Geoscience Reference
In-Depth Information
Political scientists point out that the public acceptability of a price-
raising regulation or tax may be affected by the point in the production
chain at which it is levied. “The only good tax is an invisible tax,” as the
adage goes. For example, by law one-half of Social Security taxes are
“paid” by fi rms, and most people don't count them as part of their own
tax burden. Labor economists fi rmly believe that both parts of the Social
Security taxes come out of wages (or, in technical language, are shifted to
wages). Given these behavioral perceptions, or misperceptions, it might be
advisable to place regulations or carbon taxes upstream from consumers
so that they are less prominent and meet less public opposition.
From an economic point of view, however, it does not make any dif-
ference whether the producer, the refi ner, or the gas station pays. The
carbon price will be passed on to the consumer in the form of higher
prices, and the impact on the price of gasoline or other goods does not
depend upon who writes the check.
THE ECONOMIC FUNCTIONS OF PUTTING A PRICE ON
CARBON EMISSIONS
Putting a price on the use of carbon serves the primary purpose of
providing strong incentives to reduce carbon emissions. It does this
through three mechanisms: by affecting consumers, producers, and in-
novators.
First, a carbon price will provide signals to consumers about what
goods and services have high carbon content and should therefore
be used more sparingly. Consumers will fi nd that air travel becomes
relatively more expensive than visiting local sights or taking the
train, which will reduce air travel and therefore the emissions from
air travel.
Second, it will provide signals to producers about which inputs use
more carbon and which use less or none. It thereby induces fi rms to
move to low-carbon technologies so as to lower their costs and increase
their profi ts. One of the most important signals will come in electric
power generation. The costs of generating electricity from coal will rise
sharply; costs from natural gas will rise somewhat less; and those from
nuclear power and renewable sources like wind will rise not at all. Of
