What moral obligations do businesses have to the environment? What responsibility does the government have to regulate the balance between social and market costs? This essay explores social responsibility and environmental ethics through the analysis of Pigouvian taxation, specifically in the context of a tax on carbon emissions in Massachusetts.
As humanity progresses towards a society increasingly structured by unregulated markets in a world plagued with environmental destruction, we must reassess the contemporary responsibilities of the government and private entities. Are corporations merely responsible to the global financial system, one which only incentivizes the maximization of short-term returns and raises in stock prices? Or is there a greater responsibility of corporations to ensure the welfare of the community and the environment? If we deem environmental responsibility more ethical than the parameters established by the markets, then we must re-establish government as a higher authority that regulates in the interests of workers and the environment. Therefore, as we deliberate the moral obligations of businesses, we must also assess the government’s role in regulating the balance between social and market costs. What are the policy reflections of environmental responsibility? The analysis of ethics and data collected from British Columbia suggests that a carbon tax is an ethical and viable option to hold corporations responsible for the social and environmental costs of their operations.
British economist Arthur Cecil Pigou believed that economic entities have a responsibility to everyone impacted by operations. He also considered governments responsible for intervening on the public’s behalf when commercial entities do not fully internalize the costs of their activity (The Economics of Welfare). However, to understand Pigou’s vital theories, one must first understand the concept of externalities and some of the private sector’s current methods of shifting costs onto the public. An externality is any cost or benefit that affects an involuntary third party. Although externalities can be positive, they are typically negative and impose indirect costs on the public. For example, manufacturing activities that cause air pollution impose costs and health risks to society at large. Without a regulatory entity holding businesses accountable, the cost of addressing pollution burdens the local community rather than the entity that initially caused (and profited from) the damaging action. Furthermore, producers are incentivized to increase production and continue externalizing costs onto the public when they are not required to pay all associated social and environmental costs.
In The Economics of Welfare (1920), Pigou developed the concept of externalities and used their existence as justification for government intervention. He believed that the main motive of economic study is to help social improvement, yet the economy cannot ensure economic welfare without a regulatory entity. Specifically, Pigou was concerned with corporate incentives to preserve natural resources and provide widespread purchasing power to the poor. The solution to both dilemmas, Pigou asserted, begins with a renewed perspective of economic prosperity. Instead of merely focusing on gross domestic product and immediate revenue, we must account for wages and the broader social costs of economic activity. To enforce responsible management of wealth and environmental resources, Pigou believed that governments are accountable for imposing taxes (now known as “Pigouvian taxation”) on any market activity that generates negative externalities. The charge should be equal to the social cost of the negative externality to balance social and market values. Businesses would not be incentivized to externalize costs onto the public if they are responsible for paying social costs in full.
Of the many examples of negative externalities (including air, water, and noise pollution), no social or environmental cost parallels the damage caused by the release of greenhouse gases. As businesses burn hydrocarbon fuels such as coal and natural gas, heat-trapping greenhouse gases release into the atmosphere. This process increases the temperature of the earth’s climate, which results in mass extinction, shrinking water supplies, changes in food supply, and more . According to the Carbon Disclosure Project’s Carbon Majors Report 2017, just 100 companies are responsible for over 70 percent of the world’s greenhouse gas emissions since 1988. Throughout most of the world, there is no repercussion for accelerating climate change, despite the grotesque social and environmental cost. Since the extraction of fossil fuels continues to be profitable in the short-term, companies have no incentive to slow this accelerating rate of extraction. The CDP Carbon Majors Report projects the global average temperature will raise by 4C before the end of the century.
The Economics of Climate Change: The Stern Review (2006), led by renowned economist Nicholas Stern and released by British government, cites climate change as “the greatest example of market failure we have ever seen” (Stern 8). Although the report reveals the detrimental impacts of fossil fuels on international growth and development, it also claims that the worst effects of climate change are avoidable if every nation enforces aggressive policies to mitigate the release of greenhouse gases (Stern 6). Among these policies is an indirect tax on carbon emissions. The release of hydrocarbon fuels is a negative externality because it privatizes gains while externalizing costs onto society at large. Aligned with the doctrine of Arthur Cecil Pigou, a carbon tax would internalize the social costs of production, thereby creating incentives for energy conservation. This would place renewable energy sources on more competitive footing and ultimately reduce the amount of greenhouse gases emitted.
The Canadian province of British Columbia is among the over 40 governments to impose progressive carbon taxes. The tax applies to the purchase and use of fossil fuels and covers approximately 70 percent of provincial greenhouse gas emissions (B.C. Reg. 125/2008). Since the introduction of the carbon taxes in 2008, emissions in British Columbia are estimated to have decreased between 5-15 percent (Murray, 674). Meanwhile, British Columbia’s local government collected more than $1 billion each year, which was redistributed to households and businesses through various mechanisms, including tax credit and one-time dividends to B.C. residents (Murray, 682). Research from the Journal of Environmental Economics and Management discovered that the province’s economic activity had not been adversely affected by the carbon tax. In fact, employment was modestly stimulated across all industries, and jobs have dramatically transferred from carbon-sensitive sectors such as chemical manufacturing to cleaner service industries, such as healthcare (Yamazaki 198). Analysts from the U.S. Department of the Treasury estimate that emissions could be reduced as much as 21 percent over the next ten years in the United States were to implement a similar carbon tax (starting at $49 a ton in 2019) (Working Paper 115). Despite the effectiveness displayed by British Columbia and the benefits projected by intelligence agencies, most American states currently lack a tax on carbon emissions. However, this may change in the near future.
