The arguments in favor of all the nations in the world implementing a uniform (or near-uniform) carbon tax are both old and, under some very restrictive circumstances, valid. Strong support for carbon taxes, especially among economists, continues to this day, as global carbon dioxide emissions continue to increase, reaching about 40 billion tons per year in 2019. For example, recently a High-Level Commission on Carbon Prices (2017), consisting of many very prominent researchers of the mitigation of climate change chaired by Joseph Stiglitz and Nicolas Stern, recommended that a global carbon tax of about $50 per ton of CO2 be initiated very soon, rising to $100 per ton by 2030.[i]
The Commission realizes that for many reasons individual countries might want their country-specific carbon tax to be somewhat lower or higher than this global average. Implicit in this recommendation is, certainly, the assumption that a carbon tax at these levels will be sufficiently adequate to help the world achieve zero carbon emissions within a reasonable period of time, for example, by 2040-2050, in order to keep the global average temperature increase due to climate change to under 2.0 degrees Celsius. Yet, this assumption that carbon taxes in this range will provide significant help in achieving the goals of the Paris Treaty is rarely supported by real world analysis of the actual impacts of carbon taxes on specific energy end-uses, as opposed to attempts to support this claim using un-documented integrated assessment models and out of date economy-wide price elasticity estimates.
One reason for the lack of historical analysis of actual carbon tax impacts is that according to the World Bank’s Carbon Pricing Dashboard, the estimated average carbon price for the almost 20% of worldwide carbon dioxide emissions that occurred within carbon pricing schemes in 2018 is only about $7.43 per ton of CO2, hardly enough for any consumer of fossil fuels, even businesses, to notice such a small price increase in the actual energy products they purchase. This very low average carbon price is certainly not high enough to get many people or businesses to significantly reduce their carbon emissions, or even to react at all. Thus, the world has insufficient relevant experience with carbon taxes to know what their impact on carbon emissions would likely be, in spite of a couple of studies that claim to be able to measure some effect, however small.[ii]
One major practical problem with the concept of a uniform global carbon tax is that the same tax level (e.g. $100 per ton of CO2) would have a very different macroeconomic impact in a rich country versus a poor country. In a rich country, a ton of CO2 emissions might cost only two hours of a worker’s wage, whereas in a poor country this could easily represent two weeks’ wages or more. Thus, the incentive to use less fossil fuels would be far stronger in poor countries, so much so that even a moderate carbon tax such as $100 per ton might cause major disruptions to their economies and family livelihoods even though the per capita consumption of fossil fuels in poor countries is much lower than in rich countries. Thus, in poor countries, not much carbon emissions could be reduced per person in spite of the stronger financial incentive to do so. One issue, then, that must be discussed when discussing the possible merits of carbon taxes, is to what extent can poor countries seriously consider implementing a carbon tax anywhere near the higher level of a carbon tax that might be established in rich countries. And if doing this would be impossible, would this allow global corporations to escape paying much of a carbon tax by moving production from rich to poor countries, even more than they have done already, among other unintended consequences?
Of course, the High-Level Commission noted that a carbon tax is only part of the policy solution for sufficiently mitigating climate change and that such a tax would likely need to be implemented in conjunction with other mitigation policies in order to reduce carbon emissions to near zero. It is also well known that most people and businesses do not react to prices and price changes in fossil fuels in a simple, rational way, i.e. to invest in energy-consuming equipment that will most likely minimize the present value of their total costs over the lifetime of the equipment. They usually have many other priorities other than present value cost minimization, and most consumers do not even know what this means. This fact about human beings tends to undermine the likely effectiveness of carbon taxes in the future relative to what economists typically predict.
