The cost of a climate tax

It's obvious that if Congress adopts a cap and trade mechanism or a carbon tax to control emissions of carbon dioxide that prices of goods and services emitting a lot of carbon dioxide will go up. What's less obvious is how much prices will go up in different sectors of the economy.

Tim Haab at Environmental Economics provides a preliminary look at what the impacts might be. The results are preliminary, but striking.

Only four sectors of the economy would see price increases greater than 2% with a 5 cent per kilogram tax, even when direct and indirect inputs are included in addition to the tax: coal-fired electricity, petroleum-fired electricity, coal mining, and petroleum refineries. Those price increases are large enough that I'd expect them to have a dramatic impact on purchasing behavior, leading to dramatic reductions in carbon dioxide emissions.

There will be great disruptions in some sectors of the economy if cap and trade or a carbon tax is adopted, and I don't know if a tax of 5 cents per kilogram wlll reduce carbon dioxide emissions enough to avoid the worst effects of climate change, but I'm glad to see more of the economic data we'll need to make the necessary policy choices.