Trudeau Making Pigou Proud

When listening to a Planet Money podcast last week, I was thrilled to hear Sarah Gonzalez talk public choice in the episode “The Pigou Club”. Specifically, she investigates the Pigouvian tax. This tax pertains to negative externalities, as the economist was famous for his graph of both private and social marginal cost paired with a conclusion that problems such as pollution needed to have a price put on them. I was of course elated to feel like an expert as the background information was given, and was captivated by the application in the latter half of the episode.

Canadian Prime Minister Justin Trudeau’s 2019 carbon tax calls the aforementioned “price on” externality at around $50 per ton. In reality this should be higher, but after discussing the intricacies of political decision making this semester, it should be unsurprising to us that the government would only bear around this number. Basically, the idea is that if a government puts taxes on carbon, people will change their behavior little by little, and in reaction the government’s role can be minimized to not include many other environmental regulations and subsidies that address the same concerns a carbon tax would. The more interesting part came after the Canadian government announced this carbon tax, though, when Trudeau stated he would basically be giving back “free money” in the form of a rebate as a result of electorate pushback on these taxes before his next election. If people checked a box, they would get a sort of pollution refund. This confused me at first, but what the podcast then clarified is that these taxes still cause people to pollute less even though they get a rebate, and further 80% of people are getting back more than they paid because the wealthy tended to pollute so much more (flying more, heating big houses, etc.). Therefore, this system made lots of people much better off.

People frequently ask if this type of program would ever fly in the United States, despite the fact that some individual states are considering it. Economist Gilbert Metcalf states that making the carbon tax “reform revenue neutral” (as in, like Canada, giving back revenue through lower taxes/cash rebates instead of new spending) would potentially let this idea cross the political aisle. I am fascinated to see how this all plays out over the next few years, especially (as it was mentioned in class) because this currently seems to be an issue American politicians have not been able to get behind on a national scale.