The carbon tax is not dead

During the COP26 which has just ended in Glasgow, the idea of ​​a carbon tax received renewed attention. Among the three most important steps taken during the conclave, the creation of a carbon credit trading mechanism is very symbolic. Why? Carbon trading and the carbon tax are complementary policy tools to reduce greenhouse gas (GHG) emissions. Carbon tax revenues generated in developed countries are an important source of funding for mitigation and adaptation projects in developing countries affected by climate change.

According to an IMF estimate, climate adaptation finance averaged USD 30 billion per year in 2017 and 2018, and adaptation costs in developing countries alone are currently estimated at nearly USD 70 billion. USD and is expected to reach USD 140-300 billion by 2030. As OECD countries work from all angles to raise funds for their contribution to global environmental projects, the carbon tax is expected to play an important role. The US Congressional Budget Office has estimated that a carbon tax starting at a relatively modest amount of $ 20 per tonne would generate $ 1.2 trillion in revenue over a decade.

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In a recent edition of The Atlantic magazine, Robinson Meyer wrote an article titled “Carbon Tax, Beloved Policy to Fix Climate Change, Dead at 47”. If so, my readers might wonder why I am trying to resuscitate a dead cow, or as they say in many countries, “Why whip a dead horse?” “

The outcry against the story in The Atlantic was spontaneous and loud. It cannot be denied that many problems must be resolved before a country, developed or developing, can implement a carbon tax. A national consensus must be reached on the use of the tax money collected. In 2010, Bangladesh was on the verge of adopting a carbon tax, but the idea was scrapped in part because of concerns that it could harm the wallet of the average consumer. A legitimate question would be: is the money collected used to finance environmental projects or to relieve the poor in the form of a reduction in VAT? Another unintended consequence can be an increased use of biomass. An example is the case of Sweden’s carbon tax, which has resulted in increased use of biomass for heating and industry because these fuels are classified as renewable. In Bangladesh, a carbon tax will undoubtedly increase the consumption of fuelwood, biomass, bagasse and agricultural waste.

My optimism on the role of the carbon tax and its effectiveness will not necessarily be shared by all. In a recent and very well-written editorial in this journal, Anis Chowdhury and Jomo Kwame Sundaram argued that the carbon tax is regressive, claiming “it is unfair to the poor”. While this logic has some merit, there are various countermeasures to compensate low-income taxpayers through reduced electricity tariffs and redistributive actions.

Nonetheless, I agree with Chowdhury and Sundaram that the carbon tax is not a silver bullet. Climate change is a very complex problem and tackling this global problem requires experimenting with various mitigation tools. In addition to mandatory technological innovations, economic instruments, including emissions trading and the carbon tax, are invaluable instruments that deserve a chance.

As an economist who has worked on evaluating and evaluating the effectiveness and efficiency of market-based tools, as well as other mechanisms known as command and control mechanisms , my experience has shown that the main obstacle to carbon tax or other emission reduction regulations is political. . Chowdhury and Sundaram agree that many carbon reduction measures require legislative action, and the coal and oil sectors wield strong economic and political power in the capitals of rich countries. However, it would be wrong to single out the carbon tax to ignore “political realities, especially the differences in power and influence of key stakeholders”, as all Net Zero initiatives face opposition from powerful political lobbies.

However, today 100 nations, states and cities have instituted some form of carbon tax to limit GHGs. Some countries don’t call it a tax, but to minimize its “knockdown” they have come up with other names, including carbon royalty and carbon dividend. But let’s call a devil by his real name.

In the aftermath of COP26, Bloomberg News reported that Russia will seek to reduce its ambitious targets to boost coal production over the next decade and consider imposing a carbon tax or other regulations as a result of the agreements. concluded by the great powers in Glasgow. , according to two officials familiar with the plans.

To reduce emissions, we can use traditional regulatory approaches (sometimes referred to as command and control approaches) that set specific standards for all polluters, or instead adopt economic incentives or market-based policies that develop. use market forces to correct the behavior of producers and consumers. . Of the many measures that have been proposed (and some of them have been tried), two belong to the “market-based” group. Coal, for example, can be banned outright, but why not add a tax on coal based on its true “damage” to minimize consumption?

Take the case of two countries, India and Australia, both of which are major producers and consumers of coal. India, according to a 2019 Brookings Institute report, will still generate the majority of its electricity from coal by the end of 2030. As part of the Covid-19 stimulus packages, Rs 50,000 crore has been allocated coal transport infrastructure to increase production from 730 million tonnes in 2019-20 to 1.5 billion tonnes in 2023-24. Although India’s domestic cost of production is lower than the price of imports, it cannot meet all the demand. In recent times, as the price of imports has increased, the domestic supply of coal has replaced imports.

The price of Australian coal was $ 60.8 in 2020. India imports coal from Australia at a lower price than anywhere else. If Australia reintroduces the carbon tax (which was AUD 23 per tonne), the coal price advantage will decrease and importers such as India (as well as China) will reduce their dependence on coal. Australian.

The carbon tax is often mistakenly seen as the only or the main instrument for reducing GHG emissions, even if it is only one, and only one, of many policy options. Each country can choose from a variety of tools and some of them are doomed to fail. A complete ban on carbon emissions by law has not worked and will not work. Likewise, expensive technology to upgrade coal-fired power plants will be rejected. These measures come under the “command and control” arsenal.

China’s own experience with economic reform suggests that the use of price signals and market forces tend to minimize the costs of structural change. In particular, raising the price of carbon in China to a sufficiently high level and announcing a predictable price path with sufficient lead-time could allow electricity producers and users to better adapt and manage. adapt, thereby helping them achieve the same level of emission reductions, with less loss of GDP growth.

Finally, governments that have implemented a carbon tax have taken measures to mitigate the negative impacts on households and businesses. These include reducing other taxes – in British Columbia, legislation requires that all carbon tax revenue be returned to taxpayers through tax cuts – and the phased introduction of the carbon tax. tax to give businesses time to adjust. This makes it easier for companies to adapt over time and has been used in British Columbia, South Africa (proposed) and as part of the European Carbon Trading Scheme. Other options include granting partial exemptions to certain sectors defined as export-oriented for a certain period and investing in infrastructure that can be used to improve the competitiveness of businesses, for example by ensuring good transport links and a reliable energy supply, two considerations in Bangladesh.

Dr Abdullah Shibli is an economist and works in the field of information technology. He is also a senior researcher at the International Institute for Sustainable Development (ISDI), a think tank based in Boston, United States.

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