In addition, when fossil fuel prices rise for any reason, most individual consumers of fuels and businesses first simply use a little less of the fuel when they can after the price rise begins to bother them, such as by driving their cars a little less, or by turning down their heating thermostats a degree or two. It takes a fairly big rise in fuel prices, which seems fairly permanent, to convince consumers to purchase more energy-efficient equipment, or to switch fuels to a cheaper one, which also typically requires a capital investment. Thus, in theory, what we might call the short-run price elasticity corresponding to just using a little less fuel, as we have observed periodically in the past, is just the first stage in modeling increasing carbon price impacts. Economists often do not explicitly distinguish this first phase of a response from the second stage response, which is when significant investment occurs to make the energy-consuming equipment more efficient or able to burn lower cost fuels. Because econometric analysis of the impacts of fossil fuel increases in the past can not distinguish between these two phases of individual and business responses, they cannot determine an aggregate price elasticity for each particular type of energy-consuming equipment in different sectors of the economy that might occur over a period of many years following an increase in fossil fuel prices.
In addition, this High-Level Commission, and most other analysts, neglect to discuss specifically which other mitigation policies should be implemented to complement carbon taxes, and by when, so that total carbon emissions could plausibly be reduced to zero in a reasonable time frame. Thus, there is often little discussion in academic economics articles on carbon taxes of such alternative policies such as resource portfolio standards (RPSs) for electricity supplies, much stronger CAFÉ efficiency standards for vehicles, requirements to phase-in an increasing fraction of new vehicles as electric vehicles, requiring all new buildings to be electrically heated (or net-zero carbon), or for industry to be required to ratchet down their carbon emissions over time per dollar of value added or per some other unit of output. Because of this major omission, most academic papers discussing the pros and cons of carbon taxes do not carefully analyze the extent to which these other policy options should complement carbon taxes in each major sector of the economy, by when, and what would their impact be on carbon emissions if carbon taxes were not also included in the policy mix. In particular, what is usually never discussed is to what degree monetary or other incentives would be required to implement these other policies to complement carbon price levels, and how should they be phased into practice in various sectors of the economy and regions throughout the world over the next ten years, or more.
The first analytical question that I will attempt to answer in this paper is, what impact would a $50-100 per ton carbon tax over the period 2020-2050 likely have on the world’s energy system by itself, without considering supplementary policies? How close would such a tax, by itself, get us to zero carbon emissions in each major sector of the economy by, for example, 2050? However, as we will see, answering this question will not prove to be very useful since without complementary mitigation policies, total carbon emissions would probably be affected quite little by a carbon tax under $100 per ton alone, perhaps reducing total emissions averaged over all sectors of the economy by only 10%, or so, by 2050, or substantially less than 1% per year. In contrast, if a region like California wants to reduce its carbon emissions to zero by 2045, as the state has recently committed to doing, it will need to reduce its carbon emissions by about 4 percentage points per year, on a linear basis, over the next 25 years. What does California need to do, then, to get the other approximately 90 percentage points of reductions in carbon emissions that carbon taxes alone will not likely achieve, if I am right?[1]
In fact, if I am right, then it must be the case that the complementary policies need to be structured so that in the worst case, if carbon taxes are not very effective at all, carbon emissions could still be reduced to zero in each sector of the economy even without carbon taxes. Thus, it seems that a better approach to analyzing the likely usefulness of carbon taxes is to describe to what extent carbon taxes might make it easier to achieve zero carbon emissions once the other relevant and desirable mitigation policies have been implemented, and not the other way around. But to take this approach, we need to turn our attention to the various major sectors of the economy that use energy, which means buildings, industry, agriculture, and transportation. This is because it is likely that each of these demand sectors requires very different complementary mitigation policies to be implemented whether or not a carbon tax is also implemented.
