Fuel for thought: A most unusual solution to global warming

For the past five decades, the climate change and global warming debate has been raging in the halls of parliaments, academic institutions and the chambers of TV studios the world over. How different would the scenario be if the economists were given a chance to call the shots on the policies instead of oligarchs? The solution, as it turns out, could be extremely simple and would cost us relatively nothing: Carbon Tax!

If we take a step back and look at the advances in the approach to solve climate change, the single most important challenge facing the planet today, has been gridlocked into three scenarios: the scientists world over proving that the sea levels are rising and forecasting the severe impacts of climate change, the politicians promising to take action to reduce carbon levels, and in the end nothing much happens. The trade-off here is the traditional short term pain for long term gain dynamic, but the lack of clear regulatory frameworks and lack of consensus among partisan political lines are the major roadblocks. These scenarios is what makes the solutions to climate change to be incredibly complicated and expensive. It turns out though the solution does not have to be either of those things, there is perhaps a very simple solution to this that would cost us almost nothing.

An extensive research by a group of economists at MIT and National Renewable Energy Laboratory (NREL) suggests introducing a carbon tax on fossil fuels based on the carbon they release (which would make oil, coal and natural gas more expensive). The carbon taxes would then be subsequently raised over time, to tighten the screws and gradually push the economy towards the use of renewable/low carbon replacements. So basically, some of the big ticket items that would affect an average consumer would include: transportation expenses (gasoline, traditional fuel operated vehicles), electricity expenses, food and other carbon intensive activities.

A sophisticated predictive modeling was done to calculate the increase in average spend by a consumer (random sample) on the first year of the introduction of carbon tax. Here is the break-down:

•  Gasoline ($125 per annum): The price of gasoline would increase by around 25 cents for a gallon in the first year. By 2050, it would go around to a dollar for a gallon.
• Electricity ($60 per annum): This increase in prices for the traditional sources of electricity (coal etc.) would make prices from renewable sources more comparable (solar, wind, hydro)
• Transportation ($75 per annum): Airplane flights, public transportation etc.
• Food ($50 per annum): Largely food transportation related increase
• Others ($175 per annum): Manufacturing of concrete is one of the most carbon-intensive activities in the world (production of a ton of concrete releases 8/10th of a ton of carbon dioxide), and concrete is also the most ubiquitous products globally. The process inherently produces CO2 and that’s largely unavoidable. There would be a significant impact on the prices of concrete (increase by around 25%). There would be minimal direct impact on an average consumer but there would be some indirect impact. Other carbon tax levied charges would include home energy related expenses like heating expenses, cooking, and other appliances.

That’s $485 in carbon taxes for the first year in its introduction, which is around $1.3/day. For a lot of low-medium income bracket families this could be pretty painful and they’re definitely going to feel the impact of this tax. The reason why carbon tax is extremely popular among economists is that it would make the people and business all over the economy to look for efficient alternatives and make small/big course corrections to avoid the higher costs. 

To make the scenario more interesting, a positive sum game, there is other side of the coin. Now, the government has $485 in taxes and how should it be spent? It could be extremely simple, under this policy you give this money right back to the people. It sounds too simplistic but it would work as the consumer would still like to save as much money as he could, so a person living in rural areas producing low carbon footprint would make a net positive in this scheme when compared with someone working in an industry. There would definitely be both winners and losers both at an industry level and individual level. 

In other more smarter way to give back this money could be by reducing other taxes, like income tax. Income taxes in general are disliked by economists, as the major reason to tax something is to discourage it and income is something that does not fall into this cluster. So for economists, this becomes a chance to reduce bad tax - the income tax, and replace it with a good tax- carbon tax. And that is how the introduction of carbon taxes could be a relatively painless process as a whole for an economy, which would cost virtually nothing.