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Economy & Business

Decades Ago, British Economist Created The Framework For A Carbon Tax


More than a hundred years ago, the air in London was bad - real bad. A British economist came up with this idea to use a tax to help solve the pollution problem. Sarah Gonzalez with our Planet Money podcast reports on how that same tax is being used today.

SARAH GONZALEZ, BYLINE: There's a whole club about this tax called a Pigouvian tax - the Pigou Club, named after dead economist Arthur Cecil Pigou.

GREG MANKIW: The Pigou Club has never had a meeting (laughter).


This is the guy who created the club, Harvard economist Greg Mankiw.

MANKIW: Economists are famous for disagreeing with one another. But there's certain areas where we do have an agreement, and this is one of them.

GONZALEZ: Liberal economists and conservative economists come together on this special kind of tax - Democrats and Republicans, too. Rex Tillerson, former Exxon Mobil CEO and former secretary of state to Donald Trump, he's in the club. So is Al Gore. And today, the type of Pigouvian tax people talk about the most is a tax on carbon emissions, on pollution - a carbon tax.

Why didn't you call it the Carbon Tax Club?

MANKIW: (Laughter) Well, I think it's always nice to honor our intellectual forebears.

GONZALEZ: Pigou created the framework for a carbon tax in 1912. He was an economics professor at Cambridge University. And air pollution was becoming a huge problem in London, caused by factories and homes burning coal. They called it London fog and pea soup because the air looked like yellow split pea soup.

NAHID ASLANBEIGUI: Like, it was thick. It covered everything. It was an oily substance that covered furniture, enter your rooms.

GONZALEZ: Nahid Aslanbeigui is a Pigou expert, co-wrote a book on Pigou.

ASLANBEIGUI: You would breathe it. It killed people. It killed animals.

GONZALEZ: And Aslanbeigui says Pigou was concerned about London fog as an outdoorsman who loved mountain climbing but also as an economist. As an economist, he saw the cost of London fog. He thought it would increase health care costs, affect vegetation and livestock, wreck furniture. Everyone would have to buy new furniture, wash their clothes more often. Those are all costs. And the people burning the coal weren't going to pay for it; innocent bystanders would. This is a problem economists call a negative externality. And Pigou was the first to suggest a way to deal with externalities.

ASLANBEIGUI: Now, if you allow the private sector to behave without any limits, without any consideration for society, then they will overdo things.

GONZALEZ: They will overfish, pollute.

ASLANBEIGUI: So people have to have limits.

GONZALEZ: Pigou created a famous graph that said you had to put a price on these problems or they would never be solved.

ASLANBEIGUI: Calculate that cost and force the guilty parties to pay for it.

GONZALEZ: Like, figure out how much London fog is costing people and force the companies burning the coal to pay for it, not the innocent bystander. This is what makes it a Pigouvian tax. There are plenty of other taxes on things that seem bad, like alcohol. But those taxes aren't meant to do anything for innocent bystanders.

And Canada, Canada has put a Pigouvian tax on carbon. Now the price of everything from a loaf of bread to a gallon of gasoline goes up pennies. And these price increases cause people to pollute less because people respond to prices. So maybe you take the bus one day instead of driving. And this is why so many economists support Pigouvian carbon taxes - because it gives people the incentive to make choices to pollute less.

Sarah Gonzalez, NPR News, New York. Transcript provided by NPR, Copyright NPR.