Elon Musk’s Libertarian Case for a Carbon Tax

Tesla Motors CEO Elon Musk reiterated his calls for a carbon tax last week during an interview with a Reno newspaper about Tesla’s gigafactory in nearby Storey County, Nevada.

Musk’s stance is hardly new. He's gone on record saying we need a price on carbon to fight climate change and limit global temperature rise to 2 degrees Celsius by the end of this century. But these statements were slightly different.

Musk's conversation with the Reno Gazette-Journal at first focused on the tax breaks Nevada offered Tesla in order to sway the company to build in the Silver State. The question-and-answer session then morphed into more of a libertarian case for why a carbon tax is necessary.

When asked about subsidies for his company -- and the clean-energy industry at large -- Musk retorted with an attempt to turn such an argument on it head. He first called out subsidies for oil and gas, evident in the worldwide subsidies documented by organizations including the International Energy Agency (IEA).

“With respect to some of the other elements for solar panels and [electric vehicles], the big issue we have is that in reality if you accept the scientific consensus, every oil-burning activity is subsidized -- dramatically,” Elon Musk told the Reno Gazette-Journal.

If one believes there is value to the world’s atmosphere and oceans, and if such financial damages are not accounted for at a gasoline pump or coal-fired power plant, then the answer to many should be clear, Musk explained. Fossil fuels are already massively subsidized without any incentives to mitigate energy companies’ impact on the environment.

The solution, Musk went on, is to correct this “fundamental economic error” by establishing a carbon tax. Such a levy would correct the ongoing scenario of polluters emitting carbon and toxins into the air because there is no mechanism available to limit them. For libertarians who oppose any government intervention in the economy, such a tax could help solve this issue with minimal involvement.

An increasingly diverse coalition is calling for a carbon tax, and it includes the conventional energy companies that businesses such as Tesla are threatening to undermine. For example, ExxonMobil -- which has called for a carbon tax since 2009 -- recently amplified its message and said it will lobby the federal government more aggressively on this front.

From the energy companies’ point of view, such a tax is necessary for two reasons. First, it would create more certainty in the marketplace and help companies plan for future investments. Second, energy companies would prefer such a tax instead of more regulations across all levels of government — as well as in the overseas markets in which these companies operate.

Most advocates of carbon pricing agree that such a tax should be revenue-neutral, as ExxonMobil also suggests. British Columbia and Switzerland have already implemented such policies. Many analysts suggest these policies can even create jobs and stimulate the economy while encouraging further deployment of clean energy.

According to the Brookings Institution, revenues from a carbon tax could also help cushion the economic blow in regions such as West Virginia, where the decline of coal is severely impacting local communities. At a macroeconomic level, a carbon tax could be redistributed to taxpayers as rebates to help soften the blow of increased energy prices while more electricity generated by renewables is connected to the grid.

The bottom line is that carbon pricing can help transform national economies with minimal interference from regulators.

Musk’s call for a carbon tax echoes other analysts with a libertarian streak who see the need for solutions to climate change, but advocate for a more market-based approach. Case Western University Law School’s Jonathan Adler, for example, argued that a carbon tax would be more transparent and less onerous to implement than additional regulations or programs such as a cap-and-trade system. Ed Dolan, an economist, argued that a carbon tax would be a counterweight to regulations, as such pricing would put the onus on energy companies and heavily polluting industries to change how they operate – keeping the government out while making these companies responsible for their own environmental impacts.

But for a carbon tax to work here in the U.S., it would have to be implemented at a national level. And a recalcitrant Congress would never consider such legislation. But if today's motley crew of carbon pricing supporters, with energy companies in the mix, can make a business case (and write a few checks to some campaign accounts), perhaps such a policy can finally come to fruition after this year’s election.

Image credit: NVIDIA Corporation/Flickr