Why Do Economists Like a Carbon Tax?

Abstract

In non-technical language, the chapter explains why economists favor putting a price on pollution as the least expensive way to cut pollution to its socially optimal level. Using a pollution example from nineteenth-century British law made famous by the Chicago economist Ronald Coase, the chapter lays out the principles for good environmental policy and shows how a carbon tax fits with those principles. It introduces Arthur C. Pigou, an early twentieth-century economist who saw that a tax on pollution could use the power of the market to solve the pollution problem. It then demonstrates that carbon taxes in British Columbia and Sweden have not harmed their economies but have helped reduce carbon pollution.