Every day, we make lifestyle and consumer decisions that affect how much carbon is emitted into the atmosphere. Where we live, how we get around, and what we eat are but a few of them. These decisions, while personal, have global impact. Economists refer to the public effects of personal decisions as "externalities."
How we as a society encourage people to make the right decisions (in this case, the ones that limit greenhouse gas emissions) can be approached in one of three ways, as outlined by Harvard economist Greg Mankiw in a recent article published by The New York Times.
The first involves "[appealing] to individuals’ sense of social responsibility." Mankiw raises the example of President Jimmy Carter, who during the energy crisis of the '70s encouraged Americans to adjust their thermostats and insulate their homes. The problem with this approach? Life is busy, it's not always easy to make decisions based on how they affect the world at large.
The second approach to dealing with climate externalities is government regulation. President Obama's Climate Action Plan involves lots of regulations aimed at making Americans live more carbon-efficient lives. There are several problems with this approach, according to Mankiw, not least of which is the fact that regulations can only influence a tiny number of consumer decisions. "In a free society," he writes, "the government can’t easily regulate how close I live to work, whether I car-pool with my neighbor or how often I don a cardigan."
The third approach is the one Mankiw believes we should pursue: putting a price on carbon emissions. If the government levied a fee on each unit of carbon emitted, that fee would be built into the prices of the things we buy:
When making everyday decisions, people would naturally look at the prices they face and, in effect, take into account the global impact of their choices. In economics jargon, a price on carbon would induce people to “internalize the externality.”
A bill introduced this year by two congressmen and two senators (all Democrat) proposes a federal carbon tax, which Mankiw views as "more effective and less invasive than the regulatory approach that the federal government has traditionally pursued." Whether it finds its way through the GOP-controlled House of Representatives is another thing altogether.
Most economists view a carbon tax as the most efficient and least expensive way to reduce carbon emissions. The challenge is convincing politicians and the public.
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