Carbon Tax Provides Solution That Could Scale Globally

It’s clear that we must drastically and quickly reduce carbon emissions to avoid the massive costs of inaction on climate change.

A carbon tax could be the key.

Instituting a carbon tax was central to a great panel discussion about the economic impacts of climate change at the Milken Institute Global Conference on Tuesday. I enjoyed speaking as a panelist during the session.

Here are my main takeaways from the panel:

1) The climate is changing, and human activity is responsible.

Despite discouraging discussion on Capitol Hill, the truly substantive conversation behind the scenes about the science of climate change is shifting quickly to the need for action now. At the panel, it was noted that even the scientists who recently met at a climate conference sponsored by the Heartland Institute (the champions of climate skepticism) generally agree that climate change is real and caused by carbon emissions.

2) The costs of climate change are daunting unless we address emissions right now.

Climate change is a slow-moving event. But even in the near term—say, during the next 10 years—we will likely see coastal flooding, periodic Sandy-like weather events, heat spikes that will cut labor productivity and sharp declines of around 10% in agricultural productivity.

In addition, we need to factor in the less quantifiable but sharply negative impacts on biodiversity and precious ecological communities.

Taking a longer view, we also have to consider outcomes that are lower probability but potentially catastrophic.

3) We know what we need to do:

• Incentivize energy efficiency. We must motivate society to use less energy—and by the way, they’ll save money at the same time.
• Accelerate the transition to non-carbon sources of energy. To make that happen, we need to pursue research and development around new technologies and innovations.
• Invest in natural ecosystems—such as rainforests—that store carbon at low cost and low risk.

By 2050, the world’s emissions must fall at least 50% below 1990 levels to prevent serious consequences that will affect quality of life for people around the globe.

4) We know how to make these initiatives happen.

Instituting a revenue-neutral carbon tax in the U.S. would use market forces to incentivize emissions reductions at a lower cost than other proposed policies.

Under a well-structured carbon tax—for example, one starting now at $16 per ton and rising 4% per year through 2050—impacts on consumers would be modest, initially resulting in about $8 per month per household in higher utility bills and some 16 cents per gallon in steeper gasoline fees. Consumers already experience fluctuating costs of this order as markets rise and fall.

Market forces would incentivize emissions reductions to occur at the lowest cost as well as promote the needed investments in R&D on low-carbon technology. And the certainty of these extra costs would allow citizens and businesses to plan accordingly, increasing their energy efficiency to keep their expenses stable.

A carbon tax would go a long way in the effort to slow emissions and lessen the impacts of climate change. Economists estimate a carbon tax of this order would reduce U.S. emissions by about one-third.

Current climate regulations—such as renewable portfolio standards, subsidies and various EPA regulations—can all be viewed as alternate forms of a tax, but they are an invisible and less efficient tax. If a carbon tax replaces these current measures, it would actually reduce the reach of the government and increase economic efficiency.

5) It's reasonable to expect that other countries would follow the United States’ lead.

China—the world's largest emitter—is already under enormous pressure from its citizens to reduce power plant pollution to make the country’s cities livable and the air breathable. The country struck an agreement with the United States last year under which China said it will peak its emissions by 2030.

During the panel, French Ambassador Gérard Araud shared his optimistic outlook for the U.N. climate talks in Paris in December, saying he anticipates strong commitments from both large and small emitting countries, driven in large part by private sector engagement. Already, global companies are showing encouraging leadership on climate, and governments are making good progress at the state and city levels.

Thanks to the other great panelists for a lively discussion:

• Susan Goldberg, editor in chief at National Geographic, did a tremendous job moderating the group.
• French Ambassador Gérard Araud shared his assessment and optimism for the upcoming U.N. climate talks in Paris.
• Economist John Cochrane, University of Chicago professor, strongly reminded the panel of the necessity to be mindful of economic efficiency and low costs.
• Aimée Christensen, executive director of Sun Valley Institute for Resilience, appropriately recognized the great progress made by the private sector and, especially, noted gains in solar energy.

This post is part of LinkedIn's full coverage of the Milken Institute Global Conference.