Challenging the carbon tax
A tax on carbon has been widely touted by economists as the most economically efficient way to reduce greenhouse gas emissions and combat climate change.
But new research by Haas energy economist Severin Borenstein and Ryan Kellogg of the University of Chicago challenges that long-held orthodoxy. Policies such as clean energy standards and subsidies may be as effective—or even more effective—in the electricity sector, which is of growing importance as vehicle and building electrification become a central strategy in fighting climate change.
“We hope this research will end the mantra among some environmental economists that carbon taxes are always the best mechanism to reduce emissions—and the extreme view that a carbon tax will solve the problem entirely,” says Borenstein, a professor of the graduate school and faculty director of the Energy Institute at Haas.
The electricity sector last year accounted for nearly a third of U.S. carbon emissions, and about 61% of that electricity comes from burning fossil fuels (coal and natural gas).
As the industry responds to increasing pressure for drastic cuts to greenhouse gas emissions, Borenstein urges thoughtfulness. “Carbon pricing is still a powerful tool, but this shows it’s important to think through the full context in which we’re doing greenhouse gas regulation,” he says.