Is a Carbon Tax Market-Friendly?

The extent of environmental damage from man-made climate change is a debate in and of itself, but President Obama made it clear during his 2013 State of the Union address: there will be some form of government action during his second term. One of the most hotly debated energy proposals in Washington right now is a carbon tax.

"A carbon tax would do exactly what you would want it to do, which is to incorporate the damages to the environment into the prices we pay for all manner of goods and services," says Adele Morris of the Brookings Institution. Morris studies different carbon tax models and says this tax would be better than existing regulations under the Clean Air Act.

Reason magazine's Ronald Bailey agrees that a carefully constructed carbon tax could be beneficial if carbon emissions are affecting private property.

"In an ideal world, if carbon emissions were directly harming someone's property, the government should step in and make sure they get compensated," Bailey says, "the problem is, the transaction cost of getting it through the court system is just too high. So maybe what you need is a carbon tax as a substitute for that process."

Bailey argues that a clean, simple carbon tax as a substitute for another tax might work. The government could also send a check to each household for its share of the tax. However, he fears that the government might end up using the tax to decrease the deficit instead, and that this tax could also negatively effect economic growth.

"It will certainly slow things down in the sense that makes all fuels more expensive," says Bailey.

Food processing plants would be exceptionally hard hit by the tax because they require vast amounts of energy to produce their products. Nick Kastle, director of marketing for the Morning Star tomato processing company, says that this tax would just make everything more expensive for their customers.

"There is no secret bag of money that businesses have stashed away in a drawer. It's business, you're creating value, you're deriving value from your resources," Kastle says, "the more you can limit the use of resources and create value is margin, that margin is the incentive that keeps businesses running effectively and doing everything they can."

So do the pros of a carbon tax outweigh the cons? Or vice versa?

About 7 minutes.

Written and produced by Tracy Oppenheimer. Additional camera by Zach Weissmueller, Josh Swain and Todd Kranin.

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