Carbon Tax Wedge

A general carbon tax is by common consent one of the most economically efficient ways to cut carbon emissions. While such taxes are usually presented as means to force technological innovation and decrease pollution per unit of consumption, they also incentivize less consumption, and part of the success of a carbon tax in lowering emissions undoubtedly would come from getting people to consume less.

According to the IPCC, a tax of $50 per ton of carbon dioxide equivalent could prevent from 3.5 to 7 billion tons carbon equivalent from being emitted annually by 2030, while a tax of $100 per ton of carbon dioxide equivalent could prevent from 4.3 to 8.4 billion tons carbon equivalent from being emitted annually.[i] Projected out to 2060, according to my calculations, such taxes could provide from 5.6 to 13.4 wedges of carbon reduction.[ii] In other words, a right-sized carbon tax, by itself, could conceivably provide the eight or more wedges needed to avoid catastrophic GCC.

A carbon tax is so effective because it affects consumption across the board, from airplane travel to new home construction to food purchases. It treats all these areas equally, from an emissions perspective, and does not distinguish between frivolous and important, useful or useless consumption. That is both its (economic) strength and its (ethical) weakness, and why it should probably be supplemented by measures that directly target luxury carbon emissions.

[i] IPCC, Climate Change 2007: Mitigation, Summary for Policymakers, pp. 9-10, tables SPM-1 and SPM-2.

[ii] Note that these taxes would scale up in two to two and a half decades, rather than the five decades in Pacala and Socolow’s original wedges. I have (arbitrarily) assumed that the taxes would provide the same amount of annual carbon reductions in succeeding years. Strictly speaking, the resulting figure is not a triangular carbon “wedge” but a carbon trapezoid. A similar point applies to the economic growth reduction wedges discussed in a later section.