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How to avoid the political pitfalls of carbon taxes

Bjorn Lomborg is the director of the Copenhagen Consensus Center.

A carbon tax is much discussed as a solution to climate change. It is simple and straightforward: a climate price tag makes industry and consumers take into account the implicit negative effects of their actions, whether it is the aircraft fuel for a vacation, or fossil fuels for food fertilizers or to heat and cool a home.

I have argued for a well-designed carbon tax for more than a decade. But five important caveats, almost universally breached by politicians, affect the likelihood of such a policy working.

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First, a carbon tax has to be uniform across the entire economy. Saving one tonne of CO2 by switching from coal to gas helps just as much as saving a tonne by using solar energy or not driving. Yet, politicians set different prices. Among the member countries of the Organization for Economic Co-operation and Development (OECD), there are likely more than 1,400 different levels of taxes.

Germany alone has at least 30 effective CO2 taxes. Coal is taxed at $4 a tonne of CO2 if used in industry, but at $43 if used for electricity. Every $43 used to cut one tonne of CO2 through electricity could have cut 10 times more with the industry tax.

Second, other climate regulations such as solar and wind targets and electric-car subsidies need to go (along with any fossil-fuel subsidies). Once the CO2 tax has been levied, additional regulations just mean a higher cost.

European politicians seek votes with policies such as giving subsidies for electric cars. In Norway, one study shows the subsidy reaches $17,000 for each tonne of CO2 emissions avoided. In comparison, the current price to cut a tonne of CO2 on the European Union power market is just $10.80. The $17,000 Norway spends to cut one tonne with an electric car could cut more than 1,500 tons of CO2.

This has a vast cost. The EU already has an indirect carbon tax on electricity through its cap-and-trade system, yet politicians shower solar and wind energy with love. That bad habit costs about $63-billion each year. Since total electricity emissions are capped, more wind and solar power simply makes using polluting coal slightly cheaper.

Across the EU, academic estimates have pegged the total annual waste at around $100-billion. The EU could reduce carbon emissions by the same amount for $100-billion less every year.

The third caveat is that we need to be realistic about what any feasible carbon tax can achieve. It can slightly reduce the temperature we will see in 2100, but will not achieve hyped promises such as keeping the increase in temperatures below 2 C.

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A tax will cut the emissions that bring the least benefits (like excessive air conditioning in an empty office). It cuts the most dangerous part of climate change by reducing temperatures a fraction from the highest end. But not all emissions will be cut – indeed, some have considerable benefits (such as heating the home of an elderly person through the winter). As we cut more, it becomes harder and more expensive, while we're reducing temperature rises that are less dangerous.

Fourth: For a carbon tax to work, it must cover almost all sectors and countries to prevent emitters from responding to limitations by moving to places with lighter regulatory regimes. One study found that such "carbon leakage" during the years of the Kyoto Protocol came to about 40 per cent. A simulation suggests that nearly all of California's proposed carbon cuts would be lost this way. This is unsurprising, given that California is embracing more strenuous targets than most U.S. states.

Finally, the tax must be returned through the reduction of other taxes. If not, it can be doubly inefficient because it drains resources that could be used for things such as solving other environmental problems. Yet, almost all climate taxes so far have not been returned.

A carbon tax should be set around the price of future carbon damage. The biggest, peer-reviewed study shows this price is realistically about $10 a tonne.

A higher tax simply means a less-effective overall solution – and is much less likely to gain taxpayer support. In the United States, most people are willing to spend between $2.50 and $10 for every tonne of CO2, and in China the amount is $8.80 a ton. At this level, a carbon tax will reduce some, but certainly not all of climate change. We could fix about 5 per cent or 10 per cent of the entire problem with a politically feasible, perfectly executed, globally enacted carbon tax.

But politicians have shown little interest in avoiding these pitfalls, making carbon taxes more likely to cause political gridlock and less likely to work.

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This is why we should remain open to other ways of fighting climate change. Most promising is investing much more in research and development for green energy. This is much cheaper than a tax and likely to be much more effective. If R&D can bring the price of green energy below that of fossil fuels, everyone will switch, without the pain that a poorly executed carbon tax brings.

Ontario, Quebec and California sign carbon market deal (The Canadian Press)
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