Experience with the EU Emissions Trading Scheme (EU-ETS) has been useful in showing how low and unpredictable prices of carbon allowances discourage investment in low-carbon technologies. Attempts are underway to adjust the scheme to raise the allowance price, and thus increase the price of fossil fuels – incidentally bringing the ETS closer to a carbon tax. There are also calls for the allowances to be auctioned, which would bring the scheme closer still to a carbon tax by providing revenue to governments. Such revenue could be used to reduce (or prevent the rise of) some other taxes and to help vulnerable households and the economy generally. It is now dawning on people that free handouts of ETS allowances have in fact a real cost to the general public.
Reform that takes the ETS closer to a carbon tax is like going full circle. A carbon tax was initially proposed by the European Commission in 1991 for reasons of its reliable price, its revenue, its potential fairness and its ease of application, not to mention the systemic benefits to recycling, renewables, organic farming etc. But an emissions trading scheme was chosen instead. Nevertheless, independent reports from extensive studies in Ireland saw a strong case for carbon taxes – including studies and publications by the Commission on Taxation, economists, the Environmental Protection Agency and the Royal Irish Academy, while the Combat Poverty Agency approached carbon taxes with constructive proposals of its own for use of the revenues. Eventually, Ireland introduced a carbon tax in 2010, but applied only to selected fossil fuels in the “non-traded sector”, that is, to some of the emissions not already covered by the EU Emissions Trading Scheme. Ireland’s experience with a carbon tax is itself now a focus of interest, as are applications in some other countries of the EU that used the revenues to good effect. The IIEA throughout has been a prominent platform for these and related discussions.
Is interest in carbon tax warming up? Some countries’ efforts to reform the EU-ETS amount to bringing in a hybrid of ETS plus carbon tax. For example the UK has introduced a minimum or floor price of carbon, and Ireland has also seen a preliminary analysis of a carbon floor price. But the major players – China and the USA – are mainly debating and experimenting. The OECD, long-term advocate of an effective carbon price, suggests that China could consider moving “towards national carbon pricing, preferably by implementing a carbon tax, depending on experiences with the pilot [emissions trading] schemes”. Lack of an effective environmental tax system in China may have contributed to its environmental problems and the Ministry of Finance plans to introduce a carbon tax on enterprises that are large users of fossil fuels by the end of the 12th Five Year Plan (2011-2015). However, coordination and collaboration between levels of government present many obstacles. Carbon consumption, rather than carbon production, is increasingly recognised as the target for policy, requiring application of tax adjustments at the border to ensure that imports of carbon-intensive goods from countries without a carbon price are treated on the same basis as the importing country’s domestic production. Border adjustments on imports from China and associated hassle with World Trade Organisation rules would be avoided if China and other exporters impose their own carbon tax. A number of economic journalists express similar support for carbon taxes: “A levy on carbon is an idea whose time has come” according to the Financial Times, and the European Commission is updating the rules on energy taxation, with a component to cover carbon.
For the USA to take action at federal level, the present line-up in Congress would require a volte face in Republican (and some Democrat) views on global warming, let alone on introducing a carbon tax. Yet the former adviser to President Bush and Mitt Romney, economist Gregory Mankiw, says that the case for a carbon tax looks even stronger compared to other options on the table, advocating a carbon tax that is global, where each government can keep the revenue to use as it wishes. ExxonMobil also prefers a carbon tax over cap-and-trade. Recently the Harvard project on climate agreements has published a so-called climate diplomacy proposal. On the basis that any significant carbon policy must involve a meaningful price signal, and that the current focus on emissions targets fails to address the economic realities of achieving them, it decries the fact that carbon pricing has received little multilateral attention as “a glaring gap in climate talks to date”.
Meanwhile some other jurisdictions, such as British Columbia in Canada, have also acted on the need for a credible long-term carbon price. The carbon tax is certainly getting more attention; the issue is how to present it. A start could be to stop calling it a carbon tax. As one proponent states: “Call it a carbon dumping fee or something that makes it seem more like a climate change solution.
Authored by Sue Scott
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