Elon Musk says the No. 1 way to decrease carbon dioxide emissions would be to levy a tax on carbon.
“My top recommendation, honestly, would be just add a carbon tax,” Musk told Joe Rogan on The Joe Rogan Experience podcast on Thursday. “The economy works great. Prices and money are just information. … If the price is wrong, the economy doesn’t do the right thing.”
Currently, there is no direct monetary consequence for businesses and industries whose production releases greenhouse gasses into the atmosphere; in other words, it is free to create green house gasses, the most common and pervasive of which is carbon dioxide. Carbon dioxide is released when fossil fuels, like coal and gas, are burned. Excess carbon dioxide in the atmosphere traps heat and causes global warming.
Musk calls carbon concentrations in the atmosphere and environment an “unpriced externality.” An externality happens when some consequence of production is not properly reflected in the market. In this case, it is a negative externality.
A carbon tax would change that. “If we just put a price on [carbon emissions], the market will react in a sensible way. But because we don’t have a price on it, it is behaving badly,” Musk says.
Musk suggested a tax at the point of consumption. (A consumption tax is one that is levied at the point of consumption, when someone buys something, where an income tax is one where you earn income or collect interest, capital gains and the like, according to the Brookings Institution.)
He also suggested the tax be “non-regressive,” meaning the tax could be levied based on income level. If a “low income” consumer who has to use a lot of gas (and therefore produce a lot of carbon emissions), they could get a “tax rebate,” Musk said as an example. “That’s the way to do it.”
“This is obviously a thing that should happen,” Musk said.
Musk told Rogan he had talked to the Biden administration about implementing a carbon tax. According to Musk, at the time, the administration said it seemed “too politically difficult.” A White House spokesperson did not immediately respond to CNBC Make It’s request for comment.
But Janet Yellen, President Joe Biden’s appointee to run the Treasury Department, has indicated her support for some sort of carbon pricing strategy. “Carbon pricing” can refer to a carbon tax, an emissions trading system or any number of other financing mechanisms.
“We cannot solve the climate crisis without effective carbon pricing. The President supports an enforcement mechanism that requires polluters to bear the full cost of the carbon pollution they are emitting,” Yellen said in written answers to Senate Finance Committee members’ questions published in January.
Of course, a carbon tax could give an electric vehicle company like Tesla a leg up in the market. But according to Musk, “SpaceX would be paying a carbon tax too,” he said. (Since rockets burn fuel which emits carbon dioxide when it is burned, all rocket companies would have to pay such a tax when they consume jet fuel.)
The goal of a carbon tax is to align market incentives towards transitioning from an economy that depends on fossil fuels to one that uses clean energy (energy that does not produce carbon emissions). And that, Musk says, is an existential necessity.
“The fundamental good of Tesla is to what degree it accelerates the advance of sustainable energy. It’s inevitable. It’s tautological,” Musk said. “It’s either we have sustainable energy or civilization collapses. And so if civilization doesn’t collapse we will have sustainable energy, it’s just a question of how soon does that happen. Sooner is better.
The idea of a carbon tax is not new. Opinions are split on the matter.
“Elon is spot on. We need to get millions of people to change their behavior to reduce emissions by buying more fuel efficient cars, adding more home insulation, moving us away from coal-fired electricity and a host of other changes,” Gilbert E. Metcalf, a professor of economics at Tufts University, tells CNBC Make It. “A carbon tax uses the power of markets to efficiently send a signal to consumers to make those changes. In effect, a carbon tax makes sure Adam Smith’s Invisible Hand has a green thumb.”
According to Richard Klotz, an environmental economist in the Department of Economics at Colgate University, “the prices of polluting goods/activities do not reflect their ‘true’ social costs. For example, the price you pay for gasoline does not include the damage the [carbon dioxide] from burning that gasoline causes to the climate,” he tells CNBC Make It. “So when we all make decisions about what to purchase, we don’t have to consider the environmental cost. Pricing carbon corrects this issue by ensuring that the prices/goods activities more accurately reflect the true costs.”
Others, however, do not support a carbon tax.
″A carbon tax will do nothing to prevent climate change but it will hurt the elderly, minorities, the poor and middle class, and those on fixed incomes the most because they spend a larger percentage of their incomes on energy and energy intensive goods than the relatively wealthy,” H. Sterling Burnett, a Senior Fellow of environmental policy at the free-market think tank the Heartland Institute, tells CNBC Make It.
Indeed, paying for basic energy requirements can often be a higher percentage of what a lower-income person makes each month. And, to make that pain more acute, “if you live in a substandard home that is not weatherized, that is not energy efficient, that was constructed poorly or is older, then your energy burden will be more,” Nathaniel Smith, the founder and Chief Equity Officer, of the Partnership for Southern Equity, a nonprofit in Atlanta, says to the Yale Climate Connections in 2019.
This then, is the argument for a non-regressive carbon tax, as Musk outlined in his conversation with Rogan. This idea is a non-starter, according to Burnett. “It can’t be non-regressive if it is intended to change behavior. It must hurt to work otherwise people will not change their behavior and stop using fossil fuels,” he says.
Even those who support a carbon tax say that careful implementation is critical.
“If done right, and set at the right level and without too many loopholes, it can be an excellent policy — but that’s a big if,” says Michael Gerrard, an environmental lawyer and professor at Columbia Law School. “It needs to be combined with additional regulations where needed, and with measures to counteract any regressive impacts on low-income people.”
So, too, says Metcalf. “A carbon tax is not a magic cure. We’ll need other policies as well,” he says, including increased research and development spending to make zero-carbon technologies less expensive. And with a carbon tax, “getting the price right is job one.”
According to Musk, the Paris Agreement is “just a piece of paper unless you do something about it,” he told Rogan. “It’s pretty much toothless.”
“One thing that would matter — put a price on carbon,” Musk says. “It’s the obvious move.”