The Trick to Make Capitalism Help Solve Climate Change

The best step any nation can take toward mitigating climate change is a revenue-neutral carbon fee. Here’s how it works.

In the U.S., where it’s hard to imagine decisive action at the national level for the next few years, individual states may choose to take carbon pricing into their own hands. 

Photo by  jzabloski/Getty Images.

Welcome to the climate emergency. This is what it looks like: dying coral reefs and dialed-in ice sheet disintegration; drought, flood, and refugees. This is what it feels like: a deep uncertainty about the future expressed in economic and political instability. To escape the heat, land and ocean species everywhere are migrating toward the poles. Of the millions of species on our planet, only one foolishly continues to make the problem worse by burning fossil fuels—the one that named itself “wise man,” Homo sapiens.

But as the crisis deepens, the world—with the stunning exception of certain intransigent U.S. politicians—is finally getting the message. The question becomes what to do.

I’m a fan of deep voluntary personal reduction, which (I’ve found) leads to a more satisfying and connected life and enhances one’s ability to effect broader change. But it’s not a solution; we need to leave fossil fuels quickly and globally. Economists agree that the way to do this is to make the price of fossil fuels reflect their true cost to society.

The best step any nation can take is a revenue-neutral carbon fee.

Here’s how it works: Those who wish to disrupt the climate (to be fair, all of us are complicit as we live our modern lives) should pay for the “privilege.” A price is applied at the first point of sale after the oil, coal, or gas is extracted; then it passes downstream in proportion to the amount of emissions embodied in the transaction. The price will increase over time, giving individuals and businesses time to plan and adjust.

This predictable pricing would encourage innovation across the entire economy, driving the clean energy revolution at every scale. Rational corporations, realizing we’ll eventually need to do something about climate change, prefer the certainty of a carbon price to unpredictable new regulations. Indeed, the smartest energy corporations will increasingly shift to renewables as they factor the carbon price into investment plans. As Princeton economist Alan Blinder says, “I can hardly wait to witness the outpouring of ideas it would unleash.”

A carbon price, properly designed, would be comprehensive and effective. It would go far toward correcting a horrifying market failure: that destroying the planet that gave rise to us and cradles us in the violent vastness of space … is profitable. But to realize this potential, two key details must be worked out.

Individual states may choose to take carbon pricing into their own hands.

First, border adjustments are needed to keep businesses and jobs from leaking to “dirty” nations that don’t have carbon pricing. Businesses in “clean” nations (with carbon pricing) that export to dirty nations would be reimbursed; goods imported from dirty nations would face a tariff. The size of these adjustments would be set by the emissions embodied in the goods. Trade between clean nations would be free.

Crucially, the border adjustment provides a path to global climate action. Dirty nations have an incentive to adopt their own carbon prices so they can keep the money instead of paying our tariff. Furthermore, as businesses in clean nations innovate and reduce their embodied emissions, equivalent products imported from dirty nations will become increasingly expensive. Businesses in dirty nations would therefore lobby for a carbon price—or risk being locked out of clean markets. 

In the U.S., where it’s hard to imagine decisive action at the national level for the next few years, individual states may choose to take carbon pricing into their own hands. But because interstate tariffs are constitutionally forbidden, state initiatives will necessarily be compromised by less-than-ideal border adjustments. Instead of tariffs, they might, for example, rely on tax rebates tailored to prevent businesses from leaving—an imperfect, apples-to-oranges solution. While I'd love to see states pass smart policies that navigate around this issue, unlocking the full potential of fee and dividend will take a bit of national unity.

Please raise your voices! The world desperately needs you.

To those Republicans who get the urgency of climate change—I know you’re out there—please raise your voices! The world desperately needs you.

The second key detail in designing a carbon price is how to use the revenue. Although this is contentious even among Big Green groups, there are strong reasons for giving 100 percent of the net revenue back to the people as an equal dividend.

Since the government keeps nothing, a revenue-neutral carbon fee is quite simply not a tax; therefore, revenue-neutrality creates political feasibility. Also, a carbon price in which the government keeps the money is bound to be regressive, hitting poorest households hardest. Any haggling over what to do with the money, or what other taxes to reduce, will ultimately be unfair and serve to enrich special interests—whether those special interests are conservative or liberal.

Finally, both model studies and real-world examples demonstrate that a revenue-neutral fee would boost the economy by creating jobs and putting money back in the pockets of working-class people who spend it. Take away revenue neutrality, and the fee becomes a tax—and an economic drag.

A well-designed carbon fee isn’t the only thing we’ll need to create a deeply just and sustainable society on Earth; ultimately we’ll need a steady-state economy and an end to unsustainable population growth. This will require a tectonic shift in how we see our place in the web of life. But a carbon fee would be a huge step in the right direction.

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