[op-ed snap] Putting a global price on carbon

Note4Students:

A carbon tax policy might not seem a magic wand to cut down on pollution, but it is less likely to face political opposition and compromise while creating new sectors for businesses and growth. Read the op-ed to know more on carbon tax.

  1. Read what is mitigation policy for Prelims
  2. Make note of the advantages of carbon tax, for Mains exam
  3. The points under ‘Road ahead’ are a must read in this op-ed

Context:

  1. It has been established in various scientific studies that any warming of the planet will lead to increased natural calamities such as floods and cyclones, declined crop yields and ecological degradation
  2. A large increase in global temperatures correlates with an average 5% loss in global GDP, with poor countries suffering costs in excess of 10% of GDP

As a mitigation policy:

  1. A global and immediate policy response is urgently required to reduce greenhouse gas emissions and mitigate the effects of climate change
  2. There should be discourse towards adopting a multilaterally coordinated imposition of a carbon tax as a potent mitigation policy
  3. A carbon tax aims to internalise the externality of climate change by setting a price on the carbon content of energy consumed or greenhouse gas emitted in the production or consumption of goods
  4. Carbon tax regimes will only be effective if harmonised internationally
  5. Different country-wise policies could lead to ‘carbon leakages’ where energy-intensive businesses will most likely move to less strict national regimes

Advantages of carbon tax:

  1. Harmonised carbon taxes hold advantages over quantitative limits imposed through government control and regulation
  2. First, a carbon tax regime avoids the problems related to choosing a baseline. In a price approach, the natural baseline is a zero carbon tax
  3. Second, a carbon tax policy will be better able to adapt to the element of uncertainty which pervades the science of climate change
  4. Quantity limits on emissions are related to the stocks of greenhouse gas emissions, while the price limits are related to the flow of emissions
  5. From this uncertainty arises another complication of price volatility
  6. Fourth, quantity limiting policies are often accompanied by administrative arbitrariness and corruption through rent-seeking
  7. This sends off negative signals to investors
  8. In a price-based carbon tax, the investor has an assured long-term regulation to adapt to and can weigh in the costs involved

Addresses issue of equity:

  1. The most contentious issue in any international negotiation on climate change mitigation either at the level of the WTO or at the United Nations Framework Convention on Climate Change has been the issue of equity between high-income and low-income countries
  2. The price-based approach in the form of carbon taxes makes it easier to implement such equity-based international adjustments than the quantity-based approach
  3. The carbon tax will essentially be a Pigovian Tax which balances the marginal social costs and benefits of additional emissions, thereby internalising the costs of environmental damage
  4. It can act as an incentive for consumers and producers to shift to more energy-efficient sources and products

On a Global level:

  1. The U.S. and the EU have fairly successful carbon pricing regimes in place in the form of carbon taxes and emissions trading schemes
  2. Some other countries have introduced general taxes on energy consumption instead of direct taxes on carbon content
  3. This can be a good starting point for a shift in policy by countries while they deliberate on a harmonised carbon tax regime

The road ahead:

  1. The political consensus in favour of a direct carbon tax will be difficult to achieve in low- and middle-income countries that have developmental priorities and lack the capacity to administer such regimes
  2. A general tax on energy consumption combined with a technology-centric policy that promotes entrepreneurs and investors who develop low-energy intensive products can be a good starting point from where they can gradually move towards a direct carbon tax
  3. Another near-term approach can be a ‘cap-and-tax’ which combines the strengths of both quantity and price approaches
  4. Cap-and-tax might also address the concerns of environmentalists that a price-based approach does not impose hard constraints on emissions
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