I see people who like free markets have two main reasons why: one due to the efficiency, the other due to the freedom, or a combination of both. For the people who value efficiency, why not support a carbon tax?

One of the core assumptions of an effective market is all knowledge and costs are reflected in the price. Assuming we grant that carbon has externalities and that the tax imposed was accurately accounting for them, we are than creating a more efficient market.

A typical argument against taxes can make an accurate case that the tax is reducing efficiency (sales tax on bread isn’t meant to reflect the externality of producing it). But I feel like this logic does not work since the tax aims to target externalities.

Is there an efficient market case against a carbon tax given these assumptions?


5 Answers 5


In a pure free market nothing should interfere with free trade. Any tax or penalty of any type will be opposed by an advocate of a pure free market , including a carbon tax. So there is no real need to provide an argument against a carbon tax specifically since any tax is counter to the very notion of 'free market'.

However, we don't actually have a free market, or at least not a pure one. We have regulations and taxes on many parts of our market. In truth even most 'free market advocates' usually don't argue for a pure free market, they usually will accept that some small amount of goverment oversight is acceptable, for instance to create a penalty for someone mixing arsenic into their multi vitamins or otherwise doing something blatantly immoral for profits. The real argument is how much goverment oversight can be accepted before it infringes too heavily on free trade.

If we were to hypothesis a free market advocate who accepts some minimal oversight there are a few claims which one could make for arguing why a carbon tax would be too heavy handed:

The Government won't create the tax properly

A key belief driving proponents of free market is the belief that humans in general, and the goverment in particular, are not able to properly anticipate something as complex as the market and thus will not be able to anticipate how their policies they propose will affect the economy. Honestly we have seen plenty of examples of goverment economic policies that failed to achieve the results intended, which suggest that there are limits to the ability to anticipate the affect of policy on the market. Due to the limited ability to fully anticipate repercussions of policies a free market advocate would argue any tax or other economic policy will likely to be poorly adjusted and thus risk doing more harm then good.

Your questions posits a presumption, that a carbon tax is "accurately accounted for", but a free market advocate would counter by saying that the tax wouldn't be "accurately accounted for" because we lack the ability to predict the final result of the tax well enough to be able to determine what an 'accurate accounting' should be. thus one could argue that the tax would risk being too severe and causing a disproportionate harm to businesses, by making it too expensive for a business to make a profit and thus driving businesses to shut down.

Even if the tax is not too severe it may otherwise be poorly created, perhaps by having a poor definition of carbon emissions that disproportionate penalizes certain types of companies, or encourages illogical changes that lower the tax, but not actual emissions. For instance a company may try pushing the emissions into an area that isn't taxed, like buying resources from, or moving manufacturing jobs to, locations outside the USA because the carbon emissions of foreign production are not properly calculated in the taxes, which ultimately lower the companies efficiency but does nothing to address climate change. There are many ways such a tax could theoretically be poorly implemented, and free market advocates generally presume the goverment will not manage to create a good implementation.

This is really the key argument for free market in general, to allow the market to sort things out because humans are so bad at making up good policies, and as such is likely the biggest argument you would here from someone arguing for free market.

The overhead penalty of the tax can be larger then the tax itself

Taxes don't 'just happen'. To tax carbon emissions one needs to know how much carbon is produced. This requires lots of record keeping and logistics. To enforce this law the goverment is going to want to be able to perform audits on companies, to make sure companies don't lie about their emissions, which means a company needs pay people to keep these records, prepare and send them to the goverment, and handle audits if the company is audited.

This all puts a logistical overhead on a company, and it's not trivial! Accounting costs can be a decent chunk of expenditures for some companies, anything adding to the bureaucratic overhead is frowned on by free market advocates.

It can be argued that if the tax is low enough the overhead costs may come up costing almost as much as the tax, and all that bureaucracy is 'wasted' resources that provide no one any benefit are adherent to the spirit of free market (see the Broken Window Fallacy).

Again this isn't limited to carbon tax specifically. There are many potential policies out there that would make sense, and even be accepted by free market advocates, if it wasn't for the added waste of the bureaucracy necessary to implement, and prove the implementation, of the policy which end up being so costly as to counteract the theoretical good of the policy.

