Sir Richard Branson, the brash, suave, billionaire adventurer has suggested that a carbon tax can stave off a global climate crisis, as long as it is systemically and equitably implemented. In Cancún for the UN climate talks, Branson suggested that businesses and entrepreneurs could reach emission reduction goals if world governments were unable to reach substantive agreements, but we would be better with governmental frameworks taking the lead.
“The ideas are out there,” Branson told reporters. “But if the worst came to the worst and governments did not get their act together, industry should be able to solve the problems themselves. If governments set a framework in which clean energy was not taxed and dirty energy was, then there is a chance. That’s what government has to do.”
What he is suggesting is known as a “Pigovian” tax. This type of tax is imposed on companies that pollute the environment or cause other type of social harm with their product, and its purpose is to encourage more socially and environmentally responsible behavior through financial incentives. It is meant to counter the externalization of negative costs, which in today’s economy currently go unaccounted for. The taxes levied on the negative externalities would be used to mitigate the problems caused by the product. Some classic examples of a Pigovian tax are cigarette taxes that are used for cancer research and smoking awareness campaigns, or taxing gulf-based oil companies and directing the revenue towards spill remediation.
These types of taxes are being used sparingly, but unfortunately they are not being framed well enough in the public debate to gain widespread support. Industrialists claim that any tax will cause consumer prices to rise, which of course is a death knell to a politician that would support this nowadays. The carbon tax debate, specifically, has been dominated by industrialists and business-friendly politicians who incorrectly claim that any tax on businesses will be entirely passed on to the consumer; anyone that has taken an introductory economics class knows the price-quantity supply-demand curve dictates that taxes are shared between the supplier and the demander, no matter who the tax is imposed upon. What is missing from that curve are the social costs of negative externality remediation, which are paid for by society as a whole, i.e. taxpayers, but the suppliers in this case are not being held responsible. Ultimately, by avoiding taxing negative externalities we are continuing the practice of privatizing profits and socializing the costs and losses of private industry.
The fact remains, Americans do not pay the true costs of the products we are consuming, especially energy sources (and especially especially electronics – see the newest “Story of Stuff” video for more on that subject). In the US we handed out more than $72 billion to fossil fuel companies from 2002-2008 compared with $29 billion to renewable energy, which included $16.8 billion for corn-based ethanol – not exactly the most eco-friendly alternative. So less than half the subsidies for renewable power went to wind, solar, hydro, geothermal and non-corn based biofuels, while only $2.3 billion of the $72 billion in fossil fuel subsidies went towards carbon capture technology; the rest went to oil and coal.
Much of the subsidies take the form of tax breaks and credits, which don’t even include the taxes avoided by these companies through loopholes and off-shore shelters. For example, according to a 2005 Congressional Budget Office report, capital investments such as oil field leases and drilling equipment are taxed at 9 percent, ridiculously lower than the 25 percent levied on virtually all other businesses, especially considering oil companies break profitability records on a nearly quarterly basis. Often, small and mid-sized oil companies are taxed so low on capital investments that the can use other credits and loopholes to have a higher return on these investments after taxes.
Taxpayers are paying companies to pollute, and paying to clean up after them. Just like the war on terror, we are funding both sides of the climate fight. This needs to stop, but it’s unlikely to happen anytime soon, unless we can figure out a way to frame the argument in a way that makes the American public understand this is not a tax on them, rather a cost mitigation on the damage we are currently paying for. Estimates suggest that including environmental costs in GDP assessment, as India plans to start doing by 2015 could decrease growth by 2.5 percent in the short term. As the famous Stern Report conducted by World Bank chief economist Lord Nicholas Stern notes, inaction will cost anywhere from 5-20 percent of GDP, while taking aggressive steps to stabilize and eventually decrease atmospheric CO2 would cost only 1 percent of GDP. This seems like a worthy investment.
Branson seems to think so as well. As the founder and chairman of the Virgin Group, he does not take the climate crisis lightly. He has committed 100% of Virgin Airlines’ profits towards developing alternative fuels and energy efficiency, and believes he can have his fleet flying on biofuels in three to five years. Supporting global carbon taxes is one sign that Branson can think systemically with a greater understanding of the role business plays in society than his counterparts in the dirty energy sector.