Better world: Tax carbon and give the money to the people
13 September 2009 by Richard Webb Magazine issue 2725. Subscribe and get 4 free issues. For similar stories, visit the Climate Change Topic Guide Goods should be taxed to reflect the damage they do to the planet, with revenues redistributed to society.
CONSIDER this injustice. Governments tax labour and profit, the engines of prosperity, while pollution and the depletion of resources - arguably the greatest threats to our economic well-being - remain largely untouched. So while we're thinking about how to rebuild our broken economies, here's a plea for a new cornerstone: a universal carbon tax.
The world needs to put a price on carbon, that much is agreed. The Kyoto protocol involves a very different mechanism, known as cap and trade. Permits to emit carbon are distributed among polluters up to a total, or "cap", equivalent to existing levels of carbon emissions. Those who don't use all their permits can sell them to those who exceed their allocation. Over time, the number of permits is reduced, raising their price and encouraging people to reduce emissions.
That's the theory, but the reality has not lived up to expectations. The world's largest cap-and-trade scheme, the European Union's Emissions Trading System, saw emissions rise 2 per cent in its first trading period from 2005 to 2007. Too many permits were distributed, and after tripling in value in the first six months of trading, their price rapidly collapsed to virtually nothing.
Tweaks introduced for the scheme's second phase might make it more effective, but there are some weaknesses to cap and trade that will never be eradicated. In particular, it is open to manipulation and political influence, and if not properly managed just shifts pollution around rather than reducing it. It also covers only a few carbon-intensive industries. The mooted introduction of a similar scheme of personal carbon credits for private consumption would have many of the same drawbacks - and will inevitably be a bureaucratic nightmare.
A universal carbon tax could be far simpler. NASA climatologist James Hansen is a vocal proponent, favouring a variant in which fossil fuels are taxed at source or at a country's port of entry. The most polluting fuels in terms of carbon emissions, such as coal or tar-sand-derived oil, could be taxed more heavily than others. Consumers would not pay the tax directly, but its effect would permeate through to everything from the price of gas to the price of food: the more carbon-intensive goods or services are, the more heavily they will be hit.
That doesn't mean that consumers need be out of pocket. As Hansen envisages the scheme, the proceeds of the tax should not be kept by the government, but instead distributed equally among all citizens in the form of payments into their bank accounts. Those who make greener choices - flying less, insulating their home, running a more energy-efficient car - will make a net profit from the tax.
The scheme is not without its difficulties. Poorer people spend a larger proportion of their income on basics such as heating and food, so they could be hit hardest. Such effects would have to be mitigated through targeted subsidies for poorer households, for instance, to insulate their homes.
Another criticism is that wealthier people might just pay more rather than change their lifestyles. But steadily increasing the level of the carbon tax over the years should mean that almost everyone eventually starts to feel the pinch, as well as provide a strong incentive to invest in alternative technologies. In the UK, this notion will awaken unhappy memories of the "fuel price escalator", a steadily rising tax on petrol that was abandoned in 2000 after widespread protests. Splitting the proceeds from a carbon tax among taxpayers will win many over but the fact is that any effective scheme for reducing emissions is going to involve some pain. Most of us won't change our lifestyles unless forced to.
Public opposition and the lack of political will are the biggest stumbling blocks in the way of a universal carbon tax. Hansen is pessimistic, and contrasts the simplicity of a carbon tax with the mammoth bill to establish a cap-and-trade system for the US now worming its way through Congress - and being laced with clauses serving various special interests as it does so. "A carbon tax is honest. It takes one page rather than 1400," he says. "That doesn't go down too well in Washington."
