Designed Right, Carbon Taxes Do Not Kill Jobs

The standard argument from opponents in the continuing debate over carbon taxes is the grudging admission that while they might reduce carbon emissions, the taxes ultimately fail because they kill jobs.

A recent Bloomberg editorial goes a long way to dispelling the latter part of that argument. Where they are implemented, carbon taxes—also known as environmental tax reforms (ETR)—succeed in reducing greenhouse-gas emissions. “The next question is whether that success is bought at the expense of jobs and incomes,” Bloomberg says. “The answer is no. As long as the tax is well-designed, it can cut emissions at little or no economic cost. And that is a conservative assessment: In practice, a carbon tax has been shown to provide an economic boost. The reason is that the revenue raised by a carbon tax can be used to cut other, more damaging, taxes.”

That’s because, generally speaking, taxes make economies less efficient. But there are degrees of damage, as the editorial explains: “Taxing ‘bads,’ such as pollution, actually improves the allocation of resources, whereas taxing ‘goods,’ such as labor, reduces the economy's capacity to produce. In principle, therefore, using the revenue from a carbon tax to cut other taxes can yield a double benefit: reducing pollution and expanding the economy.”

Reducing pollution

A recent report from the Institute for European Environmental Policy (IEEP) says in terms of environmental impacts, past experience has shown “substantial variations” among countries, but carbon and energy taxes carbon and energy taxes have led to substantial CO2 savings in some countries. “In Denmark for example, total CO2 emissions decreased by 24 percent between 1990 and 2001, with Danish industry reducing its CO2 emissions by 25 percent per produced unit from 1993 to 2000,” the report said. “In Sweden, average 2008-11 emissions were 12.6 percent lower than 1990 levels, while in Finland energy and carbon taxes were found to have reduced carbon emissions by over seven percent in 1990-1998.”

Despite these positive trends, the report continued, the “overall rate of emission reductions is however insufficient to meet medium and long-term GHG emission reductions targets and to achieve full decoupling of economic growth from GHG emissions.” The limited effectiveness of the taxes is often linked to the numerous exemptions and tax reductions provided to sectors with the greatest potential to achieve emission reductions, so that’s a problem. For example, in Germany, such so-called “derogations” for the manufacturing and energy-intensive industry lowered the overall potential positive environmental impact of the ETR, “although modifications to these derogations in 2003 have been found to increase CO2 emission reductions compared to previous calculations.”

GDP and Jobs

The IEEP report notes there is increasing evidence and analysis that suggests ETR “has had and can on the whole have positive effects on GDP growth, although there are also cases of negative effects and changes over time.” In Finland for example, ETR lead to an average increase in GDP of around 0.5 per cent in 2012, “with the main reason being that the taxes fall almost exclusively on imports of energy products, thus when energy demand falls there is an improvement in the international trade balance.”

The economic impacts of a particular carbon or energy tax reform depend on design (where taxes are levied), where the burden falls (on important domestic activities), the timescale, and on the use of revenues (investing in energy efficiency improvements in affected industries).

Experiences “also generally show a positive impact on employment overall,” the IEEP report said, although this depends on whether and how revenues are recycled as well as the nature of the wider ETR, including the other taxes or charges that are reduced (labor taxes). Also where the tax is applied “will determine where job losses may take place, as there may be losses for specific companies in a given sector but positive impacts for the economy as a whole.”

So it’s complicated, as they say. But overall, IEEP’s review of nine countries found none where a carbon tax had led to job losses.

Bloomberg said proceeding with caution is warranted, however: First, the economic benefits of a carbon tax “can take time to come through.” Second, while the economy as a whole may benefit from a carbon tax, that won't be true of every business or industry—energy-intensive sectors will be hit.

But the bottom line is that carbon taxes can help the environment and the economy if, as Bloomberg notes, the revenue is put to good use. The real trick, then is how to design a carbon tax.

Image: our kids are worth it by Louisa Billeter via Flickr cc