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Why Set a Carbon Tax Rate at the Social Cost of Carbon?
Economists typically recommend a carbon tax on the basis of the economic theory of externalities. The theoretical solution to the Pareto inefficiency caused by an externality is to set a tax on an unpriced activity at the value of the externality in equilibrium, called a Pigovian tax. Guided by this theoretical result, climate economists such as William Nordhaus (2014) use integrated assessment models (IAMs) to estimate the value of the externality generated by carbon dioxide emissions, called the social cost of carbon (SCC), with an aim of recommending an optimal carbon tax rate. This project has received significant criticism largely centred on the social discount rate embedded in the analysis. In this talk, I instead question the project of estimating the SCC on conceptual grounds. I argue that the SCC, as it is measured in a prominent IAM, is more akin to a productivity externality than a Pigovian externality. This implies that the theoretical justification for recommending a carbon tax rate to be set at the social cost of carbon does not hold in this context. Even if there were a consensus among climate economists on the best estimate of the value of the SCC, it would still not indicate the ‘correct’ or ‘optimal’ carbon tax rate. I conclude this talk by discussing implications of this result, both for climate policy and for debates surrounding the social discount rate.
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This is an online event, available on the Centre for Ethics YouTube Channel, on Wednesday, February 9. Channel subscribers will receive a notification at the start. (For other events in the series, and to subscribe, visit YouTube.com/c/CentreforEthics.)
Rebecca Livernois
Centre for Ethics Visiting Postdoctoral Fellow
Philosophy
University of Toronto
Wed, Feb 9, 2022
12:30 PM - 01:45 PM
Centre for Ethics, University of Toronto
200 Larkin