It´s the Tax, Stupid! Finally Putting a Price on Carbon Emissions

Tim Pfefferle

Benjamin Franklin said there were only two things certain in life: death and taxes. Not so in global environmental politics, where the introduction of a carbon tax has met fierce opposition. In spite of all the arguments in favor of a significant carbon tax – being advocated for by environmentalists, some progressive politicians, journalists, and not least by more than a few economists – for most countries this is a political dead end. However, there are currently three evolving conditions that may have created just the right environment for a carbon tax to once again become a feasible proposition.

Emissions are public bads. They should be taxed. Photo: Arnold Paul via Wikimedia Commons.

Emissions are public bads. They should be taxed. Photo: Arnold Paul via Wikimedia Commons.

For one, governments around the world are still in fiscal crisis mode. Although some of the effects of the global financial crisis and its aftermath in terms of budget pressures may have worn off, the need for fiscal consolidation persists. In Germany, for instance, the government has made it a point to bind itself to balanced budgets going forward. However, with a concomitant need to make strategic investments in areas like health, education, public infrastructure and, crucially, renewable energy, there is a pressing need for new progressive and smart revenue streams. Hiking up taxes on tobacco once again will not do the job. This is where the carbon tax comes in. It is not just another cash grab, but can be designed in a way that benefits the wider public. Less pollution, less traffic congestion, a contribution to global climate change mitigation; these could all be potential benefits of finally putting a price on carbon, in addition to adding revenue to finance badly needed future investments. Moreover, a carbon tax would make it much easier for renewable energy to compete on a level playing field with fossil-fuel based energy. Currently, governments everywhere are busy devising incentive strategies to promote renewable energy, with feed-in tariffs, quotas and tax schemes among the most popular instruments. As countries like Spain have found out, that can be expensive. Yet, in many places, renewable energy is already competitive. That is, it would be, if we properly accounted for the true costs of fossil fuels (as well as the insane amount of subsidies being gifted to the fossil industry). Instead of having to subsidize both renewable and conventional energy, a transparent carbon tax could do the job in a much more efficient manner, while simultaneously adding revenue. In fact, the absence of a carbon tax almost acts like a covert subsidy, since the long-term environmental effects associated with carbon emissions will have to be paid for by us, the public.

A second enabling factor is that there is a political imperative to do something about climate change. 2015 is the year governments have committed themselves to in finding a solution to global climate change. Not only will there be the climate change conference in Paris, where a deal to limit carbon emissions is supposed to be hammered out, but also the announcement of the Sustainable Development Goals, the successor to the Millennium Development Goals. These are to be agreed before a UN summit in September. Now, given that the best outcome of all that global summitry government leaders like to engage in may have been the passing of the Kyoto Protocol, one should be more than cautious in hoping for a significant outcome in these processes. After all, when looking back, most climate conferences have been somewhat of a joke, with the Copenhagen meeting in 2009 the standout performer in that regard as a total failure. However, we should not necessarily be preoccupied with what can be achieved globally, but what states can do individually to present themselves as serious on climate change. If a carbon tax can find its way into the climate strategies of some prominent countries, this will add to the pressure for others to follow suit, once they recognize the potential benefits. The same has happened with social security, national health systems, or renewable energy investments. Nowadays, states wear their efforts at being green like a badge. Anything to help a carbon tax attain mainstream status will accelerate a more widespread recognition of its utility.

Renewable energy is increasingly competitive. A carbon tax would level the playing field. Photo: Koza1983 via Wikimedia Commons.

Renewable energy is increasingly competitive. A carbon tax would level the playing field. Photo: Koza1983 via Wikimedia Commons.

However, perhaps the biggest development in terms of a concrete incentive is the precipitous fall in the oil price. Any attempt at introducing a carbon tax is likely to face an initial backlash, because increasing the price of fossil fuel-based energy is associated with higher burdens for low income households. Although there is some merit to that, it has been documented that fossil fuel subsidies, for instance, actually do not benefit the poorest in developing countries, but rather those who already have significant access. If we want to raise living standards for the poor, maintaining a fossil-fuel based system is counterproductive. Looking at industrial countries, energy costs make up a relatively little percentage of overall household expenses. However, the negative connotations of fossil fuel price increases are likely to remain. Against this background, the dramatic collapse in the price of oil comes in handy. It is much more easily justifiable to phase in a modest carbon tax in the current environment, because prices are historically low. Therefore, the additional financial burdens are not as significant. Once a tax has been introduced, half the work is done, as tax measures are usually quite sticky (although Australia provides the obvious counter-example).

Thus, the current global environment offers the best chance yet for the introduction of a meaningful carbon tax. Not only would it be the most sensible policy to combat climate change, but also support the fledgling economic recovery process so many countries still find themselves in. Excessive carbon emissions are a public bad. Economic theory teaches us that taxes are designed to minimize externalities. Government leaders would be wise to go back to Economics 101 to realize that.

Australians protesting the introduction of a carbon tax. Photo: Qlan via FlickR.

Australians protesting the introduction of a carbon tax. Photo: Qlan via FlickR.

 

 

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