The smaller the goverment the better

While not technically required by free market views it's very common for people who argue in favor of free market to also argue for small goverment. The belief is the larger the goverment gets the less efficient the goverment becomes, as bureaucracy, added layers of management, bloat, etc build up.

Therefore adding a bureaucratic overhead on the goverment side, to ensure that carbon taxes are implemented and audit companies, adds direct waste, in man-hours spent proving the policy itself, and adds indirectly to the goverment inefficiency seen as inherent in growing the size of the goverment and it's bureaucracy.

Likewise giving more money to the goverment, in the form of the taxes paid, is not generally seen as a good thing as it's believed the goverment will waste that money while doing little efficiently with it (like paying for the overhead created by the new tax). It's believed the money paid in taxes would do more good if it was kept flowing through the market, encouraging growth based off of basic golden hand of the market, then in the 'wasteful' clutches of an inefficient goverment.

The carbon overhead of bureaucracy can (partially) counteract the carbon savings

All that overhead in implementing the policy will require people traveling to sights, paper printed, electricity powering computers etc which will create carbon emissions. I highly doubt it would be as much as the carbon saved from more efficient policies encouraged by a carbon tax, but it can be argued to lower the potential benefit of the tax, and thus increase the odds that the overhead will do more harm then the benefit of the policy.

Why should the US pay to make the world better for China?

Climate change is a global problem being contributed to by every country in the world, but a carbon tax will only affect the country that enacts it. This could result in US companies suffering under a tax to lower emissions only to have some other country (China being the best bogyman example) to feel free pumping out more carbon counteracting the sacrifice of US companies.

This basically comes down to the classic Tragedy of the Commons style argument. Maybe we would all be better off if we produced less carbon, but no single country wants to make the sacrifice to improve the world if the rest of the world isn't willing to follow suit because no country want's to suffer a disproportionate harm in addressing Climate Change then their fellow countries suffer.

Climate agreements, like the Paris Agreement Trump campaigned on ending (and did), are meant to address this by forcing every country to agree to suffer evenly in addressing the affect of climate change. But since every country in the world is unlikely to sign up to any agreement you will still get this sort of argument (Why should US, Paris, UK, and the other ratifiers of the agreement suffer to fix the Climate when Russia hasn't ratified the agreement but will still benefit from us limiting emissions...). There are also plenty of arguments about rather countries actually adhere to the agreement, to rather such agreements disproportionately harm one country over another, etc etc that play a role.

I shouldn't have to pay for your grandchildren

Ultimately the affects of climate change aren't felt too heavily now, they will be felt in a generation or two once the change has grown enough to have more massive affects. Some can argue that they shouldn't be forced to pay for the well-being of a bunch of people who aren't even born yet out of their own pocket. IE this is a problem for the next generation. Yes you can argue that is a short sighted view, but humans can be short sighted. If you ask someone rather they are okay with loosing their company/job now (as a side effect of taxes slowing businesses and possibly shutting down marginally productive factories) in order to try to make things better in 50 years many would say they would rather be employed now.

I'm cold during winter, obviously global warming must be a myth!

I hate to say it, but climate change denialism is likely to play a huge part in any attempt to pass a carbon tax. I will be the first one to say I've done the research and have no doubt that climate change is real and backed by plenty of scientific evidence; but humans are also pretty good at ignoring science when it tells them something they don't want to hear.

Only 63% of the US believe climate change is a threat, which means 27% believe it isn't one. I disagree with that 27%, but that doesn't matter. To the 27% who don't believe climate change is a threat a carbon tax is 'obviously' an idiotic idea since it creates overhead and weakens companies all while offering no benefit besides making people less afraid of a 'made up bogyman', maybe one created by china to make our companies fail? We can't let China get away with that!

Even when you look at the 67% who believe climate change to be a threat not all believe it's a man made threat, and not all agree that it is a serious threat, only 43% of Americans consider climate change to be a 'very serious' threat. If someone believes the threat minor enough then the minor change created by a carbon tax to the minor harm of climate change may seem too trivial a difference to justify the expense to attempt to optimize.

