All around the world, grave signs of climate change are evident. Our warming planet is fueling natural disasters from Hurricane Ida to wildfires in Siberia, drought in the western U.S., and flooding in southeast Michigan. The cost of destructive weather is rising dramatically. According to NOAA, weather-related disasters now regularly cost the US over $100 billion a year, a more than 5-fold increase from just the 1980s on an inflation-adjusted basis. Along with the financial costs comes untold human suffering. Even with much needed adaptation measures, the monetary costs and human suffering will continue to rise unless we address the primary cause: burning fossil fuels.
There is a policy tool to reduce the burning of fossil fuels that is broadly favored by economists: charge fossil fuel companies a carbon fee and return the revenue to households as a dividend or rebate. It will reduce carbon pollution throughout the entire economy and can complement other needed policies, such as regulating local air pollutants and removing fossil fuel subsidies, to accelerate emissions reductions at the speed that is necessary. A statement supporting this type of carbon pricing policy has been signed by all former living Federal Reserve Chairs, 28 Nobel Laureates, and 3500+ other economists. A carbon fee and dividend is simple, transparent and will help stabilize climate risk. It will also improve health by decreasing the pollution we breathe and provide a financial benefit to the most vulnerable in our society.
A basic economic principle is that if you want less of something, make it more expensive. The simplest, most efficient way to make fossil fuels more expensive is to charge fossil fuel companies a carbon fee based on the amount their products pollute. The carbon fee should start relatively low and rise steadily each year until emissions reduction targets are met. The rising price will send a clear price signal to businesses, investors and consumers that fossil fuel intensive products will become more expensive.
Fossil fuel companies will pass some of the cost of the carbon fee down the supply chain, making all products reflect their true costs. Businesses and manufacturers will respond by finding ways to become more energy efficient and rely less on fossil fuels. It will create demand for cleaner technologies which, in turn, will spur private investment for those technologies.
On the consumer side, the cost of gasoline, electricity, heating and some carbon-intensive goods will rise. Consumers will seek out less expensive alternatives, further incentivizing producers to make cleaner goods.
Plus, to protect households from rising costs, the revenue collected from the carbon fees paid by fossil fuel companies will be returned equally to Americans as dividends, or rebates. This rebate is for people to spend as they choose, just like the recent stimulus checks. A majority of households, including the most economically vulnerable, will receive more in their rebate checks than they pay in increased prices. This net benefit makes the fee progressive rather than regressive.
To avoid putting American businesses at a disadvantage compared to China or other nations, a border carbon tax will be charged on carbon-intensive goods from nations without a similar carbon fee. That money will be used for rebates to American manufacturers when exporting carbon intensive goods to countries without a carbon fee. This will disincentivize American manufacturers from moving to a country where they can pollute for free, while incentivizing other countries to implement their own carbon fee.
In fact, beginning in 2023, the European Union intends to charge a border carbon tax on imports of carbon-intensive goods. Canada is considering the same. For American companies to avoid paying that border carbon tax, the U.S. needs to have our own carbon price in place.
We and the additional 44 economists across Michigan who joined us in signing this statement agree that a well-designed carbon fee and dividend policy will be a win for America. The time to tackle climate change is now, and an economy-wide carbon fee and dividend should be the centerpiece of how we do it.
The original version of this statement has been shortened for publication. The full statement and most current list of signatories can be found at tinyurl.com/MIEconCFD.
Thomas Lyon is Dow professor of sustainable science, technology and commerce, School for Environment and Sustainability, University of Michigan. Michael Moore is professor of environmental economics, School for Environment and Sustainability, University of Michigan.
This article was originally published in Crain’s Business Detroit. To read the original publication click here.