Two of the cities I have lived in are in areas with a carbon tax regime: Vancouver and Stockholm. British Columbia implemented a carbon tax starting in 2008, at a level reaching C$30 per metric ton of CO2, under the right-wing BC Liberals, who favored the carbon tax as a market-friendlier approach than the left-wing NDP’s proposal for cap-and-trade. The tax was revenue-neutral, offsetting other taxes, and is seen as a success; the NDP has since won power and announced a hike in the tax to C$50/t by 2021.
Sweden’s carbon tax is higher and older. It was implemented by the Social Democrats in 1991, at a rate of €24/t for home use, such as fuel, and €6/t for industrial use; it has been subsequently hiked multiple times, reaching €88/t for home use by 2004, and Löfven’s coalition of Social Democrats and Greens has increased it to €114/t for both home and industrial use. Our World in Data cites it as a success too, linking it to high levels of political trust and low corruption levels in Sweden as well as in other European countries with carbon taxes, such as Switzerland.
The question of interest is, how come these carbon taxes are good not just for reducing greenhouse gas emissions, but also for the economy? British Columbia’s economy has grown somewhat faster than that of the rest of Canada. Sweden has had high economic growth since the 1990s as well – see for example World Bank data from 1990 to 2018, in which Sweden’s growth in GDP per capita only behind that of Norway and the Netherlands, both by very small margins. What gives? How come this is apparently good for raw economic growth, when it’s supposed to be an economic distortion that reduces living standards if one ignores long-term environmental benefits?
Negative carbon taxes
There is an array of policies that act as negative carbon taxes – that is, taxes on green activity, or subsidies to polluting activity. The construction of highways is one example – the negative effects of cars include not just climate change but also local air pollution, noise, and car accidents. There are various policies counteracting these effects, such as fuel taxes and mandatory insurance, but they are not enough. For example, in British Columbia the minimum insurance requirement is $200,000 in personal injury plus $300,000 in medical expenses and smaller sums for related torts like funeral costs, but the insurance value of human life is measured in the millions.
To the extent non-carbon taxes on cars are too low, the addition of a carbon tax should move the tax level closer to the true level of the negative externality even ignoring long-term climate change. Carbon taxes should not by themselves improve economic growth on a 30-year horizon, let alone a 10-year one, but lower levels of air pollution, fewer car crashes, and less traffic congestion would.
Another aspect is development. Various zoning laws, such as single-family residential zones in much of Vancouver and restrictions on high-rises in Central Stockholm, encourage people to live and work in lower-density areas. This is simultaneously a negative carbon tax of a sort and a drag on economic productivity. A carbon tax is no substitute for reforms making it easier to add housing – and thankfully, both Stockholm and Vancouver already have fast housing construction, unlike (say) New York – but it does help countermand the subsidies to suburbanization implicit in restrictive zoning.
Climate science vs. arbitrary rule
The economic reasoning behind why special fees on various activities are inferior to broad taxes on income, property, and consumption has to do with incentives and rule of law. Taxing a specific activity incentivizes people and corporations to find creative ways to shift apparent activity elsewhere, creating economic distortions. It also sends everyone a message, “spend more money on lobbying politicians to keep your sector’s taxes lower than those of other sectors.” Broad-based taxes don’t do that, first because the only way to avoid an income tax is to be poorer, and second because there are fewer moving parts to an income or sales tax.
However, carbon taxes are not your run-of-the-mill tax on an activity some politician does not like. Yes, there is a definitive political movement calling for restraining greenhouse gas emissions, but the reasoning behind it is telegraphed years and even decades in advance, and is based on a scientific consensus. Lobbyists can try to fight for exemptions, as they can from income taxes, but the tax itself is based on a process that is transparent to informed economic actors.
In green democracy as in social democracy, the role of the state is not to side with the interest groups that voted for the party in power, unlike in populism. Social democracy holds that the state has an expansive role to play in the economy, but this role is not based on arbitrary exceptions but rather on budgetary and regulatory priorities that have been largely stable for generations: income compression, labor unions, health care, education, child care, infrastructure, housing. It’s not a coincidence that the part of the world with the strongest social-democratic institutions, the Nordic countries, also has more or less the lowest corruption levels.
Green democracy has a different set of priorities from social democracy, but they too are well-known, especially when it comes to the transition away from greenhouse gases. There’s a lot of lobbying concerning specific spending priorities, but the point of a carbon tax is that it adjudicates how to prioritize different aspects of the transition apolitically.
Carbon taxes and good government
The World in Data’s praise of Sweden’s carbon tax regime talks about the necessity for low corruption and high trust levels for a carbon tax to work. But does the causation really run in that direction? What if the causation is different? It’s likely that a carbon tax could politically work in a wide variety of countries, but only in states with high levels of political transparency do politicians prefer it to opaque schemes that reward cronies and favored interest groups.
In other words, once British Columbia enacted its carbon tax the results were positive even without unusually low corruption for a rich country. But for the most part, governments without much transparency or rule of law such as much of the United States do not like the simplicity of a carbon tax. Politicians who call themselves green prefer schemes that either directly subsidize favored groups or at least politically empower them (“Green New Deal”), and that specifically ream difficulties on groups they do not favor (real estate developers, the nuclear industry, etc.).
But that American politicians do not like carbon taxation does not mean carbon taxation could not work in an American context. It does in a Canadian one, without any of the negative economic effects that people who take perverse joy in environmental destruction predicted. The private economy can and does adapt to changes in relative prices, as fuel becomes much more expensive and other products become cheaper to compensate – and judging by the experience of Sweden in particular, even a fairly high tax is compatible with fast economic growth for a mature economy. All it takes is someone willing to spend short-term political capital on the long-term green transition.