The neoliberal case for a carbon tax

I do not like taxes. They hamper economic growth, increase the cost of living, and carry with them the deeply troubling coercive element of the state using the threat of its monopoly on violence to extract money from its citizens. What’s more, the tax burden in the UK is already at a 49-year high.

However, there is one tax that I believe the government should introduce: a border-adjusted carbon tax. Such a move is ethical, compatible with neoliberalism, and has other potential benefits.

According to current estimates, unmitigated greenhouse emissions such as carbon dioxide are likely to lead to significant global temperature increases by 2100. If this happened, there would likely be significant humanitarian damage, including more severe weather, food crises, and the spread of infectious diseases.

Therefore, steps need to be taken to reduce carbon emissions if we are to avoid causing long-term damage to our planet and its future inhabitants. A carbon tax is one way in which this could be achieved.

Increasing the cost of carbon-based fuels will motivate companies to switch to clean energy. These costs will be passed on to consumers in the form of higher fuel prices, which will encourage them to become more energy efficient, thereby further reducing carbon dioxide emissions.

There is a great deal of evidence which suggests that a carbon tax is an effective way to do this. For example, Sweden has seen a significant decrease in its emissions since it introduced a carbon tax.

One of the key arguments for a carbon tax is protecting the planet for the future. Now, it can often be quite easy not to care that much about a future you will never see. We tend to place less emphasis on events that will take place far into the future, and so humans have a tendency not to take problems which will occur in the future as seriously as more immediate concerns. This is known as temporal discounting, and helps to explain why you might be feeling as though we should focus our attention on solving more immediate problems.

However, there is a case to be made that focussing on improving the welfare of future generations is even more important than addressing issues concerning humanity right now.

This is because action taken now to deal with major potential problems in the future can have a very high expected value. Human civilisation has the potential to exist for billions of years into the future, meaning that between now and whatever future date, there could be over a trillion more human lives.

On a more philosophical note, it could be argued that calling for a new tax flies in the face of libertarianism, as it is interfering too much with no guaranteed gain. After all, the great philosopher Robert Nozick in his Anarchy, State, and Utopia, argued that taxation was tantamount to forced labour. So, wouldn’t it be reasonable to suggest that individuals and businesses should be free to use their property in any way which they see fit, without having their money confiscated from them by the state?

Such a suggestion would not be in the least bit liberal. Nozick also argued that people have rights over their bodies and property which are sacrosanct. As we have already seen, carbon use has negative externalities as it causes environmental damage. Carbon dioxide emissions can result in damage being caused to other people and their property, thereby violating their rights. Therefore, for a neoliberal, the government is well within its rights to introduce methods to prevent the rights of individuals being violated by the actions of others.

And not only is a carbon tax an effective way to achieve these aims, it is also the approach most in line with the free market. Governments around the world currently place heavy restrictions on companies in an attempt to reduce their harmful emissions. They also heavily subsidise the renewable energy industry. Such approaches represent unacceptable interference in the market, financed by taxpayers.

The UK, for example, subsidies the renewable energy industry through the various schemes that force energy companies to include minimum shares of energy from renewable sources in their portfolios. These sources of energy are inefficient and more expensive and these costs are passed on to consumers. As a 2014 report from the IFS found, environmental policies “drive up energy prices directly through the environmental charges in the bill but also indirectly, and significantly, through the impact on generation and network investment costs”.

Instead of interfering in the market by imposing regulations and granting generous subsidies to certain companies, a carbon tax offers us a much simpler solution. Businesses and individuals respond to economic incentives and disincentives, and a carbon tax would allow the market to find a solution. Companies would naturally invest in research to find new and cost-effective ways to provide clean energy.

A carbon tax is also preferable to the current system of environmental taxation. There are already numerous taxes levied in the UK for environmental reasons. These taxes increase the cost of living for people by making it more expensive to eat, drive a car, go on holiday, and heat and light their homes. Introducing a carbon tax would allow the government to scrap these taxes thereby allowing people to keep more of their money.

Humanity faces challenges caused by global warming, and so steps need to be taken to solve them. Introducing a carbon tax is ethical, in keeping with neoliberal values such as respect for individual rights, looks to the free market rather than the state for solutions, and can lower the cost of living.

Written by Ben Ramanauskas

Ben Ramanauskas is a research economist at Oxford University.