Carbon Tax and Emissions Trading
Some of the
issues surrounding carbon tax are introduced in a short factsheet from the International
Transport Worker’s Federation (ITF, n.d.). Carbon taxes are described as a
‘market solution’ intended to reduce CO2 emissions by making it more expensive
to produce them. An example of how this might work is that fossil fuel
companies would be taxed on the basis of their emissions, and would then pass
the cost on to their customers, resulting in reduced consumption of the goods
and services the companies provide. The main argument advanced against carbon
tax is that the poor would suffer most from price increases, for example in the
cost of heating, while the behaviour of wealthier people might well be
unaffected; the tax is thus considered regressive. A fairer way to reduce CO2
emissions would be through government actions such as a program of house
insulation. The article concludes that despite the unfairness of carbon taxes,
there is still a strong argument for them in view of the financial restraints
on governments, the urgent need to cut emissions, and the likelihood that if
they are not reduced, working people and the poor will suffer far more than the
rich. These and related issues will be examined in more detail below.
Carbon taxes
have been described alongside other “mechanisms that force polluters to pay for
the climate damage done by their product” (Mann, 2021, p.99). Whereas a carbon
tax “is levied at the point of sale on the carbon content of fuels or any other
product yielding greenhouse emissions”, tradable emissions permits are sold or
allocated in limited quantities by governments, and the “polluters can buy or
sell these permits” to pollute. A third mechanism is provided by carbon
credits, “granted for activities that take carbon out of the atmosphere and
bury or store it”.
The World
Bank considers that there are “several paths governments can take to price
carbon” in order that the “external costs of carbon emissions” such as damage
to the environment and health and the effects of drought and sea level rise should
be tied to those who are responsible for emissions, and who can reduce them. The
two main methods are emissions trading systems (ETS) and carbon taxes. Emissions
trading systems are also known as cap-and-trade systems since they place an
upper limit on permitted greenhouse gas emissions, and allow “those industries
with low emissions to sell their extra allowances to larger emitters.” This
process “establishes a market price for greenhouse gas emissions.” A carbon
tax differs from an ETS in that it directly sets a pre-defined price on greenhouse
gas emissions or on the carbon content of fossil fuels. “The choice of the
instrument will depend on national and economic circumstance” and some “40
countries and more than 20 cities, states and provinces already use carbon
pricing mechanisms, with more planning to implement them in the future” (The
World Bank, 2020).
An article which
appeared in the Wall Street Journal early in 2019, was subsequently published
as the “Economists’ Statement on Carbon Dividends organised by the Climate
Leadership Council” (Econstatement, 2019). It recommends a carbon tax as “the
most cost-effective lever to reduce carbon emissions at the scale and speed
that is necessary.” The tax should “increase every year until emissions
reductions goals are met and be revenue neutral to avoid debates over the size
of government.” Such a tax, if sufficiently robust, would “replace the need for
various carbon regulations that are less efficient.” Two further
recommendations are advanced in the context of the USA, though they may well
also apply to other countries: a border carbon adjustment system should be
established to prevent carbon leakage and to protect national competitiveness;
and all the revenue from the tax should be rebated directly to citizens as lump-sums.
The Climate Leadership Council, based in Washington, describes itself as an international
policy institute aiming to “promote a carbon dividends framework as the most
cost-effective, equitable and politically-viable climate solution” (CLC, 2021).
Commenting
on the Economists’ Statement on Carbon Dividends, Chomsky and Pollin (2020, p.
22) note that while its authors propose to redistribute revenue from the carbon
tax to the population in equal shares to protect the poor from cost-of-living
increases, “these economists offer no support for increases in public
investments in renewable energy and energy efficiency”, but oppose regulations
that require electrical utilities to stop burning coal, positions which they see
as “massive policy errors”. However, they acknowledge that the “orthodox
economists” who signed the 2019 statement “are clear that government
intervention is necessary to force capitalists to integrate the costs of
environmental destruction into their calculations” (p.67). Chomsky and Pollin
have in mind global solutions to the global problem of climate change, with
some form of carbon tax with rebates playing an important role alongside other
measures such as the elimination of all fossil fuel subsidies, a Green Bond
lending program initiated by the US Federal Reserve and the European Central
Bank, and funds reallocated from worldwide military budgets. Together with
private investments, a total of $2.4 trillion should be reached in 2021,
representing about 0.7% of total global financial assets (p.104). Carbon tax is
envisaged as beginning at around $20 per ton of carbon in 2024 (p. 105), and
revenues would contribute about $160 billion to the total (p.108). A simple
global rebate scheme would give about $60 to everyone on earth significantly
raising the income of the poorest; but Individual governments would adjust
distribution within their populations (p.111). A substantial portion of total
funds would be invested in clean energy projects.
Helm (2020)
is no doubt thinking mainly of the developed nations when he writes that “the
root cause of climate change is … our unsustainable carbon lifestyles” and that
if we pay for the pollution that we cause “our standard of living will be
impacted” (p.xv). He argues that without a price on the pollution that causes climate
change, there is no incentive to reduce it (p.84) and points out that every
“company in the FT100 index is embedded in the fossil fuel economy” (p.26). In
his view “a pragmatic climate change policy” involves three interventions:
making polluters pay; providing public funding for public goods; and ensuring
that damage is compensated for by requiring net environmental gain”. These
actions can be unilateral, and do not require international agreements,
“provided the price of pollution is generalised to include imports” (p.105).
