We Need a Global Carbon Tax

A global carbon tax can both mitigate climate change and radically redistribute wealth.

Jim Cooke / Gawker

Despite my suspicions of the neoliberal tenor of the organizers and my post-Occupy reservations about marches without explicit political demands, I’m going to the People’s Climate March this morning.

But if we were mobilizing around just one demand today, we could do worse than a global carbon tax, with revenues redistributed directly back to people through a global universal basic income. The policy is both politically infeasible and economically inferior to more complex and radical policy packages. But it is so blunt, and so revealing of the twin issues of inequality and climate change, that it is still a “useful utopia.”

One of the many things I admire about Thomas Piketty’s Capital in the Twenty-First Century is that it examines capital and inequality through an international lens. His proposed solution is thus global in scope — the institutions and political alliances needed to make any progress must to operate at the same level as (or higher than) other global regulatory, diplomatic, and public goods arrangements. Wealth inequality across the global population is a problem just as inequality between current and future generations is a problem, one that must be addressed at a transnational level.

I want to make the connection between some of Piketty’s arguments about climate policy and environmental economics concrete, just as people like Naomi Klein and Christian Parenti have linked climate issues to redistribution and inequality.

We can, in good economics fashion, play with a prima facie solution to a huge global problem. A global economy organized through decentralized markets means that you only have to change one price to change all the prices faced by everyone. Carbon taxes do exactly that, leveraging market interactions to reduce carbon use throughout the economy. With the quasi-failure of cap-and-trade in Europe and its political defeat in the United States, we’re now closer to a carbon tax, where we charge a tax on each ton of carbon extracted. The tax is completely efficient, set equal to the (marginal) social cost of carbon, which we would have to argue about as a society.

Liberals love this kind of technical, social-democratic, fix. A non-intrusive tax would raise the price of carbon, and the economy would adjust, and we can keep going. But I think the magnitudes of the taxes required, together with the sheer size of the carbon economy, mean that even this liberal measure would lead to political conflicts between the haves and the have-nots that would be closer to redistributive politics than gentle timelines of mitigation and adaption.

Economists, of course, constantly debate who wins and who loses from carbon taxes, even if they all agree that increasing the price of carbon by fiat is much better than any other hodgepodge of fixes. The immediate effect of carbon taxes is an increase in carbon prices, and this is largely regressive, falling on households and countries with low incomes.

But three things work against this: over your lifetime, your consumption of carbon will change. As alternative technologies evolve, the ability of companies to pass along the price increase will fall.

Second, the lump-sum rebate everyone would get in the dream scenario would go a long way towards undoing the price increase. It’s been calculated that a global carbon tax, with equal per-capita revenue payments, would on net lower the world Gini by 3 percent and raise the bottom decile’s share of income by 81 percent. And finally, a lot of the capital tied up in carbon processing, like refineries and oil rigs, would also fall in value due to the increased price of inputs. These are hardly the people’s machines — the shift would decrease inequality.

Besides the forward transmission of the tax to consumers, there is also a backwards transmission of carbon taxes to the owners of carbon stocks. The important effect of the tax is what it does to the value of property rights to stores of carbon that haven’t been extracted yet, essentially fossil fuel reserves that are already discovered. This is paper wealth, the promise of revenue from burning fuel that will be extracted and demanded in the future.

What is frightening is that asset markets are currently pricing these things as though they are actually going to get used. What does a carbon tax do to the value of these assets? It depresses it by killing the anticipated future revenues. One Norwegian study estimates that a $10 per ton global carbon tax would lower petroleum wealth for the average oil producer by 33 to 42 percent.

What is the size and distribution of this carbon wealth? Given how much of it sits on the balance sheets of a) first-world multinationals with concentrated ownership and substantial monopoly power and b) democracy-challenged sovereign wealth funds and small countries with lots of fossil fuels, I’m willing to bet it is pretty unequally distributed. So this means a small share of the population is benefiting from flows of income derived from inheriting a stock of dead dinosaurs.

Of course, if the carbon wealth were distributed equally, we would have a very different social trade-off. But that’s not this world. And let us not forget that the primary source of profit here is pure rent: income derived from exclusive control of a scarce resource, not productive investment or labor.

We can calculate the importance of carbon to global wealth thanks to Carbon Tracker, which put together these estimates: There are roughly 2,700 gigatons of carbon in proven reserves, which have a 90 percent chance of being extracted. Climate scientists guess that we have maybe 886 gigatons in the carbon budget from 2000 to 2050 to avoid 2 degree Celsius increases. And oops, we’ve already used 286 gigatons of that since 2000.

So that means we have about 2,100 gigatons of carbon in proven reserves, sitting on balance sheets (already priced into the global capital stock) that we need to not burn in order keep temperatures from rising 2 degrees Celsius before 2100. Overwhelmingly, this is coal, which is just too abundant for our own good.

To get a sense of the magnitudes, Gabriel Zucman estimated almost $6 trillion were sitting in tax havens in 2008. If we taxed all that carbon as a stock, at $3 a ton, it would be the same liability, and almost completely expropriate the fossil fuels sector (which is worth around $5 trillion). These carbon reserves would become “stranded assets” that are worth nothing or even a costly tax liability.

What carbon tax should we implement? The literature calculates an optimal carbon tax between $27 and $4,293 per ton of coal (the wide range reflects uncertainty on damages and different choices of discount rates). This contains the estimates by Nordhaus ($27) and Stern ($250), who argue about the appropriate interest rate to use.

There are over a trillion tons of coal in the ground. At current prices, that is something like $50 trillion. Essentially, controlling climate change involves driving the value of this down, making it unprofitable to extract. World capital is somewhere around $382 trillion. Given that the world’s top one percent owns about $110 trillion of this, even a moderate carbon taxes could drastically alter the global distribution of wealth, without even accounting for the income that is redistributed.

Carbon taxes do two great things at once, knocking down the share of wealth in the economy while helping us avoid the climate disaster that will drive inundated (and possibly armed) Florida archipelago refugees to besiege dike-encrusted fortress Manhattan in thirty years. But levying the carbon taxes required to avert large environmental changes will destroy a chunk of economic obligations enshrined in stock portfolios around the world.

The political economy of climate change looks a whole lot like the political economy of redistribution. And they’ll be plenty who want to resist it.

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