The time has come for a global carbon emissions tax

by Mats Persson / 04 May, 2019
Polar bear (Ursus maritimus) standing on ice floe, Svalbard, Norwegian Arctic, Norway

Polar bear (Ursus maritimus) standing on ice floe, Svalbard, Norwegian Arctic, Norway. Photo/Marko Konig / imageBROKER/Shutterstock.

The time has come for a global carbon emissions tax, writes Mats Persson.

STOCKHOLM – The problem is staggering, even existential. Global emissions of greenhouse gases – especially carbon dioxide – are rapidly driving up global temperatures, transforming life as we know it. If those temperatures reach 2oC above pre-industrial levels, scientists warn, the results will be catastrophic. An international conference is called, under the auspices of the United Nations. Politicians declare that the world must curb CO2 emissions to avoid exceeding the 2oC threshold. And then nothing substantial happens.

The 2015 UN climate conference in Paris was supposed to be different. It produced a document, signed by 197 parties, containing general guidelines for climate policy and memorializing a global commitment finally to address the problem. As usual, however, emissions have continued to rise steadily, increasing the concentration of atmospheric CO2 at an alarming rate. Last year’s climate conference in Katowice, Poland – which focused on making the Paris commitments more specific and binding – did nothing to change this.

The reason UN climate conferences keep failing is straightforward: their agendas – centered on voluntary, quantitative targets – are fundamentally flawed.

Agreeing to quantitative, universally applied emissions-reduction targets at a UN conference is easy. But countries automatically regard adherence to those targets as a sacrifice: in the effort to reduce emissions by x tons, we would lose y million jobs, and GDP will fall by $z billion. Because there are no actual sanctions or punishment for non-compliance, when push comes to shove, governments can simply change their minds.

Even if a government does try to uphold its commitments, say, by imposing new regulations on high-emitting industries, it may not obtain the desired results. Businesses, too, want to avoid making any sacrifices, so they will seek any way to avoid regulations, including bribing government officials to look the other way.

Read more: What role should dairy farms play in NZ's low-emission future?Three businesses striking the right balance between environment and profitThe impact rising sea levels will have on New Zealand

Questions of fairness can further weaken incentives to fulfill UN climate commitments. Why should a poor developing country make the same reduction, whether in absolute or proportional terms, as a rich Western country? After all, on their path to high-income status, Western economies emitted with abandon.

Poor countries not only face constraints on development that their rich counterparts never did; it is also much harder for them to cover the costs of creating a low-carbon economy. Compensation is discussed, but countries consistently fail to agree on who should receive how much support, and who should pay. So the debate is pushed to the next conference. Meanwhile, the volume of atmospheric CO2 keeps increasing.

The voluntary quantitative restrictions that underpin the UN climate agenda amount to a weak foundation for a solution to the crisis. A better approach would begin with a uniform tax on CO2 emissions worldwide – say, $100 per ton.

Virtually all economists agree that, from an economic perspective, such a tax would create a much firmer foundation for climate action, not least because it would generate immediate revenues for governments. A global tax would also be politically more feasible than national measures – such as the French fuel tax that triggered widespread protests against President Emmanuel Macron – because consumers would not bear the full cost.

To be sure, prices for consumers would still rise, with the precise amount depending on the price sensitivity of supply and demand. If the supply of oil were completely inelastic (that is, if the world had a fixed number of wells from which oil could be pumped at no cost), the market price would fall by exactly the amount of the tax. In such a scenario, the full cost of the tax would be borne by the owners of the oil wells.

But supply is not completely inelastic. If the market price is high, new oil deposits (with higher extraction costs) will be developed; if it is low, some existing production will be closed down. The extent to which oil companies adjust to shifting demand will thus shape the effect of a global CO2 tax on consumer prices.

Because supply is not completely elastic, either, producers and consumers would share the burden of the CO2 tax, meaning that both would have an incentive to reduce their fossil-fuel production and use – and thus their emissions. If the billions of dollars in new tax revenue, at least partly funded by oil producers, were channeled toward broadly beneficial or otherwise popular investments, voters might be more than accepting of a CO2 tax.

