I have just read an article in the Bloomberg Green newsletter which discusses carbon pricing. Indonesia has announced that it will impose a carbon tax of about $5 per ton of emissions in order to raise revenue as well as meet climate goals. Whilst this is about a tenth of the current EU ETS carbon price it will be welcomed by the IMF which recently suggested that low-income emerging markets should aim for a price of $25 a ton by 2030 (with advanced countries at $75). The IEA is also arguing for international carbon pricing, stating that advanced economies should be at $250 a ton and emerging markets $55 a ton by 2050.
Carbon pricing is often criticised as an own goal – will it lead to importing countries taking advantage with non carbon priced imports? Canada and the EU are in the process of establishing a Carbon Border Adjustment Mechanism (CBAM) so that importing countries will pay higher tariffs or offset them by imposing their own carbon prices.
The CBAM ‘threat’ is already having an effect, in the process of watching an ERCST (European Roundtable on Climate Change and Sustainable Transition) discussion today I learnt that it is estimated that Turkish exporters would have to pay 580 million euros in CBAM tariffs and lose 1.125 million jobs in the heavy industry sector. Establishing their own ETS system could raise revenue of 13 billion euros. Could the threat of CBAM also be part of the reason for the Chinese ETS system being established?
In the Bloomberg Green article Akshat Rathi states that carbon pricing doesn’t raise prices as high as critics claim. According to the Energy Transitions Commission (also arguing for international carbon prices)…..Taking into account all the costs for making zero-carbon cement, steel and plastic, for example, only boosts the price of a house by 3%, a car by 1% and a soda bottle by 1%.
Akshat then goes on to discuss carbon pricing with Sam Fankhauser, professor of climate change economics and policy at Oxford University. Sam points out the need for an economy wide carbon price, especially in developing countries like Indonesia where emissions are more likely to be generated by agriculture than heavy industry.
Sam then argues for the Climate Income method (he cites British Columbia)……..,
Taxes aren’t popular. What’s the best way to overcome that perception?
The argument should be that a carbon tax is about making polluters pay—it’s not simply yet another way for states to extract more money from people and businesses. In Canada’s British Columbia, they’ve found some clever ways to deal with the problem by sending citizens regular checks from the carbon tax revenues raised.
Note the Canadian federal backstop ‘Climate Action Incentive Payment’, like the British Columbia policy Sam cites, has been used in Ontario, Manitoba, Yukon, and Nunavut since early 2019….The federal carbon pollution pricing system is not about raising revenues. It is about recognizing that pollution has a cost, empowering Canadians, and encouraging cleaner growth and a more sustainable future. Under the federal approach to pricing carbon pollution, all direct proceeds are returned to the province or territory of origin.
Sam also argues against the claim that taxing carbon will lead to lower economic growth…..
What about the argument that taxing carbon may lead to lower economic growth?
Lower relative to what? If it’s relative to other regulations that cut emissions, then a carbon tax is probably cheaper because it can more efficiently reduce emissions across the economy. That’s one of the attractions for a carbon tax. Lower relative to what? If it’s relative to other regulations that cut emissions, then a carbon tax is probably cheaper because it can more efficiently reduce emissions across the economy. That’s one of the attractions for a carbon tax.
But if it’s relative to a world where there are no carbon regulations, then countries like Indonesia need to ask, why do they want to cut emissions? Would the cost of climate change in the long term be more affordable? That’s unlikely.
Some of the hits to the economy of a carbon tax are short-term costs that come from structural adjustment, moving an economy from high carbon to low carbon. That’s not easy. But once you come out at the other end, the penalty will disappear.
His final comment, on the EU’s CBAM policy, is corroborated by what I heard about Turkey …. From a developing country perspective, they might think, why should I let the Europeans tax my industry and keep that revenue when I can do it myself?