Studies also show climate change denial is linked with free market beliefs. So a strong proponent of the free market is more likely to either not believe in climate change or believe it to be a minor affect not worth penalizing companies over.

  • "To the 27% who don't believe in climate change" Not believing something is a threat is very different than not believing in it. I would recommend beefing up your answer with more on the arguments for bureaucratic costs and assessing the carbon tax accurately. That is where free market advocates are. Specifically on assessing the impact or cost of a carbon tax credit to the environment and comparisons between carbon tax administrative costs to healthcare administrative costs.
    – David S
    Dec 4, 2018 at 19:12
  • Be careful that you are not just constructing strawmen in speaking of "pure" free markets and hypothetical proponents thereof. Dec 4, 2018 at 22:05
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    @pluckedkiwi I don't think that counts as a strawman, especially since I'm not using it to try to prove or disprove a point. That is simply pointing out the literal definition of free market. I am quick to qualify that the common use of the term is different then the literal meaning of the term, as usually it's taken to include 'mostly-free' markets with some degree of limited oversight.
    – dsollen
    Dec 4, 2018 at 22:12
  • A tax is a penalty on production, and a disincentive to work.
  • There is no guarantee the revenue collected by the tax would be used effectively by the government, instead of say, buying more bombs.
  • Global warming alarmist fail to recognize the benefits of global warming, such as faster shipping channels through the arctic ice (which would reduce carbon output), and farm-able arable land to grow more crops in the Canadian tundra and Siberia to feed more people and reduce the cost of food.
  • Technology increases exponentially. In the 100 year projections of global warming alarmists, we will likely have fusion power which will render carbon taxes moot.
  • The atmosphere is like the tragedy of the commons. It's not a Nash Equilibrium to be the only person to do what everyone else wants you to do.
  • Global warming alarmists are nearly always on the coasts, where waterfront property is the most expensive. This class of wealthy elites have selfish motivations to protect their property. Do you think these maps of conservative/liberal and wealth concentration are a coincidence?

Even proponents of carbon taxes acknowledge that they can disproportionally hurt low-income people. Energy costs make up a larger portion of their overall expenses, so a fuel price increase eats up more of their paycheck and leaves them with less to spend. And because energy costs are almost impossible to avoid, they feel trapped.

It is also not lost on them that it is the rich, unbothered by fuel taxes, who are hardest on the environment because they travel and consume more.

  • Global cooling alarmists made headlines in the 70's. If they were wrong then, it's likely they are wrong now. Media's purpose is to sell the most copies, so they favor sensationalism.

  • The last century witnessed the greatest migration of people from rural areas to cities. People are capable of just moving to another city further inland.
  • Runaway carbon is a byword, like "perpetual motion" and "swampland real estate in Florida". Global warming should never be naively confused with runaway climate change. Dec 3, 2018 at 23:58
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    Is it that people on the coasts have a selfish interest, or simply that they have first-hand knowledge? It's much easier to deny waters are rising if you live in Topeka rather than Miami Beach. This of course ignores the fact that ocean rise is hardly the only effect of a warming atmosphere...
    – Geobits
    Dec 4, 2018 at 13:28
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    "There is no guarantee the revenue collected by the tax would be used effectively by the government, instead of say, buying more bombs." - FYI, one of the proposals that seem to have support from all sides of the spectrum is the "carbon dividend," where all of the collected revenues are distributed equally to citizens, so "what government does with it" is not an issue for that proposal. washingtonpost.com/news/monkey-cage/wp/2017/03/13/… Dec 4, 2018 at 20:15
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    This answer implies that because some climate journalism is inaccurate and sensational that all of it probably is. It's tantamount to arguing that because some scientific theories are false, that all of them probably are.
    – agc
    Jan 26, 2019 at 5:28
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    @Chloe, You're right. The problem is that a representative answer without sufficient context looks too much like advocacy. Clearly some (perhaps most) answers here are unapologetic advocacy, so to avoid confusion disinterested answer should make its own objectivity clear.
    – agc
    Jan 28, 2019 at 12:26

From an efficient market hypothesis, a carbon tax is unnecessary. Consumers will decide for themselves how much they like or dislike the underlying company utilizing carbon fuels. This will influence them to either continue using the product despite their misgivings, or go with a competitor that better fits with their environmental concerns. The company, faced with its current consumer usage, can then decide on its own whether it will adjust its policy regarding carbon fuels, or continue with current path.