The Building Sector
Obviously, at the present time, almost all the buildings in the world use a lot of fossil fuels either directly, or indirectly via their electricity consumption. Natural gas, biomass, and heating oil are the primary fuels used directly. Causing the building sector’s energy consumption we find primarily the need for heating, cooling, hot water, cooking, and electricity for appliances. Of course, some of the energy for heating, cooling, cooking, and hot water is also currently supplied by electricity, but relatively little is, except for cooling. Most of the heating, cooking, and hot water is currently supplied by burning either natural gas, biomass, or oil on the premises of the buildings. Thus, to get to zero carbon emissions, we cannot just make building shells more energy efficient via the use of better insulating materials and multi-pane windows, although this is very important to do for older buildings. We also must phase out all natural gas, biomass, and oil-burning heating equipment and replace it with technologies run on renewable (zero carbon) electricity. This new equipment would mostly be heat pumps of various sorts, which take heat from the outdoor air, or for a limited number of buildings, from the ground (geothermal energy). Most heat pumps have the added benefit of also being able to be used for air-conditioning in the summer, thus reducing their effective capital cost for heating only. Of course, much of the renewable energy needed could be provided from onsite solar energy technologies, either roof-top solar hot water or photovoltaic cells, and not only from the electricity grid.
Prior to making major changes in building technology for enhanced efficiency and to run energy end-uses off of electricity, we can ask what impact a carbon tax in the range of $50-100 per ton of CO2 might have had independently of any other regulations and laws that would require such changes. Since such carbon taxes in this range would increase the variable cost of heating a building and providing hot water by only about 30-60%, without including equipment costs, they are not likely to have much impact in either causing building owners to enhance the energy efficiency of their building shells or in causing them to buy electricity-based heating and cooling technologies to replace their current gas-fired equipment prior to the end of its functional life. This is particularly true for the owners of residential real estate, who are not typically very reactive to these levels of price changes, especially when rental real estate is concerned. In fact, increases (and decreases) in heating fuel costs in the range of 30-60% have occurred over the last few decades as the market prices for natural gas and oil fluctuate from month to month, and year to year, without leading to long-term investments in increased energy efficiency.
Yet, even when fuel prices have gone up in the past, we have seen very little activity on the part of building owners to better insulate their buildings, and even less of a move towards purchasing electricity-driven heat pumps for heating, given the significant capital costs of doing so and the higher variable costs of electricity when compared to oil and natural gas. (Note that air conditioning has always been electricity-driven because it always depends on heat pumps.) One reason for such inaction is that most older people have typically experienced fuel prices going back down fairly soon after they have gone up (in inflation-corrected dollars), therefore they do not believe that most energy price increase will persist in the long run.
The other major component of building energy consumption is the use of electricity for a wide range of appliances, as noted above, in addition to its use for cooling. It is important to note that the major trend in electricity consumption for each individual appliance has been downwards over the last few decades, primarily due to appliance efficiency standards established by many governments in developed countries. But the number and size of many appliances have also increased rapidly, so much of the benefit of more efficient appliances such as refrigerators has been canceled out by bigger TVs and more computers, for example. However, overall, light bulbs have become much more efficient over the last few decades and will continue to do so, as new technologies such as LEDs come into the market to replace all kinds of light bulbs. But whatever efficiency electrically driven appliances operate at, they can all easily become “carbon-free” if the electricity supplied to them becomes all renewable.
Thus, the key issue for appliance-related carbon emissions is to get the electricity supplying them to be 100% renewable. This can usually be achieved much more readily by government regulation than by market forces or carbon taxes, i.e. by governments requiring the electricity supply to become more and more renewables-based each year. The approach often used is the implementation of resource portfolio standards (RPSs) which mandate that the percentage of the electricity supply being renewables should increase at a designated percentage each year, such as 4 percentage points per year which would achieve 100% renewables by 2045. Many states in the US have adopted RPSs, though currently they increase the percentage of renewables too slowly to mitigate climate change quickly enough.