Carbon pricing is collective, does not involve moral persuasion, and Helm
believes that done properly it can be a bottom-up approach which “incentivises
other countries to follow suit” (p.106). However he acknowledges serious
difficulties: in the UK the political left sees the carbon tax as regressive
and favours progressive taxation of wealth and income, with regulation as the
method of controlling pollution (p.102).
There are also ethical problems, since a carbon price can be seen as a
license to pollute (p.107ff). However, the flaws in carbon pricing “pale into
insignificance when compared to those of regulation” which is open to lobbying
by vested interests (p.109).
Attempts to
set a price for carbon using cost benefit analysis have yielded a wide range of
results “from less than $10 per tonne to more than $200” (pp. 113-4). This is
perhaps not surprising since the damaging effects of climate change vary
greatly from one part of the world to another. “An immediately high price will
yield lots of money … but not much in the way of actual carbon reductions” and
Helm stresses the advantages of setting a low initial price, and increasing it
over the next thirty years to achieve the climate target of net zero (p.115).
A carbon tax
aimed at eliminating the contribution of a country to global warming must be on
consumption and not merely on production, and this necessitates a carbon border
tax. The objections to such a tax are listed by Helm as the resulting increase
in the cost of living; the difficulty of measuring the carbon content of many
imports; and the supposed illegality of such a tax under World Trade
Organisation rules. On the first point Helm accepts that we simply have to
reduce our consumption; on the second he argues that a rough approximation to
carbon content would be acceptable; and on the third he proposes that WTO rules
on “environmental adjustments” could accommodate the tax. In an earlier work he
claimed that “the carbon border tax does not need an international agreement …
With a carbon tax in place … the market would then be properly incentivized to
start the serious business of decarbonizing” (Helm, 2012, p. 194).
Mann (op.
cit.) provides examples of the effectiveness of carbon pricing policies, the
sources and methods of opposition to them, and issues concerning regression, rebate
and the law. He cites the International Monetary fund as supporting carbon
pricing, and as recommending an average price of $75 per ton in order to meet
the Paris Agreement goal of keeping global warming below 2°C. An amendment to the
U.S Clean Air Act of 1990 is referred to as an example of effective action
against atmospheric pollution: a cap-and-trade policy “required coal-fired
power plants to scrub sulfur emissions before they exited smokestacks” (p.100).
These emissions fell by 36% in the subsequent 14 years while power output rose
by 25%. The emissions trading scheme implemented in Australia by Prime Minister
Julia Gillard in 2012 is described as resulting in emissions reductions in the
electricity sector of “more than 9% during the first six months of
implementation” (p.100), but was eventually revoked (p.104).
Opposition
to carbon pricing can come from sources such as fossil fuel interests and right
wing politicians: “to make a price on carbon toxic, all they have to do is to
associate it with social unrest, disruption and economic pain” (p.107). However
“carbon pricing has been vulnerable not just to attacks from the right, but
also to attacks from the left”; it has been portrayed by some progressives as
“an ostensible mechanism of neoliberal economics that discounts social justice”
(p.108). An example of opposition from an environmental movement to a carbon
reduction policy is provided by the vote by Australia’s Green Party against the
2009 Carbon Pollution Reduction Scheme on the grounds that it was not
sufficiently ambitious (p.111).
Mann argues
that “whether a carbon tax is progressive or regressive depends on how it is
designed” (p.108), that it is not intrinsically divisive and that it can return
revenue to “the poor and those most impacted” through appropriate design. He
claims that “Americans in general support carbon pricing by a four-to-one
margin” (p. 231), and that moderate conservatives are “on board with climate action”,
in contrast with the “deniers, delayers and deflectors” (p.117). He cites David
Cameron in the UK who “implored his fellow conservatives not to abandon”
climate change and the future of the planet, which were natural conservative
issues which the left would approach with anti-business, anti-enterprise and
anti-technology responses (p. 117). The belief that the introduction of a
carbon tax would shield the fossil fuel companies from legal liability for
their actions is challenged by Mann, who refers to current lawsuits against the
fossil fuel companies, drawing comparison with earlier action against the
tobacco industry which hid the dangers of its activities from the public
(p.109).
References
Chomsky, N.
and Pollin, R., 2020, The climate crisis and the global green new deal: the
political economy of saving the planet. London
and New York: Verso Books.
CLC, 2021, The
Climate Leadership Council, website accessed 3 April 2021
Econstatement,
2019, “Economists’ Statement on Carbon Dividends organised by the Climate
Leadership Council”, online, accessed 30 March 2021 https://www.econstatement.org
Helm, D.,
2012, The carbon crunch: how we’re getting climate change wrong – and how to
fix it. New Haven and London: Yale University Press
Helm, D., 2020,
Net zero: how we stop causing climate change. London: William Collins.
ITF, n.d.,
“Factsheet 13: Controversies – carbon taxes”, International Transport Worker’s
Federation, online, accessed 30 March 2021
https://www.itfglobal.org/media/658254/ITF-factsheet-13-Controversies-–-carbon-taxes.pdf
Mann, M.E.,
2021, The new climate war. London and Brunswick: Scribe Publications.
World Bank,
2020, “Pricing Carbon”, The World Bank, online, accessed 2 April 2021
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