Putting a low price on valuable environmental resources is a phenomenon that pervades modern society. Agricultural water is not scarce in California; it is underpriced. Flights are stacked up on runways because takeoffs and landings are underpriced. People wait for hours in traffic jams because road use is unpriced. People die premature deaths from small sulfur particles in the air because air pollution is underpriced. And the most perilous of all environmental problems, climate change, is taking place because virtually every country puts a price of zero on carbon dioxide emissions.
Carbon prices must be raised to transmit the social costs of GHG emissions to the everyday decisions of billions of firms and people.
When I talk to people about how to design a carbon price, I think the model is British Columbia. You raise electricity prices by $100 a year, but then the government gives back a dividend that lowers internet prices by $100 year. In real terms, you’re raising the price of carbon goods but lowering the prices of non-carbon-intensive goods.