Once a resource portfolio standard, or a feed-in tariff that subsidizes renewable electricity, is established, as in Germany, what incremental impact would a carbon tax in the $50-100 per ton range likely have? Again, the impact is likely to be very small, since the change it would cause to electricity bills would be very small given that much of the price of electricity is the recovery by utilities of fixed investment costs and not fuel costs, even when that electricity is produced by burning fossil fuels. In fact, it is usually the case that less than half of the cost of electricity produced by fossil fuel plants is the fossil fuel costs themselves. Furthermore, as the percentage of electricity coming from renewables increases over time due to other mitigation policies, the percentage impact of an increase in the price of electricity due to a carbon tax will decrease, since less and less fossil fuel on a percentage basis will be burned to generate that electricity. Thus, a carbon tax of any given dollar level will have a steadily decreasing impact on electricity consumers in all sectors of the economy, as the renewable component of electricity approaches 100%. And since the main thrust of mitigating climate change is to convert all end-uses of fossil fuels to electricity, the overall impact of a carbon tax on the entire economy will rapidly diminish over time.
At best, then, a carbon tax would have diminishing returns for all electricity consumers and diminishing impacts on the use and type of electricity consuming equipment over time unless the level of the tax is continuously increased far above $100 per ton of CO2, perhaps necessitating taxes in the $1000 per ton range for fossil fuels burned to produce the last amounts of non-renewable electricity in order to have any effect at all. This obvious fact of diminishing returns seems to be neglected in most if not all discussions of the desirability of implementing carbon taxes. Analysts seem to forget that in the long run, almost all energy consumption will have to come from 100% renewable electricity in order to get to zero carbon emissions. This implies that the major effect that relatively low carbon taxes, such as those in the $50-100 per ton range, are likely to have, will come only in the short to medium term if there is any effect at all. Carbon taxes will, then, not likely be very useful to drive the percentage of renewable electricity anywhere close to 100%. Again, complementary laws and regulations will be essential to accomplish that goal. This makes it clear why any real-world price elasticity that accurately quantifies the impact of carbon taxes on total energy use will rapidly decrease over time. In fact, since some countries are planning to convert most of their electricity supply to all renewables by as early as 2035, since this sector is the easiest to de-carbonize, price elasticities for electricity may hit zero soon after many economists want carbon taxes to only hit $100 per ton.
The Transportation Sector
As is the case for the buildings sector, eventually all fossil-fuel vehicles, trains, ships, and airplanes will also have to be replaced by vehicles that consume, in most cases, renewable electricity. For ships and airplanes, at least, synthetic liquid fuels made from sustainable biomass and renewable electricity will probably be necessary. Some vehicles or ships might also burn hydrogen in fuel cells, when that is convenient, but that hydrogen would also have to made from renewable electricity by electrolysis. All cars, buses, and most trucks and trains will likely consume electricity directly. Obviously, trains and buses are the easiest and cheapest to electrify since overhead power lines can often be easily installed as has been done in the past so that they do not need to depend on more expensive battery technologies.
Again, this implies that in the long run, a carbon tax will have to be increased well above $100 ton of CO2 in order to have any significant effect at all on the declining fossil fuel consumption in the transportation sector. This is because while in the short run a carbon tax might cause drivers of gasoline and diesel-fueled vehicles to drive slightly less, but since a $100 per ton carbon tax translates into only about a $1.00 increase per gallon of gasoline, such increases have happened many times in the past with very limited reductions in the miles driven by vehicles, and very limited changes in the types of vehicles purchased. These small changes are due, in part, to the fact that many people need to drive their vehicles to work or for other purposes no matter what the price of gasoline or diesel fuel is. And buying a more efficient vehicle is typically very expensive relative to the value of the saved fossil fuels unless the vehicle is driven many miles per year. Furthermore, the range of available efficiency improvements for similar vehicles has often been small in the past. While more high-efficiency fossil-fueled vehicles such as hybrids and electric vehicles are rapidly becoming available, once someone buys such a more energy-efficient vehicle, the incremental incentive of carbon taxes to get an even higher efficient vehicle is greatly reduced.
