Economists call for carbon tax, Midwest emissions market

Two measures — taxing carbon and creating a Midwest market to trade emissions — would help reduce the greenhouse gases contributing to climate change, top economists said Thursday.

Richard Sandor, the founder of the Chicago Climate Exchange, advocated for a Midwest carbon market, saying the Chicago project, along with similar efforts in the northeast and in California, show that markets can be an answer. And he said the Midwest has the elements needed to make it work.

"We have manufacturing, we have technology, we have agriculture, which can be a solution, so the hope is that maybe this conference will get some of the leaders in the Midwest to say there's a blueprint already out there, get in front of it," said Sandor, who said 110 companies have voluntarily agreed to reduce emissions through the Chicago Climate Exchange.

"This could be an absolute marvelous laboratory," he added.

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Setting emission reduction targets is the hardest part of creating such markets, Sandor said, but the U.S. Environmental Protection Agency has already done so in proposing reductions for each state to meet by 2030. The EPA is allowing states to work together to meet the targets.

Sandor and five other economists sat down with reporters on Thursday to discuss everything from risk management to taxing carbon. The latter idea had several supporters, including Harvard University economist Martin Weitzman.

"If you taxed carbon, you could lower the taxes on other things like capital and it would lead to an increase in output to a more efficient economy," he said.

Weitzman and Bob Litterman, chairman of Kepos Capital and a former Goldman Sachs risk department head, agreed the impact on the average consumer would be minimal.

"If we embed the appropriate prices into the costs of all the goods and services, there's a tremendous informational efficiency. You don't have to worry about how do I reduce my carbon footprint," he said. "The reality is very few people would notice."

But the economists agreed that getting politicians in Washington to act has been a challenge, especially because climate change is a long-term problem.

"Politicians typically have short horizons: what's the next election cycle," said Lars Peter Hansen, a University of Chicago economist and Nobel Prize winner. "It's always easy to say, 'this is a problem' but if I kick it down the road two years it's not a big deal. ... With these long-term problems, you can't keep kicking them down the road and solving them later."

Listen to an interview with University of Minnesota economist V.V. Chari here, and a longer interview with Kepos Capital's Bob Litterman here.