With a carbon tax there is nothing to exchange with other people. If you buy gasoline or coal, you pay a tax and the money is evenly distributed to everyone. People who have existing coal-fired power plants don't get free credits to allow them to sustain their operations, they just pay the tax and then become uncompetitive with non-carbon generation methods. So they go out of business as fast as alternative generation methods can be constructed. In the meantime ordinary people have the refund to compensate for the temporarily higher price of electricity.
Oh I get it. You tax emissions with no way to lower the tax besides lowering emissions. That means there's an underlying accounting for carbon, but like you said there's not something like market or exchange. So in this model air travel for example would 2x in price, but 1x of that would go towards the carbon tax which is then redistributed to everyone. Sounds interesting, are there any particular strengths or weaknesses to this model?
The strengths are that it's simple, hard to game, and doesn't harm ordinary people because the average person gets a refund of 100% of the money. (It's also somewhat progressive because people with more money tend to emit more carbon and so pay more tax, but only get the same refund.)
The main "weakness" is that it imposes significant costs on existing fossil fuel operations. Oil and coal companies would lose billions of dollars in value because they would both have to pay the tax and experience a surge in new competition from alternatives that can now underprice them. I don't regard this as a problem -- the writing has been on the wall for a long time now and if you've invested in these industries you could have predicted this was coming -- but it is an inconvenience because it causes those industries to lobby against it aggressively, which makes it harder to enact. (But the same will be true of anything with near-term effectiveness, because the whole point is to put them out of business.)
The other weakness is you can game it with international trade.
Produce a good in a country without the carbon tax, repackage it in a country that doesn't keep good origin manifests, lie about doing that, then send it to your destination on a solar powered boat (or whatever has the lowest carbon footprint).
We see the same game being played with slavery and child labor. Pick a favorite brand, add "slavery" and you'll find decades of shocked outrage and "commitment to do better"
Mind you, I still support broad carbon taxes. But this is a predictable outcome.
This is not really specific to a carbon tax though, is it? If the EU is using a cap and trade system or what have you, it still happens, because it's a problem of evaluating what is going on in someone else's jurisdiction.
My suggestion in another thread is to impose general tariffs on countries that don't have their own carbon tax, which, if it successfully pressures them to adopt one, avoids these kinds of games because now the high-emitting country charges the carbon tax itself regardless of whether its exports make a pitstop in Greenland, which it may do even if some of its exports were avoiding the tariff that way, so that all of them can avoid it.
But it's not obvious this is even necessary because if the largest economies (especially the US) did this, it would shift the economies of scale in favor of non-carbon energy sources to such an extent that they would become cost competitive on their own nearly everywhere else in the world anyway.
Fair point. There likely needs to be somewhat of a critical mass before it becomes super effective. This might be something that could be accomplished with an international treaty.
Which is why you have to pair carbon taxes with some sort of carbon import tarrif. The EU/EEA (who have high and increasing domestic carbon prices) have now created the legislation to introduce one - though it will be phased in very slowly over the next decade:
A boarder tarrif helps, but I'm talking about the situation where a country hides the origin country to skirt the tarrif.
For example, imagine a company manufactured something in Qatar (which has the highest per capita CO2 emissions), then they ship their product to Greenland, which has the lowest emissions per capita. Then they repackage their stuff and upon import to the EU, report that "yup, 100% a product of Greenland". Which will almost certainly have low or no carbon tarrifs.
(Not saying any of these countries would actually participate in such a scheme, just an example).
This sort of wheeling and dealing is how companies skirted US and China tarrifs.
