Taxing new plastic is the cheapest way to address its environmental impact

We can probably all agree we have too much plastic pollution. We were all moved by the images of a plastic straw being pulled from the nose of a tortoise. I am probably not the only one to have also tripped over a plastic bottle littering the street. And, sadly, I am not the only one to have thrown a plastic bottle into the trash. But are we just helpless to the fact that soon there will be more plastic on our oceans than fish? We are not. 

Let’s start with the problem. First, plastic pollution is everywhere — and everywhere it shouldn’t be. You need not go far before you see a plastic bottle polluting the environment; this is true whether you’re walking down the street or a turtle swimming in the ocean. Second, 98 percent of the plastic making up your bottle of soda is virgin plastic — plastic that has never been recycled. Third, even when we try to do the right thing, it doesn’t happen. Only 10 percent of the plastic we throw in recycling bins gets recycled. Finally, this isn’t just about plastics ending up in the ocean or on the street. It is also a climate change problem. A Franklin Associates study recently found that a ton of virgin plastics is responsible for more than a ton of additional carbon dioxide emissions compared to recycled plastics. At the current social cost of carbon dioxide emissions used by the federal government, this translates into an additional $60 of climate change damages.

What’s the solution? The solution flows directly from the fundamental issue: Virgin and recycled plastics do not compete on a level player field. The market is able to ignore the greater environmental burden of virgin plastics. Economists have known that the most efficient way to address this is to level the playing field by making users of virgin plastics pay for the added costs the virgin plastic adds to the globe. 

Sen. Sheldon Whitehouse (D-R.I.) has a new bill that will do just that. The bill would place a $40 per-ton tax on virgin plastics used to make single-use products. Recycled plastic would not face the tax, nor would plastic used in multi-use products such as in your car, cell phones, etc. Importantly, imported single-use plastic would also be taxed so as not to disadvantage U.S. plastic manufacturing.

Basic economics tells us that this is the cheapest way to reduce the added environmental costs of virgin plastics. Whitehouse’s bill would make plastic manufacturers pay for these added environmental costs and then rely on market forces to reduce pollution.

Not surprisingly, the plastics industry is not happy as this will be costly to them. Their most passionate argument is that they will simply pass these costs onto the consumer. It may seem strange for an industry to broadcast their desire and plan to pass the tax onto consumers, but this is an issue we should take seriously.

Back to economics: Whether simply passing the tax onto consumers is possible is actually quite complicated. Sure, every firm would love to simply pass along a new cost to consumers, but it isn’t as simple as that. How much of the tax would be passed onto consumers depends on the sensitivity of consumers to increases in price, the degree of competition in their industry, the availability of alternatives to virgin plastics and more. In some cases, firms have to absorb all of the tax increase. I would expect the plastic manufacturers to absorb some, the bottling companies to absorb some, soda companies to absorb some, restaurants to absorb some, etc. How much is ultimately paid by consumers is uncertain and should not be simply assumed.

A second argument that the industry makes is that the tax will be regressive, meaning it will harm low-income households more than wealthy households. This is also an important issue. Whether the industry’s claim is valid, however, is again not clear. It might actually be progressive. This issue is more nuanced because the industry seems to be ignoring how the revenues will be used. Whitehouse’s bill would establish a fund to increase recycling; the ultimate outcome would be to make it easier for households to recycle plastics. Therefore, whether the bill is progressive or not will depend on whether or not low-income families increase their paid recycling as a response. A 2011 research study in the American Economic Review finds that bottle deposit-refund programs actually increase the income of low-income households. Investing in recycling infrastructure and improving the incentives to use recycled plastic could magnify these effects.

Not only is taxing virgin plastics a good idea but the basic idea should also be expanded to pollution more generally. This includes the concurrent discussions Congress is having about decarbonization efforts more generally. Let’s take a page out of Whitehouse’s playbook and set an economy-wide price on not only virgin plastic but carbon and other ways in which we harm the environment and climate. Putting a price on pollution is the cheapest way to address environmental pollution.

Christopher R. Knittel, Ph.D., is the George P. Shultz professor of applied economics at the Massachusetts Institute of Technology (MIT), the director of MIT’s Center for Energy and Environmental Policy Research and deputy director for policy at MIT’s Energy Initiative.