A CO2 tax would also go a long way toward resolving the corruption problem raised by quantitative emissions restrictions, because governments would have less incentive to accept bribes from companies, especially if officials are held accountable for meeting revenue targets. Even governments that are skeptical about climate change might find the added revenues sufficiently appealing to support the tax. In this sense, a CO2 tax is “incentive compatible”: all governments – corrupt or honest, dictatorial or democratic, climate skeptic or climate leader – have a motive to impose and enforce it (provided that all other countries do the same).

As for fairness, the issue would be resolved in an ad hoc way: all oil-consuming countries, rich or poor, would receive tax revenue that is partly covered by oil-producing countries, which include the richest (and, in some cases, most corrupt) economies in the world. This might not be the optimal way of redistributing wealth across countries, but it is a feasible one. And the inclusion of any element of redistribution could ease resistance to climate action among developing countries frustrated by the advantages enjoyed by their wealthier counterparts.

The next UN climate conference will take place in Santiago, Chile, in December. That gives the world eight months to prepare a new agenda focused on coordinating a worldwide CO2 tax. Oil-producing countries will vote against it, because it would be much harder to avoid implementing than current commitments. But if most of the international community stands behind the measure, a UN conference could, at long last, bring genuine progress toward reducing global emissions and curbing climate change.

Mats Persson is Professor Emeritus at the Institute for International Economic Studies (IIES), Stockholm University.

Copyright: Project Syndicate, 2019.

Republished with permission.


Pulitzer Prize winner Jared Diamond on the need for nationhood
105738 2019-05-18 00:00:00Z History

Pulitzer Prize winner Jared Diamond on the need fo…

by Andrew Anthony

Jared Diamond’s new book about empowering national identity to respond to crises is bound to tip off yet another controversy, but...

Read more
Jared Diamond: Finland shows how nations can survive adversity and thrive
105744 2019-05-18 00:00:00Z History

Jared Diamond: Finland shows how nations can survi…

by Jared Diamond

Today, Finland is one of the world’s richest countries, but it’s had to fight for it, as this edited extract from historian Jared Diamond’s new...

Read more
Musician Warren Maxwell returns to his roots to connect Wairarapa Māori
105544 2019-05-18 00:00:00Z Music

Musician Warren Maxwell returns to his roots to co…

by Sarah Catherall

Trinity Roots frontman Warren Maxwell is laying down history, recording 25 waiata composed and sung by Wairarapa Māori.

Read more
George Clooney is the driving force behind a new adaptation of Catch-22
105911 2019-05-18 00:00:00Z Television

George Clooney is the driving force behind a new a…

by Fiona Rae

World War II-era Catch-22 swings from drama to comedy as John Yossarian slowly loses his mind.

Read more
How to listen to your body's cues for the optimal time to eat
105454 2019-05-18 00:00:00Z Nutrition

How to listen to your body's cues for the optimal…

by Jennifer Bowden

Your body tells you when it wants food, so you just need to listen.

Read more
Why Te Papa's latest shake-up is raising alarm among experts
105796 2019-05-17 00:00:00Z Social issues

Why Te Papa's latest shake-up is raising alarm amo…

by Sally Blundell

Te Papa’s new nature zone is just one of the big shake-ups at the national museum. Another involves restructuring that some experts warn will...

Read more
MMA fighter Shane Young is on a mission to fight bullying and toxic masculinity
105994 2019-05-17 00:00:00Z Social issues

MMA fighter Shane Young is on a mission to fight b…

by Noted

Napier-born Shane Young is calling out the idea that sharing your emotions is weak.

Read more
The 'Christchurch Call' is just a start. Now we need to push for systemic change
106007 2019-05-17 00:00:00Z Social issues

The 'Christchurch Call' is just a start. Now we ne…

by Kevin Veale

A great deal of evidence suggests that algorithms designed in pursuit of profit are also fuelling radicalisation towards white supremacy.

Read more