Tuesday, June 24, 2008

Taxing time to stabilise climate

We cannot continue using the atmosphere as a rubbish dump for greenhouse gas emissions, argues Matt Prescott. In this week's Green Room, he sets out the case why a carbon tax will make it cheaper to protect the environment than harm it.

A global carbon tax cannot single-handedly stop us from using our atmosphere as a rubbish dump; but it could represent a fair and affordable step forward.

We all depend upon the Earth's atmosphere. Yet we continue to treat it as though it were a free, limitless and indestructible rubbish dump.

With little more than our fingers crossed, we seem to cling to the hope that the atmosphere will be able to absorb all of the greenhouse gases that we pump into it without changing its chemical structure.

Unfortunately, the available scientific evidence tells us this is not the case, and that humanity's emissions have already increased the risk that dangerous, perhaps abrupt, climate change will hit billions of people over the years ahead.

The time has come for us to stop freeloading and to find a fair, affordable and effective way of valuing, in dollar terms, the maintenance of a stable climate.

Put simply, we need to make it cheaper to help the environment than to harm it.

The principle of costing carbon emissions is not new - the international carbon trade, led by the EU market, turns over billions of dollars a year.

But the majority of the world's countries, companies and citizens play no part in the exercise. It is remote and aloof, so we need something that touches everybody.

Tax incentives

I propose, as a first step, the establishment of a low rate of carbon tax; implemented globally, but raised and spent at the national level.

This tax could quickly be applied to every source of greenhouse gases in every nation, where it would act as an incentive for everyone to reduce his or her emissions.

To date, most carbon tax proposals have advocated that the full environmental and social costs of climate change should be reflected in the introductory rate of a carbon tax.

Sweden deliberately did this in 1991 and now has a carbon tax equivalent to $151 per barrel of oil. It has been a huge success and enabled the country to achieve a 9% reduction in its emissions while simultaneously achieving economic growth of 44% between 1990 and 2006.

Clearly, not every society can afford such a high upfront cost.

My suggestion would be to introduce the global carbon tax at a rate that everyone could afford and that allows every country and human activity to be brought on board from the outset.

A rate equivalent to $1 (£0.50) for every tonne of carbon dioxide (CO2) released into the atmosphere would meet these criteria and also create a global minimum price for carbon.

Assuming a credible global carbon tax was established, this initial rate could then be increased using a pre-determined price escalator or further international negotiations.

The rate of $1 for every tonne of carbon dioxide would add roughly $0.0023 to the price of a litre of petrol, or $0.32 to a barrel of oil. This would raise a total of $6bn (£3bn) in the US, $5.5bn (£2.75bn) in China, $600m (£300m) in the UK and $700,000 (£350,000) in Afghanistan.

To help put these carbon tax costs in perspective, since December 1998 the price of a barrel of Brent Crude oil has increased from $9.10 to its present price of more than $135. So it's not going to wreck any economy.

To encourage innovation, each country would be allowed to raise its $1 per tonne of CO2 in any way that it saw fit. Its only international obligation would be to demonstrate that it had done so.

Carbon cash-back

Full, fair and affordable international participation is important because it would create a new and higher level playing field for businesses to compete upon, and discourage the shift of industries and investments to non-participating countries.

Rich nations could use the carbon tax revenues to help developing nations

If a government wanted to, it could give all of the carbon tax it raised back to its citizens, on an equal per capita basis.

This would not only make people sensitive to the cost of emissions but also create a reward for those who emitted less than their fair share.

When the rebate cheque was sent out to everyone, once a year, it could also be accompanied, for example, with discounts on energy-saving home improvements.

Alternatively, citizens in richer countries could be encouraged to donate some or all of their carbon tax rebate to help others in their own country, or abroad, to adapt to the impacts of climate change.

Governments could also spend the money they raise on preparing for climate impacts.

Finally, money could also go into fast-tracking the development and uptake of low-carbon technologies such as solar heating systems, air-source heat pumps, concentrated solar power and tidal lagoons.

Countries would then find themselves importing less energy from unstable regions, and investing more in local jobs and locally supplied sources of power.

At present human activities, such as burning fossil fuels for energy and clearing rainforests for agriculture, release approximately 29bn tonnes of CO2 into the atmosphere each year. This means that a $1 tax would generate $29bn.

Even a fraction of this would be enough to kick start low-carbon economic development and fund adaptation to climate change in many regions of the world.

One invaluable service a global carbon tax could provide would be to contribute some funds to help places such as Brazil and Indonesia to retain and extend their rainforests, providing benefits for their own societies as well as for the global community.

A carbon tax will help raise funds for clean energy projects

Clearly, if today's markets worked more perfectly, it wouldn't be necessary to propose a corrective tax because the price we paid would already include all of the costs associated with using fossil fuels.

Although a lot is expected of carbon markets they have so far failed to provide a consistent, stable and predictable carbon price for long-term investors.

Taxes also aren't perfect. Many "green taxes" have been abused by governments and treated as a way of raising general-purpose funds rather than as a way of funding green measures.

Treasuries hate having to spend the taxes raised from a particular source on a given activity; but if governments hypothecated their "green taxes" and spent more of the money they raised under this banner on environmentally beneficial activities, this would greatly enhance democratic accountability and public trust.

Nobody enjoys paying taxes, but the brutal truth is that they work. They force you to value what was previously taken for granted, and provide the funds needed to achieve socially and environmentally beneficial outcomes or to correct market failures.

I'm a believer in the power of goodwill and markets, but I am worried that they will continue to fail us, unless we start to tackle more of our excuses for inaction and consider our all of the options for delivering massive emission reductions.

We cannot continue to postpone action indefinitely or to wait for disasters to force our hand. This is because climate change is like a giant super-tanker, and we are unlikely to be able to stop it by the time that we can see it is going to hit us.