Enacted and recently-proposed policies provide glimpses into the present and future of emission mitigation policy in Massachusetts and the United States as a whole. Massachusetts is currently among ten states involved in The Regional Greenhouse Gas Initiative (RGGI), a “cap and invest” program aimed at reducing carbon emissions in the Northeast United States (RGGI.org). The initiative mandates any fossil-fuel-fired electric power generators with a capacity of 25 megawatts or greater to acquire allowances equal to their carbon dioxide emissions over a three year period. Therefore, sizable fossil-fuel power plants must purchase pollution permits through auctions every three years to continue operation. The number of grants allocated each sale is determined by the decreasing capacity each state sets on the amount of emissions allowed. Since the price of permits increases each auction as states lower their capacity, businesses are incentivized to invest in long-term alternative energy sources (RGGI.org). According to “Analysis of the Public Health Impacts of the Regional Greenhouse Gas Initiative,” a 2017 report from Abt Associates, RGGI saved 300-850 lives, avoided over 8,200 asthma attacks, and saved $5.7 billion in health savings from 2009-2014 (Manion et al. 33). A later 2019 report from the Acadia Center determined that carbon dioxide emissions from RGGI power plants have fallen by 47 percent since 2008 (outpacing the rest of the country by 90 percent) while GDP growth in RGGI states also grew by 47 percent (outpacing the rest of the country by 31 percent) (Stutt 2). Although Massachusetts has reduced carbon emissions since 1990 at the most dramatic rate of any state, it still failed to meet the Global Warming Solutions Act’s targeted reduction of 25 percent by 2020.
However, multiple ambitious proposals are currently under review by the Massachusetts State Congress to help the state reach its future emission targets. Bill H. 2810, titled “An Act to Promote Green Infrastructure and Reduce Carbon Emissions,” is one such proposal. Presented alongside a petition in January 2019 by Jennifer E. Benson of Lunenburg, the bill introduces an increasing tax on the pollution of greenhouse gases to halt the rising usage of fossil fuels in Massachusetts (MALegislature.gov). The impacts of the tax would be annually examined by the Department of Energy and Environment Affairs, who would advise future policy amendments and goals. The Department of Revenue would invest seventy-five percent of the money collected from the greenhouse gas pollution tax into a household fund for lower-income residents (Bill H. 2810, 25A:13C). The remaining twenty-five percent would go towards workers experiencing displacement and other forms of economic loss due to the shrinkage of fossil fuel industries (Bill H. 2810, 25A:13C). The bill currently aims to assist Massachusetts in reaching its existing target of a 2050 statewide emissions limit at least 80 percent below the 1990 level (as outlined in Section 3 of Chapter 21N of the Massachusetts General Laws, the Climate Protection & Green Economy Act). Power plants regulated by the RGGI would be exempt from the greenhouse gas pollution charges (Bill H. 2810, 25A:13A).
Humanity currently finds itself at a junction, and the steps taken in our lifetimes are perhaps the most important in human history. As we brace for the detrimental impacts of climate change, our society is structured by an unregulated global financial system that encourages not only the emission of greenhouse gasses but the externalization of environmental costs onto the public. Though solutions must be proposed through an interdisciplinary lens, we must utilize ethics as our ultimate compass in this junction. Arthur Cecil Pigou believed that economic entities should be held responsible for the entirety of their action’s social cost (The Economics of Welfare). Indeed, the moral justification of negative externalities is more questionable than ever in the face of climate change. A select number of corporations will primarily cause the universal destruction of climate change (CDP Carbon Majors Report 2017). Although these companies generated profit in this time, they paid nothing in taxes to account for the enormous social and environmental costs of their emissions. This data, combined with the belief that we must maximize the well-being of most individuals, suggests that the current system is immoral.
Guided by the philosophy of Arthur Pigou, we must select the path of social and environmental responsibility to ensure the well-being of future generations. After British Columbia placed a Pigouvian tax on carbon emissions in 2008, emissions decreased while employment was stimulated (Yamazaki 198). The U.S. Department of the Treasury estimates that emissions could be reduced as much as 21 percent over the next 10 years in the United States they were to implement similar policies (Working Paper 115). Cap-and-trade programs such as The Regional Greenhouse Gas Initiative undoubtedly save lives and public health costs (Manion et al. 33). However, all of the ten states involved failed to meet the Global Warming Solutions Act’s targeted reduction of 25 percent by 2020. Therefore, Massachusetts must consider other forms of carbon emission mitigation policy to reach the state’s target of a 2050 statewide emissions limit at least 80 percent below the 1990 level. The analysis of ethics and data collected from British Columbia suggests that a carbon tax is an ethical and viable option to hold corporations responsible for the social and environmental costs of their operations.
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