Carbon Tax as a Solution to Fossil-Fuel Negative Externalities

Bill McKibben, a leader environmentalist who has written extensively on the impact of global warming, has long argued for some kind of price on global warming pollution. Specifically, McKibben is trying to push for a carbon tax price because it isn't fair that the "fossil fuel industry is allowed to put out their waste for free, using the atmosphere as an open sewer." He sums this up as a massive negative externality imposed upon the world, having been caused by the fossil fuel industry. McKibben's solution is to simply tax carbon directly since many alternative schemes (cap-and-trade systems, etc.) have not worked effectively. This removes the "arbitraging games and artful dodges that have helped undermine many schemes" to combat emissions and global warming. Another proposal that he favors even more is the "fee-and-dividend" approach: it sets a price on carbon, and then rebates the revenue straight to the citizens by sending them a monthly check. It's a mind-boggling proposal where it will increase what we pay at the pump, which is good, because then we ride bikes more; yet, the check will cover the increased cost. Everyone’s made whole, and if you push up the tax you push up the rebate too. McKibben quotes it as a "kind of perpetual motion machine, a virtuous cycle."


His reasoning resonates with our reading "Public Finance and Public Policy" by Gruber. Specifically in Chapters 5 & 7, Gruber outlines Public-Sector remedies for externalities. Gruber details the argument for corrective taxation in which there is a tax to the perpetrator of the negative externality that can effectively internalize the externality and lead to the socially optimal outcome. The perpetrator in this case would be the fossil-fuel industries who have allowed to spill over high pollution at no cost. For the "fee-and-dividend" approach, McKibben is using Gruber's concept of subsidies as a solution to positive production externalities by making the consumers who drive less and produce less carbon emissions a "check" (subsidy) to incentivize them to save more and more.