The strange tax supported by both economists and major polluters

The strange tax supported by both economists and major polluters

If you asked 100 economists how to solve climate change, more than 90 would probably agree on the solution. They would say you need a carbon tax. What is that? It is simply a tax on the CO2 emitted by a given company. The higher the cost, the more difficult it becomes to pollute, and the cheaper it is to produce green energy and green goods. It is magical. The solution is not new. It has been the solution of economists since the 1970s, when Nobel Prize winner William Nordhaus theorized it.

It’s rare for economists to agree on issues, but carbon taxes are an exception. They agree so much that 3354 American economists, including many Nobel Prize winners, recently signed an open letter supporting the introduction of a carbon tax. You can get an updated list of signatories availablehere. You may note that the signatories are mostly US-based economists -RePec lists that there are 12727 US economists. This means that this open letter was signed by 25% of US economists, and it’s possible that not all the remaining 75% were invited to sign.

Economists’ approval of carbon taxes is not all that surprising. A more puzzling phenomenon is that fossil fuel companies seem to agree as well. Fossil companies are the heaviest polluters on the planet, yet they seem to want their emissions to be taxed. This is a bit like if bakers lobbied for a tax on wheat, or if students lobbied for more exams. Something about it seems off. So what’s driving this finding?

Large fossil fuel companies like to be taxed?

Building up a new dataset in research published in Ecological Economics, Dr. Alain Naef, assistant professor of economics at ESSEC Business Schoolfinds agreement rates as high as 78% when looking at the top 50 largest oil and gas companies who have expressed their opinion on the question. The table below shows that there is a broad consensus among large companies. While there remains a silent majority, the majority of large fossil fuel companies who responded favor carbon taxes. But why?

Why shouldn't fossil fuel companies support carbon taxes?

Before understanding their logic, let us first explore why they should not support carbon taxes. Dr. Naef builds a conceptual trilemma model for the relationship between fossil fuel companies and carbon taxes. A trilemma means you have to choose only two options among three tempting ones. Economists love trilemmas: for example there is a trilemma making it impossible for a country to have fixed exchange rates, an independent monetary policy and free flow of capital. His model outlines three distinct possibilities. First, the implementation of an efficient carbon tax that effectively curtails emissions while also diminishing sales for fossil fuel companies. Second, an ineffective carbon tax that allows fossil fuel companies to sustain their sales. The third option is a pathway in which fossil fuel companies voluntarily transition into broader energy firms, thereby reducing emissions without necessitating a carbon tax. It is important to note that, like any conceptual model, this one comes with its own set of limitations, but it contributes to the ongoing discourse.

But why do they support carbon taxes?

To understand this paradox, Dr. Naef offers non-mutually exclusive reasons why fossil fuel companies might support carbon taxes. Oil and gas companies could use a carbon tax to get rid of the competition from coal, which emits much more CO2 and would be penalized. They could also want to create a level playing field and remove regulatory uncertainty, which always harms business. Or they think that these taxes will not affect them, because demand for oil and gas is inelastic or that international coordination will fail and lead to leakages. Finally, it could be that this is simply a communication exercise and that a carbon tax helps them shift the responsibility from fossil fuel companies to customers, voters and elected officials.

Shifting responsibility to you, the consumer

Fossil fuel companies shifting their responsibility to someone else is not new. BP is an expert in that. They invented the idea of the carbon footprint. We have all calculated our carbon footprint and companies are progressively forced by lawmakers to do it. In a sense, it’s a good thing, as it puts responsibility on emitters.

BP launched a campaign in 2004 to remind us that we, and not BP, emit CO2 when we take our car. The campaign's catchy slogan, cooked up by the folks at the communication agency Ogilvy, was "What's your carbon footprint?". It aimed to remind people that when they hopped on planes or drove their cars, they were the ones burning fossil fuels, not just the big fossil fuel companies. The idea was to make consumers realise they shared responsibility for climate change with these companies and that they should take action, rather than relying solely on fossil fuel companies to curb emissions.

So, should we believe fossil fuel companies when they want to introduce a carbon tax? Maybe there is some truth to it; it could help them reduce uncertainty and phase out coal, which is good. But we really need to keep in mind that stopping climate change goes through mostly getting rid of fossil fuel companies as they currently exist and replacing them with energy companies that do not rely on coal, oil or gas. It can also come as a word of caution to economists: maybe the carbon taxes that they love so much are not the best solution. Not because they do not work in theory. In theory, they are fantastic. But in practice? The French gilets jaunes (yellow vest) movement was a reaction to carbon taxes, and work by economists Douenne and Fabre (2020,2022) shows that it might not be that simple. So can we find other complementary solutions that are not favoured by the largest polluters on the planet?

Further reading

Naef, A. (2024). The impossible love of fossil fuel companies for carbon taxes. Ecological Economics, 217, 108045.

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