Of course, the higher renewable electricity prices might cause electric vehicles to become slightly more energy-efficient, but electric vehicles are inherently much more efficient than fossil-fueled vehicles to begin with, and there is a strict limit on how much more efficient they can become for any given weight and size of any vehicle. The efficiency of the batteries in electric vehicles is also important, and it should be assumed that battery efficiency will increase but very slowly, given how much research has already gone into improving this technology. All these factors imply that carbon taxes under $100 per ton will have little impact on the transportation sector in the future as the total consumption of fossil fuels in this sector declines, especially in rich countries. In poor countries, again, the consumption of fossil fuels per capita is already far lower than in rich countries, and the vehicles are already far more energy-efficient, so there is also low potential there for significant impacts of carbon taxes on fuel consumption.
Again, regarding trains, both for freight and passengers, it is very easy to convert all trains to electricity, and many already run on electricity. All railroads have to do to make this conversion is to string all of their rail lines with electric wires, which is relatively cheap, and which will not likely be significantly influenced or accelerated by the implementation of a carbon tax, unless it is far above $100 per ton. Then they have to buy electric locomotives as the older diesel ones retire. The rate of continued electrification of all rail lines is likely to be more dependent on the price of electricity that the railroads must pay when compared to diesel fuels, than any small increase in electricity and diesel prices that result if a carbon tax was charged to both electric utilities and diesel refineries.
With regard to the potential use of advanced liquid biofuels for long-distance trucks and airplanes, as advertised recently by Exxon Mobil and other oil companies, there are several key issues to consider. The first is that no matter how efficient new processes are for converting biomass to synthetic biofuels, this must be done without the use of any fossil fuels as input to these processes. This implies that renewable biomass and renewable electricity must provide all the energy inputs required by such processes. This fact is often not discussed in the context of the future production of synthetic biofuels, including hydrogen. This implies that synthetic liquid biofuels will continue to be so much more expensive than liquid fossil fuels are today that relatively low carbon taxes applied to fossil fuels will not be sufficient to induce a change to consuming more synthetic biofuels. Strict regulations requiring such a transition will probably be necessary.
Secondly, many analysts have raised justifiable doubts as to how much tonnage of sustainable biofuels can be produced on an annual basis, given the need to preserve most of the earth’s land area for agricultural use, and for forests and other ecosystems to sustain the earth’s atmosphere and water. Of course, forests are also needed to produce wood and paper products, many of which are better for the environment than the products made from plastics or metals today. Thus, we may need to use more wood and other biomass per capita in the future for these kinds of products, rather than less. This may include the greater use of wood to replace concrete and steel beams for new buildings, except for very tall buildings, and to replace pedestrian walkways.
Similarly, as sanitary standards in developing nations improve, more biomass may even be needed for products like toilet paper and cleaning products. It is probably best, then, to assume that biomass use should be reserved for only the highest value-added products, implying that alternatives to biofuels such as renewable electricity and its possible energy derivatives such as hydrogen should be used whenever possible. Obviously, to the extent that airplane travel is still allowed and affordable, synthetic kerosene for aircraft may become one of the best uses of synthetic biofuels given the lack of technological alternatives. One key question usually not discussed is whether or not the combustion of synthetic biofuels should be subject to carbon taxes, at least in the long run, if questions arise about their sustainability given society’s other needs for biomass. In addition, we must remember that the combustion of biomass in any form creates immediate carbon emissions, whereas the process of new biomass growth reabsorbing the carbon back from the atmosphere takes time, at least a year for crop biomass, and many decades for forests.
The Industrial Sector
The major costs to industry of mitigating climate change will be the costs to convert all of their fossil fuel using equipment to electricity or synthetic renewable fuels, including hydrogen, and the incremental cost of these zero-carbon energy sources themselves, since they are generally more expensive per unit of energy than energy from fossil fuels. (Fortunately, this is starting to change in many parts of the world for new renewable electricity technologies.) This implies that yet again a small carbon tax of $100 or under will have little or no influence in getting industry to also convert to the use of 100% renewable energy resources, especially electricity, as it will be required to do to allow society as a whole to get to zero carbon emissions. While the easiest renewable energy resource to convert to will be electricity, some industrial processes may not be amenable to being converted to electricity use, in which case gaseous or liquid energy forms such as hydrogen or synthetic biofuels, would be needed to eliminate CO2 emissions, if they are produced by 100% renewable electricity.
