Surprise! Even A Crazy-High Carbon Tax Would Help California Businesses

CREDIT: Shutterstock
CREDIT: Shutterstock

According to a new study out of California, taxing carbon emissions at a whopping $200 per ton would create more jobs in the state than business-as-usual.

The report was commissioned by Citizens Climate Lobby and carried out by Regional Economic Models, Inc. (REMI). The latter used a model of the California economy they’ve developed and combined it with the Carbon Tax Analysis Model — an open-source, Microsoft Excel-based model of carbon emissions and tax revenues at the state level, built off data from the U.S. Energy Information Administration. The resulting simulation looked at three different tax levels: $50 per ton of carbon emissions, $100 per ton, and $200 per ton. All three started at $10 per ton in 2015, then rose $10 annually until they hit their maximum level: $50 in 2019, $100 in 2024, and $200 in 2034.

Lots of previous analyses have tried to model the economic cost of the damage climate change will impose, and $200 per ton of emissions is consistent with several of them. But it’s also way higher than anything lawmakers here or elsewhere have considered. The Canadian province of British Columbia, for example, has a carbon tax of $27.88 per ton. When the Obama Administration estimated the price of carbon, the mid-range of their numbers was around $40 per ton.

Yet not only did the $200 per ton tax create more jobs than the “do nothing” baseline in REMI’s simulation, it created more jobs than the lower taxes did. Anywhere from 236,775 to 286,475 more jobs by 2035, to be specific.

How would this happen? Shouldn’t higher taxes hurt job growth?

Well, one reason a carbon tax is friendly to the economy is that it imposes a price on greenhouse gas emissions but doesn’t specify how the cuts are to be made. As the video below shows, that turns every business into a laboratory, each one looking for the most effective and least-costly ways to cut emissions that work for them:

But the other reason is what lawmakers do with the revenue. In all its scenarios, the California study set aside the first $4 billion in revenue each year for investment in renewables. Beyond that, it modeled two options:

The “across-the-board” model (ATB), which uses the revenue to cut California’s sales, income and corporate taxes by a proportional amount.

The “fee-and-dividend” model (FAD), which returns the revenue in equal amounts per person to every household in the state.

When NPR looked into a carbon tax, economists at MIT told them that plowing the money back into the economy like that essentially eliminated any economic drag from the tax. British Columbia went with the ATB option, and their carbon tax shows no signs of harming the province’s economy.


What’s especially interesting about the California study is it breaks down the different results from the ATB and FAD options. Cutting taxes created more jobs than giving out checks: 286,475 more jobs versus 236,775 more. Both increased real disposable income for the average California household by $16,000 by 2035. But cutting taxes resulted in almost $250 billion in additional cumulative GDP by 2035, while handing out checks only added around $60 billion by 2035.

So does a bigger economy mean cutting taxes is the better option? Not necessarily. Imagine an economy with enough productivity that everyone can make enough to support their family working just 20 hours a week. They’d then have more time to spend on friends, family, hobbies, travel, leisure, etc. Or they could sacrifice all that to keep working 40 or more hours or more and make way more income, which would then show up in the GDP data. So a society in which everyone just kept working more would have a larger economy as we measure it. But it’s not obvious it would be a better society in everyday human terms. This is just one of the problems with treating GDP as a proxy for a society’s overall well-being. (Also, while both versions of the carbon tax reduced income inequality, returning the money via checks reduced inequality more.)

The FAD option is strikingly similar to what’s called a universal basic income (UBI) — a policy where everyone in the state or country gets a check for the same amount every year, no strings or conditions attached. Alyssa Battistoni recently argued in Jacobin that a UBI itself would help make society more environmentally friendly, by moving it toward less carbon-intensive work and consumption.

REMI’s study also didn’t account for the health benefits of cutting carbon emissions. Those cuts inevitably reduce other pollutants from fossil fuels life sulfur dioxides and particulate matter, which are linked to asthma and other cardiovascular problems. Reducing those makes for healthier citizens and fewer expenditures on medical care, which also rebounds to the benefit of job creation and growth. So the economic benefits of a carbon tax could conceivably be even higher than what REMI modeled.

Finally, there’s the carbon emissions themselves. According to REMI’s model, the $200 per ton tax would cut California’s emissions between 25 and 30 percent from 1990’s levels by 2035.

Back in 2010, the the National Academy of Sciences and National Academy of Engineering recommended the United States as a whole try to cut its emissions 50 to 80 percent cut below 1990 levels by 2050 — a goal the White House may eventually propose.


An earlier version of this piece incorrectly stated that REMI’s modeling showed the tax would cut California’s carbon emissions 70 percent below 1990 levels by 2035.