 | | Julie Ades
Economist
National Forecast |
Many governments have come out of the global recession with large deficits and growing debt -- but there exist green means to address these problems. While policy measures often imply a win-lose situation, a carbon tax could produce a win-win. It could help reduce greenhouse gas (GHG) emissions (assuming the tax level is high enough) and simultaneously raise revenue, helping to fix the deficits.
Over the past two years, the main concern for governments the world over has been to sustain economic growth and jobs. Phenomenal efforts were undertaken to rescue financial markets and, in most instances, fiscal stimulus took precedence over climate change initiatives. While we focused on economic recovery and sound budgets, GHG emissions reduction was seemingly pushed to the back burner. The United Nations Climate Change Conference in Copenhagen in December 2009, for example, failed to result in a legally binding agreement for a new protocol to replace Kyoto once it expires in 2012. Instead, participants left with agreement, in principle, to make efforts to reduce GHG emissions.
But there are ways to incorporate the quest to mitigate climate change into our efforts towards economic recovery. For example, at an earlier stage of the economic downturn, the United States, China and South Korea allocated an important share of their stimulus package to green technology investments1. A carbon tax would be another way to combine climate change mitigation and economic recovery. The tax would set a price on GHG emissions and simultaneously help to balance governments’ budgets.
During the last two decades, Canadian federal (and provincial) officials have been considering an array of climate change initiatives and programs. Provincial governments have instituted a variety of different actions related to climate change, including green taxes. In early 2009, Canada announced its willingness to participate in the development of a North American cap-and-trade system, but no clear national system has yet been established in the United States or Canada. Even though the House of Representatives passed the Waxman-Markey bill in June 2009 proposing a cap-and-trade mechanism (with a myriad of exceptions), the U.S. Senate has still not acted upon it. Debate and discussion of alternatives are still taking place.
Although a cap-and-trade system is often favoured for its direct control over emission levels, it is also criticized for its complexity, the vulnerability of caps to heavy lobbying by affected sectors, the lack of transparency and the length of the implementation phase.
A carbon tax, on the other hand, is much simpler and faster to implement. Although the ultimate result of a carbon tax on total emissions is difficult to estimate, the tax level could be adjusted over time to better achieve the desired results. Given the current state of the economy and of governments’ budgets, the cost effectiveness and simplicity of a carbon tax are advantages not to be ignored. Such a tax would help to curb GHG emissions and raise government revenue with lower expected implementing and operating costs than a cap and trade system. A cap and trade system with the auctioning of permits could also lead to the same benefits, but it would require the implementation of new infrastructures; whereas a carbon tax could be based on existing fiscal mechanisms.
The next G20 meeting will be held this month in Toronto and is set to focus on financial sector reform, stimulus programs and global trade and growth under the theme Recovery and New Beginnings. Although the theme of the meeting is already established, United Nations General Secretary Ban Ki-Moon has asked that climate change be the priority of the meeting. Climate change mitigation and economic recovery are not necessarily at odds. Economic tools to mitigate climate change can also be part of the equation and the discussion on recovery.
A carbon tax would certainly not fix deficits by itself alone but it could help to address them. How high this tax should be to achieve the targeted emissions reduction is another question of its own…
1 HSBC, Global Research, A Climate for Recovery, Climate Change Global, February 2009, p 3.