Of course, one implication of a transition to 100% zero-carbon energy is that the need for oil and gas refineries, pipelines, and pumping stations will decline rapidly, implying that certain industries may almost completely disappear. The same might be true of much for the plastics industry, if the world returns to the use of biomass for many final products, as it survived doing for thousands of years, including as recently as the 1950s when the manufacture of plastics first began to skyrocket. Plastics may also begin to disappear since they often create very nasty types of pollution and have very limited recycling potential, contrary to common belief. Other types of industries that will begin to disappear will include gasoline stations, natural gas utilities, the manufacture of fossil-fueled power plants, and other industries that use and make very energy-intensive products. On the other hand, some new industries will spring to greater life such as the commercial-sized battery industry, which will require intensive and thorough recycling of its input materials to become sustainable, if it can be made sustainable.
A Global Carbon Tax?
While a carbon tax in the $50-100 per ton range in a rich country might have little effect on the economy, and on the mix of energy products purchased, it might have disastrous consequences for poor countries, as noted above. Thus, it seems obvious that any proposal for a global carbon tax would have to specify carbon prices that scale, to some extent, with the average per capita income of each country.
The best thing about implementing a carbon tax, even if it is fairly small such as $100 per ton, is that governments will acquire a very large but declining revenue stream that can be used to subsidize further climate change mitigation. For example, even at the very low carbon tax of $50 per ton, the US government will receive a revenue stream of about $50 (per ton of CO2) x 330,000,000 (people) x 20 (tons of CO2 emissions per capita), or about $330 billion per year to spend on mitigation, before the revenues start to decline as carbon emissions decline. While this will not be nearly enough money to completely fund the incremental capital costs of climate change mitigation and adaptation, it will go a long way towards reimbursing and subsidizing its citizens who do not have the financial resources to take adequate mitigation actions themselves, such as buying electric vehicles and converting their homes and apartments to electric space heat, which, again, would have to be supplied by somewhat more expensive renewable electricity. Note that one reason why the retail price of renewable electricity is likely to rise to levels higher than the current mix of sources of electricity is that there will be substantial investments needed to expand the electricity distribution and transmission grid to accommodate the much higher new demand, even if the unit price of new electric generation does not change.
One question which has also received a fair amount of attention in debates about carbon pricing is whether or not some or all of the revenues collected by governments from taxing carbon emissions should go directly back to consumers in some way, in addition to subsidizing climate change mitigation costs. In general, the direct refund of carbon tax money to consumers or taxpayers seems like a very bad idea, since such refunds would tend to substantially undermine the goal of such taxes, which is for people to consume fewer fossil fuels. One argument in favor of refunding such carbon taxes is, of course, that doing so would enhance the political feasibility of getting such a carbon tax program established in the first place. But the main problem with this argument is that no one has yet demonstrated that if carbon taxpayers get these refunds that they will still buy significantly less or any less carbon, in comparison to the level of reductions in carbon emissions that would follow from investing most of the carbon tax revenues in technologies which mitigate climate change. Again, many groups of voters in many rich countries are incredibly sensitive to raising certain types of fuel such as gasoline prices via carbon taxes, which are posted daily on every gasoline station and thus highly visible. In contrast, rising electricity prices are much more likely not to be noticed by the public who rarely read the prices in their monthly electricity bills.
Either way, it is my “educated guess” that carbon taxes at the $100 per ton of CO2 or lower level will only likely cause CO2 emissions to drop by about 10% when averaged over all end-use sectors of the economy in countries where there is only limited use of coal today, and even that will likely take many years to occur. Thus, the first priority for governments to accomplish the other 90% or so of CO2 emissions reductions needed is to develop a comprehensive set of regulatory and legal mandates that cover the need for changes in energy-consuming technologies in all sectors of the economy, and a timetable for their implementation.
