How to avoid the political pitfalls of carbon taxes
A carbon tax is much discussed as a solution to climate change. It is simple and straightforward: a climate price tag makes industry and consumers take into account the implicit negative effects of their actions, whether it is the aircraft fuel for a vacation, or fossil fuels for food fertilizers or to heat and cool a home.
I have argued for a well-designed carbon tax for more than a decade. But five important caveats, almost universally breached by politicians, affect the likelihood of such a policy working.
First, a carbon tax has to be uniform across the entire economy. Saving one tonne of CO2 by switching from coal to gas helps just as much as saving a tonne by using solar energy or not driving. Yet, politicians set different prices. Among the member countries of the Organization for Economic Co-operation and Development (OECD), there are likely more than 1,400 different levels of taxes.