Why Cap and Trade Doesn’t Work
UVA Law Faculty Affiliations
Many people, including many highly trained economists, seem to think the economics of decarbonizing the U.S. economy are simple and straightforward. Reduce the use of fossil fuels for producing goods and services by imposing taxes equal to the estimated economic cost of the CO2 emissions generated by their production. Increase the production and use of power from wind and solar by subsidizing power from these sources.
The actual impacts of such taxes and subsidies are not this simple. Consider first the tax side. A carbon tax is intended to increase prices of goods or services whose production generates CO2 emissions, lowering demand and ultimately production and emissions. But in the U.S., demand for many carbon‐intensive things — such as gasoline for automobiles and electricity for heating and cooling — is highly inelastic. This means higher prices don’t significantly reduce the number of miles that people drive or how much electricity they use. What higher prices for carbon intensive goods and services will almost certainly do is to severely punish poor and middle class households with higher costs for life’s necessities — like driving to work and heating the house, leaving less money for truly discretionary spending.