Conclusions and Implications
So how should a carbon tax be structured so that it might have a significant positive effect in driving the economy to completely eliminate the consumption of fossil fuels by 2050, or sooner? Could this happen only if other powerful policies are adopted very soon to require the reduction of carbon emissions in each sector of the economy? It is easy, but glib, to think that any increase in the price of fossil fuels, such as an increase caused by a relatively low carbon tax of $100 per ton of CO2, would cause some people and businesses to use less fossil fuel. However, this simple economic hypothesis does not take into account how people and businesses react to the actual complex mix of energy end-use technologies that exist in a modern economy, and the fact that many other policies will need to do the major part of the work to drive all fossil-fuel consumption to 100% zero-carbon energy, especially renewable electricity.[iii] And, of course, the faster that society decides to achieve zero carbon emissions, the less likely it is that society will be able to depend on a carbon tax playing any significant role at all in achieving this goal, given the inherent diminishing effect that carbon taxes can play as carbon emissions fall.
Thus, while there may be some political reasons, especially those involving social justice impacts, for opposing high carbon taxes, a carbon tax in the $50-100 range as recommended by the High-Level Commission on Carbon Prices seems likely to be fairly innocuous, but also fairly ineffective. However, given social justice concerns a carbon tax in the range of $50-100 per ton of CO2 would only be reasonable to implement in rich countries, with some compensation required for the poor even in such countries. In poor countries, a carbon tax at that level would be far too disruptive to the economy compared to simply regulating the carbon emissions from each energy end-use or supply technology. Yet, such a low carbon tax in rich countries might at least provide some psychological context to motivate other much stronger mitigation policies such as phasing out/banning gasoline cars, but it will probably not do much more than that. Thus, I am all for rapidly phasing in a low carbon tax at the $50 to $100 per ton level for CO2 in rich countries in order to raise awareness of the broader need to invest large sums of money to mitigate climate change.
Of course, the impact of a much higher carbon tax in the $500 per ton of CO2 range would have a much more dramatic impact on the economies and energy technology mixes of rich countries, probably far too dramatic for a capitalist market global economy to cope with, but that is altogether another story. Yet, such potentially disruptive economic impacts of very high carbon taxes are almost certainly not properly modeled in the IAMs used in IPCC and related studies over the long run, since those models seem to be incapable of producing financial crises and economic disruption generally. Finally, we must remember that even with a reasonably slow phase-in rate to a high carbon tax in rich countries so that the economy could cope without crisis, as typically modeled by IAMs, even a high carbon tax will still have rapidly diminishing returns in reducing carbon emissions as the supply of electricity approaches 100% renewables, with little to no carbon left to be taxed.
Notes:
[1] Of course, taxes on CO2 emissions at a level well above $100 per ton would likely yield greater reductions than 10%, but that is another important but very different possible scenario, with serious likely disruptions to many economies.
[i] Stiglitz, J. and Stern, N. (Co-Chairs), Report of the High-Level Commission on Carbon Prices, World Bank, Washington, D.C., 2017.
[ii] Rafaty, R., Dolphin, G., and Pretis, F., Carbon Pricing and the Elasticity of CO2 Emissions, Institute for New Economic Thinking Working Paper No. 140; https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions; Taylor, L., Carbon Pricing Isn’t Effective at Reducing CO2 Emissions, Institute for New Economic Thinking, May 10, 2021, https://www.ineteconomics.org/perspectives/blog/carbon-pricing-isnt-effective-at-reducing-co2-emissions.
[iii] Even the High-Level Commission on Carbon Pricing Report stated that “Carbon pricing by itself may not be sufficient to induce change at the pace and on the scale required for the Paris target to be met and may need to be complemented by other well-designed policies tackling various market and government failures, as well as other imperfections.”
