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COMMENTARY: Some Kind of Carbon Tax Is Coming to America, Like It or Not

These translations are done via Google Translate

Fifty countries now have national systems for pricing global warming emissions, and they may soon drag the US into joining them.

The late economist Milton Friedman, the patron saint of conservative capitalism, didn’t have much use for government involvement in business. But he made an exception for pollution. If an industry spoils the environment, he often said, then the government should tax it until it cleans up its act. Because if polluters can pollute for free, then they are essentially stealing wealth and well-being from everybody else.

When he said that in the 1960s and ’70s, he was talking about smog and the like. But as scientists and oil companies knew then, and we all know now, carbon dioxide is another form of pollution, one that is heating the world and threatening human civilization. Making polluters pay a price for this negative externality, as Friedman would call it, is an idea that is not only conservative and capitalist and moral but also a boon to both the environment and federal budgets.

So, naturally, the world’s shining bastion of conservative capitalism, the United States, consistently rejects Friedman’s idea. Fortunately, plenty of other countries are getting on board with it. And they may soon enough drag the US into joining them.

Fifty countries now have national systems for pricing carbon, involving a carbon tax, emissions trading or a combination of both, according to the latest World Bank tally. These systems cover 24% of the world’s carbon emissions, up from just 7% in 2013.

Carbon Pricing Is Catching On

Dozens of governments have instituted or are actively considering taxes, trading systems or other methods of making carbon pollution more costly

Source: World BankNote: Several US states have pricing mechanisms. Excludes voluntary credit markets in Saudi Arabia, Sri Lanka and Thailand. Data for policy positions in distinct regions.

Dozens of local governments have their own mechanisms, including California, Massachusetts and Washington. Nineteen countries and 13 more local governments are actively debating or preparing to take up the practice, including six more US states.

The US government is one of just three members of the Group of 20 nations that are in no hurry to price carbon. The other two are Russia and Saudi Arabia (and even Saudi Arabia is at least about to launch a voluntary carbon-credit market, for whatever that’s worth). This is not what you would call good company, though it is perhaps understandable — all three are large producers of fossil fuels. Refusing to price carbon amounts to a $700 billion annual gift to US oil companies.

But the pressure to change is building, even if the pace is still too slow. Carbon pricing raised a record $104 billion in revenue last year, a far cry from the trillions needed annually to deep-six fossil fuels and avoid the most catastrophic climate change. US involvement would move the needle significantly.

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Europe, of all places, may be the source of the most pressure. The European Union is transitioning to a carbon tariff, called the Carbon Border Adjustment Mechanism, that will be fully in place in 2026. This will charge foreign exporters for the emissions they generate in the production process, which will move the market’s invisible hand to favor cleaner production. And it will be fair because EU producers already pay a price for carbon as part of the union’s cap-and-trade system. The tariff and the trading system work together to set a carbon price that everybody pays.

Another key detail about the CBAM is that it gives exporters a break if they can prove they’ve already paid a carbon fee in their home countries. That will push those countries — including the US — to set their own carbon price or get left behind, MIT economist Catherine Wolfram noted in a recent session at Harvard University’s Climate Action Week.

Not that there aren’t plenty of other great reasons for the US to jump on board. At the session with Wolfram was Harvard economist James Stock, who estimated that adding a carbon tax to the Inflation Reduction Act’s clean-energy incentives would cut US carbon emissions by 66% by 2035, easily surpassing the Biden administration’s stated goal of cutting emissions in half by 2030. Without it, the country is on a path to climate failure.

“No models indicate the 2030 US climate target would be met with the IRA alone,” Democratic Senator Sheldon Whitehouse of Rhode Island said on the panel. He has proposed legislation for both a domestic carbon price and a border tariff. “If we want a pathway to climate safety, it will require we do what’s economically and morally right and price carbon pollution.”

A carbon tax could also raise $2 trillion over a decade, Wolfram said, putting a huge dent in the federal budget deficit when everybody is starting to panic about it again. That estimate is consistent with other studies — though a new one from researchers at the University of British Columbia suggests a global carbon tax could raise $2 trillion per year, enough to cover a universal basic income for the entire planet.

As Whitehouse noted, US manufacturers are already two-thirds less carbon-polluting than those in, say, China. This means Europe’s tariff will benefit them even if the US doesn’t lift a finger to impose its own price. But doing so would benefit them even more while also tweaking China. That calculus has inspired bipartisan interest, including a bill by Republican Senators Bill Cassidy of Louisiana and Lindsay Graham of South Carolina proposing their own carbon tariff.

As my Bloomberg Opinion colleague Liam Denning noted, Cassidy has gone out of his way to deny his tariff would amount to carbon pricing. Without a domestic carbon price, a border tariff probably wouldn’t be fair enough to withstand World Trade Organization scrutiny, Wolfram suggested. Still, the bill was another encouraging sign that momentum is growing toward the US finally taking Milton Friedman’s advice. It can’t happen soon enough.

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