A case for a differential

Global Carbon Tax

 Climate change is a global problem. The most recent Intergovernmental Panel on Climate Change (IPCC) report suggests that we, as humankind, might have just over a decade left to limit global warming. The IPCC says total global emissions will need to fall by 45% from 2010 levels by 2030 and reach net zero by 2050. If these targets are not met, tropical regions of the world, which are densely populated and happen to be mainly concentrated in the global South, are likely to be most negatively affected because of their low altitudes and pre-existing high temperatures. Some impact of this was already felt during the Tamil Nadu water crisis this year.

Sharing the burden

The global South, which has historically contributed less to the problem (and even at present its per capita carbon emissions are much smaller in comparison to the countries in the global North), happens to be at the receiving end of the lifestyle choices made by the global North. Although time is running out, a genuine global consensus on the mitigation of this problem is unfortunately missing. In the absence of a collective agreement, the environment is becoming the casualty. The bottom line is that both the worlds need to contribute to avert this danger in their self-interest. At the same time, the burden of adjustment cannot be equal when the underlying relationship between the two worlds has been historically unequal (climate injustice funnel). But what is the correct balance in terms of sharing this burden, something which can be politically and juridically just?

A just approach would involve a global sharing of the responsibility among countries according to their respective shares in global emissions. Currently, the most accepted model of mitigating strategy has been the carbon trading process. However, it has its own limitations. Our proposal, a Just Energy Transition (JET), on the contrary, is premised on a sense of global justice in terms of climatic fallouts and the respective contributions of the countries. It will also help the resource-poor developing countries to make the energy transition without having to worry about the finances unduly. Instead, the current experiences of the developing countries point to the contrary.

Correcting injustice

How can this injustice be corrected while making the planet a better place to live in for future generations? The first priority is to fundamentally change the energy infrastructure, which requires massive investments for the green energy programme across the world. What we propose here in some sense is a new global green deal. But how can it be financed? We suggest that those on the top of the funnel, apart from funding their own energy transition, partially support the transition for the countries at the bottom and this sharing of the burden of development be done in a way which inverts this injustice funnel. For a successful energy transition to greener renewable sources, countries have to spend around 1.5% of their GDP. We propose that the global energy transition be financed through a system of the global carbon tax. Since the total global carbon emissions are 36.1 billion metric tonnes of CO2, this amounts to a global carbon tax of $46.1 per metric tonne.

A case for a differential global carbon tax

Who subsidises whom and by how much? Those countries which emit more than the global per capita average pay for their own transition plus fund a part of the energy transition of those who are below this average. So, those at the receiving end of climate injustice are duly compensated for even as the entire world transitions to greener earth as a result of this process of carbon tax sharing. Currently, the global average of carbon emissions is 4.97 metric tonne per capita. All the countries with emissions above this level (68 in all) are “payers” to finance energy transition for ‘beneficiary’ countries (135 in number), which are emitting below this level.

The total amount of “carbon compensation” made by the payer nations comes to around $570 billion. The distribution of this amount across the payer countries is based on their distance from the global average (controlled for their population size). The other side of the same coin is the compensated countries, and the distribution of this fund across them is also based on how lower their emissions are in comparison to the global average. Once you add (subtract) the carbon compensation amount to (from) each of the countries, you get the effective carbon tax for them.

The two top ‘payer’ countries in terms of absolute amounts of transfers are the U.S. and China since their emissions are higher than the global average. What’s interesting is that despite being a payer country, the effective tax rate for the Chinese is lower than the possible universal tax rate of $46.1 per metric tonne and that’s because their own energy transition (1.5% of China’s GDP) plus the global compensation they make requires a tax rate only of $34.4 per metric tonne. So, in that sense, the burden of adjustment is only partially falling on their shoulder and only because they emit more than the global average.

Robin Hood tax

In terms of ‘compensated’ countries, India comes at the top due to its population size and its distance from the global emissions’ average (India has per capita emissions of 1.73 metric tonne). The other suspects are all countries from the global South, but this list springs a few surprises like France, Sweden, and Switzerland. What this tells us is that even high-income countries which have currently kept their per capita emissions low are beneficiaries of this globally-just policy. With China in the first list and some of the first world countries in the second, it’s obvious what this policy wants to achieve. It wants all nations to climb down the emissions ladder without necessarily having to give up on their standard of living. It’s a global green Robin Hood tax!

The public’s recognition of global warming has driven lawmakers around the world to negotiate greenhouse-gas reductions. You’ll probably hear a few legislators suggest a tax on carbon — or sometimes more broadly, a tax on the emissions of fossil fuels. But before the word “tax” sets off alarm bells, consider the effect of combusted fossil fuels on the environment. They cause ground-level ozone, acid rain, global climate change and a myriad of other problems. Here is a look at the carbon tax and how it works:

What is a carbon tax?

Carbon tax is a form of pollution tax. It levies a fee on the production, distribution or use of fossil fuels based on how much carbon their combustion emits. The government sets a price per ton on carbon, then translates it into a tax on electricity, natural gas or oil. Because the tax makes using dirty fuels more­ expensive, it encourages utilities, businesses and individuals to reduce consumption and increase energy efficiency. Carbon tax also makes alternative energy more cost-competitive with cheaper, polluting fuels like coal, natural gas and oil.

How It Works?

To implement a carbon tax, the government must determine the external cost for each ton of greenhouse gas emission. This is difficult because scientists and economists must first agree on which assumptions to use.

One group, the U.S. Interagency Working Group on Social Costs of Carbon, developed an estimate of $40 per metric ton. A tax reflecting this social cost would increase gas prices by 36 cents a gallon. It would add $0.02 to the price of a kilowatt-hour of electricity.

A United Nations report said the price should be much higher to keep temperatures from rising above 1.5 C by 2030. It recommended a carbon tax of between $135 and $5,500 per ton.

A recent report from the Organization for Economic Cooperation and Development found that the average carbon price across 42 major economies was around $8 per ton in 2018. The price differential means governments find it politically difficult to charge enough to reduce emissions significantly.

Advantages

• The tax reduces emissions in two ways. First, increasing the cost of carbon-based fuels will motivate companies to switch to clean energy. These include solar energy, wind energy, and hydro-powered sources.
• The carbon tax will also increase the price of gasoline and electricity. Consumers will then become more energy-efficient, further reducing greenhouse gas emissions.
• Taxes allow industries to find the most cost-effective ways to reduce carbon emissions. That’s a better alternative to free-market economies than government regulation.
• For that reason, even oil companies support the tax. ExxonMobil, Shell, and BP have all called for the tax. Exxon even donated $1 million to the nonprofit that supports its preferred plan. BP’s chief executive has promised to cut emissions.
• A carbon tax also boosts economic growth. For example, Sweden’s carbon tax has reduced its emissions by 23% in the past 25 years. During that same period, its economy grew 55%.
• A carbon tax raises substantial revenue. The Congressional Budget Office estimated that a carbon tax starting at $20 per ton and increasing to $34.40 per ton in 10 years could have raised $1.2 trillion. That’s on par with the amount raised by all other excise taxes in the United States.