Competitors can similarly get an advantage by appealing toward consumers' environmental concerns. With this setup, so long as competition is fair and available, companies will compete with each other to cater their actions to the consumers themselves and where ever they are willing to spend their money. If people dislike a particular company's actions, they can vote with their wallets. Furthermore, with their right to free speech, they can spread truthful information to other consumers and possibly influence (or not, free country and all that) them to use an alternative competitor.

A tax is intervening in the free market. It can stifle competition within the industry which in turn limits consumer choice, and thus dis-incentivizes companies to meet consumer demand.


All taxes have the potential to trigger popular dissent. The recent yellow vest riots in France for example seem a tailor-made example of what can happen in reaction to a government action that amounts to a "carbon tax".

It is easy to paint a carbon tax as regressive, and thus stir popular support for defeating it without needing to get into detailed analysis of efficiency at levels of social responsibility higher than individual and family. At its heart the idea behind carbon taxes may be economically effective at a national or world scope, that argument does not address individuals. If a carbon tax is perceived as hurting the average population more than the elite proposing it, it seems like an uphill battle to try to argue it is good for those taxed. As a result, decisions to participate in tax protests, even to the point of destruction of public property or personal risk of punishment can and probably should be viewed as a rational economic ones.

There certainly may be other viewpoints on the subject, this one just seems ripe given current events.

  • It's a big simplification to consider that the yellow vest movement was caused solely by the diesel tax increase, it's much more complex than that.
    – Erwan
    Jan 24, 2019 at 23:17
  • @Erwan It's much more French than that.
    – John
    Dec 18, 2019 at 13:43

Yes, there are externalities from releasing carbon dioxide into the atmosphere. The simplest such externality is that it makes plants grow faster around the world, as the plants try to use up the extra carbon dioxide.

This externality is a reason to promote burning fossil fuels. But notice that burning fossil fuels produces power, so people are already willing to do that. So there is no need for a government-funded incentive to put carbon dioxide into the atmosphere.

In general, any governmental tax or incentive applied to a single good or service distorts the market. Competing ideas will find themselves at a disadvantage.

Government expenses are paid for via compulsory taxation, or the promise of compulsory taxation in the future. In this context, "compulsory" means "backed up by the threat of hunger, loss of one's home, loss of one's livelihood, kidnapping, or death." Any government program that increases the tax burden on the remaining population has moral costs; a strong practical and moral argument should be made for any program that would incur such moral costs.

Plus all government programs (including taxation plans) have costs to design and administer. Purely administrative costs are just the tip of the iceberg. Adding the incentives to the existing tax code and legal code make these codes harder to understand. There are also opportunities for corruption and legislative rent-seeking.

-- A "person who values the effectiveness of a free market".

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    The last half seems to be an argument against all forms of taxation, rather than carbon taxes specifically. The first two paragraphs would be improved by references.
    – agc
    Dec 2, 2018 at 9:20
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    Do you know of any ecosystem on earth where growth is limited by the lack of carbon dioxide? The most commonly cited limits are lack of water, nutrients or sunlight...
    – user000001
    Dec 3, 2018 at 17:34
  • @agc It doesn't look like an argument against taxation, but rather an argument that proposals for new taxes must be taken seriously. The attitude should be that the government raise taxes only enough to pay for what is needed, as opposed to the current policy, which is to set taxes at the highest rate they think people will tolerate and then decide what they want to spend it on.
    – user15103
    Jan 26, 2019 at 3:40
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    @Joe -- More specifically, the argument for imposing an incremental tax needs to be much stronger than "it will compensate for this externality". The portion of the externality that is compensated for needs to justify the moral and practical costs of the tax. By the law of diminishing returns, this means that the argument cannot justify trying to completely eliminate the externality.
    – Jasper
    Jan 26, 2019 at 3:46

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