MIT, found himself “absolutely consumed” by a problem facing the new and experimental recycling industry. In short: Nobody was recycling, nobody knew how to pay for it, and manufacturers weren’t even using recycled materials, because raw materials could be had for cheaper.
Wilson’s solution was a “virgin-materials tax.” If you “put a fee on the use of virgin materials,” you fixed the price gap and gave companies an incentive to recycle, he later explained to The Boston Globe.
That winter, oil-producing countries slammed an embargo on the United States. The price of gasoline quadrupled, and Americans began trying to conserve energy in earnest for the first time since World War II.
The virgin-materials tax would work for this problem too, Wilson realized. The government could treat carbon-based fuels as a virgin material, tax their use on a per-ton basis, and redistribute the revenue back to Americans.
The carbon tax—what we would now call a “revenue-neutral carbon tax”—was born.
But it did not catch on until a group of atmospheric chemists, some of them working down the street at Harvard, publicized the existence of the greenhouse effect several years later.
In December 1981, at a conference for American economists at the Washington Hilton, William Nordhaus, the Yale professor, asked what economics could do about the problem of carbon dioxide.
Carbon pollution, he argued, was a negative externality, a cost borne by someone who didn’t consent to paying it, like conventional air pollution. But carbon dioxide was a much trickier problem than smog, Nordhaus said, because its costs diffused through space and time. If your factory makes smog, your neighbors suffer from it immediately. But if your factory emits CO₂, then the people who suffer from it most might live in another country—and another century.
Nordhaus entertained two solutions. The first was a standard, which would force everything that emits carbon—such as cars, power plants, and steel mills—to install emissions-reducing technology. The second was a tax, which would levy the same fee on each ton of CO₂ pollution from all sources.
In one of the most important paragraphs ever published about climate-change policy, Nordhaus endorsed the tax. He reasoned that the costs of carbon-abating standards varied wildly from sector to sector: For instance, it might cost $100 to reduce a ton of carbon from a car, but only $25 to reduce a ton from a power plant. But a carbon tax subjected every sector to the same cost per ton of carbon, meaning you could remove the most carbon for the fewest dollars. Ultimately, humanity should care only about reducing as many tons of carbon as possible, as cheaply as possible, he said.
Nordhaus’s paper, which became the field’s foundational work, arrived in the middle of a revolution in policy making: Officials in the outgoing Carter administration and incoming Reagan administration had started emphasizing the intellectual framework of economics—and its respect for rationality, efficiency, and cost-benefit analyses—over other ways of addressing society’s problems. The carbon tax gave climate change a place in that framework.
By 1983, the Environmental Protection Agency was modeling what a carbon tax would mean for American emissions. Soon the Congressional Budget Office was researching one too.
By the time James Hansen, the director of climate science at NASA, told the Senate in 1988 that global warming had begun, lawmakers knew a carbon tax was one of their best bets.
The carbon tax came into legal majority in 1990, when Finland passed the world’s first version of the policy. A year later, the European Commission said it would implement a carbon tax by 1993.
Back at home, its family was growing. Republicans had become keen on the carbon tax’s cousin: emissions-trading systems, or “cap and trade” schemes. These offered a new way to price carbon pollution. Under cap-and-trade, the government decreed the total amount of pollution allowed each year, then auctioned off the right to emit it. By the 1992 presidential election, Democrats were more likely to favor a carbon tax, while Republicans endorsed a carbon market—when they endorsed climate policy at all.
But an even more important fissure was opening in Washington. The industries that stood to lose from climate policy—heavy polluters such as the coal, railroad, oil, and steel industries—were organizing against policy faster than allies were coalescing around it. They were beginning to deny the science of climate change, and they were dragging the GOP along with them.
Four years earlier, in 1988, President George H. W. Bush had promised to fight climate change. “Those who think we are powerless to do anything about the greenhouse effect forget about the 'White House effect,’” he said. Now Bush warned in the final days of his failing reelection campaign that Bill Clinton would impose a “drastic” and “punishing” carbon tax.
