In a nutshell, carbon pricing simply means adding something to our economic system so the cost of carbon dioxide emissions — in terms of impacts of climate change — are reflected at the point of purchase. Currently, we pay the cost of getting the fossil fuel to us, but that price doesn’t express the effects it goes on to have.
It’s the sort of problem economists call a “market failure” (and one of the reasons why some choose to pit climate against capitalism).
People have been pushing ideas of carbon pricing for years. There have been several schemes put in place too and, in the case of Australia, overturned. But we’ve seen a push in advocacy for carbon pricing in the run up to the Paris talks, notably from the World Bank and also parts of the extractive industries.
There are two ways we tend try to price carbon. One is a sort of quota system. They are normally called “cap-and-trade” because after a total amount of allowable emissions is agreed — the “cap” — permits to emit are auctioned off or given away and can then be traded, creating a sort of market for pollution. There are carbon trading systems like this in place all over the world. Another option is to levy a form of carbon tax.
Chris Hope, Reader in Policy Modelling at Cambridge Judge Business School, thinks we should go for the idea of a tax. People can be wary of the word tax, but Hope argues that such a tax, designed well, would plough money back into the economy as a whole, being used to reduce other taxes and help the economy grow. One key criticism of carbon pricing is that taxation tends to hurt the poor, but it doesn’t have to be that way.
For Hope, it’s important to him that any carbon tax would be fiscally neutral. Some sell the idea of a carbon tax with the promise of raising funds to help us decarbonise, but Hope’s wary of using it to subsidise renewables.
“The bulk of revenue has to go into general tax to reduce income and sales taxes and other distortionary taxes in the economy. Maybe you could reserve 10% of climate change tax to support early stage innovation. But you certainly shouldn’t be using the bulk of the revenue for subsidising other sources of energy, because they get a big boost anyway from the fact that the fossil fuels are more expensive.”
Hope also prefers to talk about a climate change tax, rather than a carbon tax. “For a start, it’s not carbon. It’s carbon dioxide. You don’t want to tax diamonds or graphite,” he laughs. Moreover: “If we want to extend it at some point to other greenhouse gases — like methane and nitrous oxide — then its better to have a climate change tax rather than a carbon tax.”
The sticking point for a lot of climate action is that we need to get everyone to agree, and we need to get everyone agreeing to something sufficiently ambitious. But, Hope argues, this doesn’t have to be the case with a climate change tax.
“One of the nice things about this is that it doesn’t have to be done as a global agreement,” he says. “It can be done by a few regions or a few nations and if the modelling is right, those regions and countries will grow faster, you won’t have to twist the arms of other nations because they’ll see it works.”
Further, he says the modelling he’s been involved in suggests a price of around $100 per tonne of carbon dioxide, whereas EPA numbers are nearer to $30-40, but he isn’t too concerned about this. Systems shouldn’t start too low, but they can offer a productive point to start from.
“You can build it up in real terms. It’s not difficult administratively to do that,” and, he adds, increasing the tax fits the scientific modelling. “If you release a tonne of carbon dioxide in 2020, it’s likely to do more damage than a tonne of carbon dioxide released in 2015.” We’re going to have to expect to raise it anyway.
Whether ideas of carbon — or climate change — taxes really start to catch on either in the run up to the 2015 climate talks, or in its aftermath, remains to be seen. Critics on the right will most likely continue to balk at the tax word, and the left may well feel it’s just a way of propping up a system that is ultimately unsustainable at a more systematic level.
As Hope argues, there are many businesses that are keen to see more moves towards climate pricing.
“The more progressive companies can see that [it will benefit the economy] and also they want to behave in a sustainable way,” he suggests. “And they don’t want people who are not as progressive as them to benefit from acting in an unsustainable way. If you have a climate change tax on every tonne of carbon dioxide that’s emitted anywhere in the economy, then the less future-focused companies aren’t able to take advantage.”