Over the past year – when societies around the world have had to grapple with their greatest challenge in decades – climate change hasn’t been at the top of the agenda. But that doesn’t mean it’s gone away. Far from it – in fact, we just experienced the hottest September in 141 years, and extreme warmth recorded in the Arctic continues a disturbing trend. When the focus turns back to this ongoing existential threat, hopefully we’ll have learned some lessons from the pandemic about what can be achieved when imaginative thinking is brought to bear.
Our approach towards tackling the climate crisis is necessarily going to be multipronged. But one powerful tool is that of a carbon tax. So far, however, only a few nations have taken this route. Why?
First of all, how do taxes on carbon work? Basically, they penalize fossil fuels for the CO2 emitted when they’re burned, and in doing so offer a two-part advantage compared with other measures. They make non-polluting industries and products more competitive, and yield a flow of revenue that can be used to calm opposition to emissions reduction.
Weaning our economies off fossil energy involves making it less financially attractive. In market economies, most personal and business decisions are driven by prices, and wherever a fossil fuel is the cheapest source, and not forbidden, it will continue to dominate. Not only that, but fossil energy is a determined adversary, ploughing money back into research and development designed to push costs down so it can remain competitive, even as renewables become cheaper. A price penalty on fossil emissions counteracts this.
There are several ways to raise the prices of coal, oil and natural gas. For example, you can build a tax-and-trade system, which limits total emissions but encourages emitters to trade their carbon allowances. It’s simpler, however, to just tax fossil fuels when they’re burned, as it sends a clear price signal to the market, which a variable trading price doesn’t. At the moment, taxes on fossil energy are collected across the supply chain, from the point of production, as with US state severance taxes, to final sale, as with gasoline taxes in many countries. It’s messy.
For environmental effectiveness, and ease of collection, carbon taxes are best imposed at the earliest point you can: the wellhead or the mine mouth, the refinery output gate, or the port of entry for imports. That way, the incentive to reduce emissions spreads down through the economy. For example, a US tax of $50 per metric tonne of CO2 would raise the price of oil leaving the Texas oil patch by about $21 a barrel, and increase prices throughout the country for motor fuel and products made using oil-based energy. This would percolate down to your local store: environmentally friendly goods would become relatively less expensive, and carbon-intensive ones would…
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