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Planet Money

Economists Have A One-Page Solution To Climate Change

Originally published on Fri June 28, 2013 9:45 am

Climate change seems like this complicated problem with a million pieces. But Henry Jacoby, an economist at MIT's business school, says there's really just one thing you need to do to solve the problem: Tax carbon emissions.

"If you let the economists write the legislation," Jacoby says, "it could be quite simple." He says he could fit the whole bill on one page.

Basically, Jacoby would tax fossil fuels in proportion to the amount of carbon they release. That would make coal, oil and natural gas more expensive. That's it; that's the whole plan.

Jacoby's colleague John Reilly told me the price of gasoline might rise by 25 cents a gallon in the first year. Over time, that would increase. By 2050, Reilly figures the carbon tax would add about $1 to the price of every gallon. Across the economy, prices of energy-intensive goods and services would rise. This would encourage people and businesses to be more efficient.

This is why economists love a carbon tax: One change to the tax code and the entire economy shifts to reduce carbon emissions. No complicated regulations. No rules for what kind of gas mileage cars have to get or what specific fraction of electricity has to come from wind or solar or renewables. That's by and large the way we do it now.

Reilly says the current web of rules is a more complicated and more expensive way of getting the same outcome as a carbon tax. The current system "pretty much is one of the worst ways we could do it," he says.

As with any fix for climate change, a carbon tax would hit some people harder than others. People with long commutes would pay more. People who work in coal mines could lose their jobs.

But here is where Reilly brings up what is perhaps the most surprising thing about a carbon tax: If you do it right, he says, carbon tax can be nearly painless for the economy as a whole.

Besides reducing carbon emissions, a carbon tax brings in a bunch of money — it's a tax after all. So, Reilly says, you can reduce, say, income tax to balance out the new taxes people are paying for carbon emissions. People pay more for gas, but they get to keep more of their income.

I called around and talked to a bunch of economists about this, and they said the basic idea was sound: If you give the carbon-tax money back by cutting income taxes, you can probably offset a lot of the pain.

President Obama has indicated he would support a market-based solution to climate change. But a carbon tax would, of course, require an act of Congress. And right now, that seems unlikely.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

DAVID GREENE, HOST:

Just before leaving for Africa, the president announced a string of initiatives to try to combat climate change. He didn't spell out too many details but the announcement got our Planet Money team thinking - how much would it cost to deal with a global problem that seems intractable? Well, surprisingly, some experts say, the problem isn't actually that hard to solve.

Here's Planet Money's, David Kestenbaum.

DAVID KESTENBAUM, BYLINE: Climate change seems like a problem with a million moving pieces. But Henry Jacoby, an economist at MIT's business school, says really there is just one thing you need to do.

HENRY JACOBY: If you let the economists write the legislation it could be really simple.

(LAUGHTER)

KESTENBAUM: If you were to write it, how short could it be?

JACOBY: Well, if I were to write it, a page.

KESTENBAUM: What Jacoby would write on that page, is a carbon tax. Basically, he says you tax the fossil fuels in proportion to the amount of carbon they release. That would make coal, oil and natural gas more expensive. And then - actually - that's all he has to do.

(SOUNDBITE OF CAR DOOR CLOSING)

KESTENBAUM: To understand how this would work, I took a drive with Jacoby's colleague John Reilly. Under our carbon tax, gasoline and driving would be more expensive. What kind of car is this?

JOHN REILLY: It's an Infiniti. This does get something like 27 miles per gallon on the highway, so it's not the worst thing around. But it's not a Prius.

(LAUGHTER)

KESTENBAUM: We pull into a gas station. In the first year of a carbon tax, Reilly imagines the price of gasoline would rise by about 25 cents a gallon.

(SOUNDBITE OF BEEP)

KESTENBAUM: But you'd ramp up the tax over time to gradually push the economy away from fossil fuel. By 2050, Reilly figures the carbon tax would add about one dollar to the price of every gallon. Reilly does the math, how much that would cost him in a year.

REILLY: I might buy a more fuel-efficient vehicle.

(LAUGHTER)

KESTENBAUM: Right there - that is the carbon tax working its magic. People in businesses all over the economy would start thinking this way, making changes - some big, some small - to avoid the higher cost. And this is why economists love a carbon tax. One change to the tax code and the entire economy shifts to reduce carbon emissions. No complicated regulations, no rules for what kind of gas mileage cars would have to have or what specific fraction of electricity has to come from wind or solar or renewables. And those approaches, by and large, are the way we're trying to do it now. Reilly says those are more complicated and more expensive ways of getting to the same place you'd get to with a carbon tax.

REILLY: I suppose there's always worst ways to do it. So, I wouldn't say that's the worst possible way. But it pretty much one of the worst ways we could do it.

KESTENBAUM: As with any fix for climate change, a carbon tax would hit some people harder than others. People with long commutes would pay more, coal miners could lose their jobs. But here's where Reilly brings up what is perhaps the most surprising thing about a carbon tax. If you do it right, he says, a carbon tax can be nearly painless for the economy as a whole. That's right - at least initially, you can fight climate change and do it for free he says. Here's the trick - and it really does feel like a magic trick - the carbon tax brings in a bunch of money - it's a tax after all. So, you take that money and give it back to people by reducing, say, their income tax. So, yes, people are paying more for gas but they get to keep more of their income. And lowering income taxes stimulates the economy - enough, Reilly says, that you can offset the drag from higher energy prices.

REILLY: This is almost magic, right, because in some of the work we've done the whole economy actually benefits by that tax swap. You raise the carbon tax - that increase your energy costs - but you actually improve economic performance by reducing these other taxes and the economy is actually better off.

KESTENBAUM: Can that really be true?

REILLY: Yes.

KESTENBAUM: I called around and talked to a bunch of economists about this, and they said the idea was basically sound. If you give the money back by cutting taxes you can probably offset a lot of the pain. President Obama has indicated he would support a market-based solution to climate change, but a carbon tax would, of course, require an act of Congress, and right now that seems unlikely. David Kestenbaum, NPR News.

(SOUNDBITE OF MUSIC)

GREENE: And you're listening to MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.