After he took office, Clinton proposed a “BTU tax” that would have raised the cost of coal, oil, natural gas, and nuclear energy. Although it was not a carbon tax, Vice President Al Gore, who had called for a carbon tax in his 1992 best seller, Earth in the Balance, meant for it to resemble one.
But the tax bombed. Heavy industry rallied against it, and its simplicity became a liability: Utilities insisted that the tax appear as a line-item charge on every customer’s power bill. By 1994, the BTU tax was dead. The Senate never even voted on it. (These sorry events are recounted in more detail in the political scientist Matto Mildenberger’s book, Carbon Captured.)
Business opposition took down Europe’s continent-wide carbon-tax proposal too. For the next decade and a half, only the Scandinavian countries—Denmark, Sweden, Norway, and Finland—managed to pass and keep a carbon tax aimed at curbing emissions.
From then on, cap-and-trade—not a carbon tax—would prove the more politically successful form of carbon pricing.
In the mid-2000s, Gore’s documentary An Inconvenient Truth, as well as a dire United Nations report and a rash of severe hurricanes, again pushed the world to adopt climate policy. The European Union finally enacted a cap-and-trade scheme, although it remained weak for another decade.
But in Congress, cap-and-trade fared no better than the carbon tax had. A bipartisan climate coalition fell apart in 2010 before it could agree to a cap-and-trade bill. President Barack Obama backed off supporting a Democratic climate bill.
More recently, a bipartisan effort to pass a revenue-neutral carbon tax—led, ironically, by some of the same Reaganites who had once championed cap-and-trade or no climate policy at all—faltered during the Trump administration. At last count, only one national Republican lawmaker, Representative Brian Fitzpatrick of Pennsylvania, supported a carbon tax.
Cap-and-trade has caught on as a regional policy. In 2008, seven northeastern states launched a cap-and-trade market for their electricity emissions, the Regional Greenhouse Gas Initiative. It now includes 11 states, and Pennsylvania and North Carolina could join soon. California adopted an expansive cap-and-trade program in 2013. Earlier this year, Washington State voted to join that market.
But at the federal level, policy makers have rejected policies that maximize efficiency at all. Biden’s infrastructure bill adopts the standard-based approach that Nordhaus once disdained.
Looking back, some political scientists say that the reasons for the failure of efficient carbon policy, at least in the United States, are clear. With the exception of Canada, every country that has adopted carbon pricing has no major fossil-fuel industry, notes Nina Kelsey, a political scientist at George Washington University. (Coal-rich Australia once adopted a carbon price, then repealed it.)
Carbon prices save dollars, these researchers admit. But they expend an even scarcer resource: political capital. Because a carbon price affects all of society, it increases costs for every energy consumer, without providing an immediate alternative. Because most industries interact with the energy system only as consumers, that takes a cohort that wouldn’t care about climate policy in the abstract and turns it into a foe.
Meanwhile, a price does nothing to convince “convertible” industries—businesses such as utilities and automakers, who could support an energy transition if they changed some aspect of their production line—to switch sides. And it benefits “winner” industries, such as solar-panel makers, only indirectly.
In other words, a carbon price might cheaply eliminate carbon, but it does not change political coalitions to make passing more climate policy in the future any easier.
Today, cap-and-trade markets are by far the dominant form of carbon pricing worldwide. Now that China has launched its cap-and-trade system, carbon prices cover 20 percent of global emissions. Forty-five countries are covered by some form of carbon price, according to the World Bank. But relatively few of them use carbon taxes.
Advocates say they will cryogenically freeze the American carbon tax in case it is needed in the future. Some supporters argue that the tax is one of very few climate policies that can survive a conservative Supreme Court, because the Constitution clearly empowers Congress to levy taxes but may not allow other types of regulation.
Yet near-term prospects for the policy’s revival are dim.
The American carbon tax leaves behind dozens of supportive think-tank employees, thousands of politically engaged and idealistic Americans, and 3,589 dejected economists.