When economists sit down and scratch their heads to find a solution for a problem, the first word that comes to mind is “tax”. So it’s no wonder that many leading economists of the world think that a carbon tax will solve global warming.
Unless a carbon tax is used as a form of revenue for environmental purposes and to fund decarbonisation, it’d be a hard sell. In ordinary circumstances there is no appetite for new taxes, and in the current climate to sell the idea of a carbon tax is nearly impossible.
Usually the idea of a carbon tax is discussed versus cap-and-trade as though they’re mutually exclusive. There is no objective reason why this should be so. A carbon tax can be introduced in developed countries as a form of value added tax to reflect the carbon footprint of goods and services and to incentivise decarbonisation.
In this way, when products follow a strict code of carbon disclosure, they can be taxed according to their environmental cost (and this could include toxicity and level of sustainability, not just GHG emissions). This tax could then be reclaimed by businesses who offset their emissions or fund projects to remedy their environmental impact.
The revenue collected will then be used to give grants to those businesses who take measures to reduce their impact. In effect this form of carbon tax creates three tiers where those businesses who minimise their environmental impact receive the greatest financial incentive.
A uniform carbon price or carbon tax worldwide would be completely unrealistic because of the huge wealth gap between developed and developing nations.
Cap and trade has got a bad reputation because in the EU it has miserably failed to deliver emission cuts. CDM is also widely criticised for delivering carbon credits of questionable additionality, creating a bloated market of carbon assets to the service of financial interests but not necessarily the best formula for climate change mitigation. This can and should change in future.
Potentially carbon trading could deliver the economic benefits that developing countries require to fund decarbonisation. Public money alone will not be sufficient to fund a technology transfer that developing countries need to grow and curb their GHG emissions at the same time. At the moment, developing countries are taking positions to show up at Copenhagen and demand around $500bn per year for “technology transfer” whilst developed nations are only prepared to commit $100bn per year (and even that might be tricky to pull off).
It is probably too late now to expect that Copenhagen will give us a global emissions trading mechanism that will effectively make up the shortfall but this should be articulated sometime in the next year, as it is our best chance to fund decarbonisation, rather than through a carbon tax.