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Internationally, one of the big advantages of a carbon tax is that it avoids the baseline quandary that bedevils carbon markets. For example, signatories to the Kyoto Protocol are supposed to cut their emissions of greenhouse gases by 7 percent below what they emitted in 1990. Why? That goal has no relationship to any specific environmental policy objective. In fact, achieving the cuts specified by the Kyoto Protocol goals would reduce projected average global temperatures by only a minuscule 0.07 degrees Celsius by 2050.
As the thorny international negotiations about what to do after the Kyoto Protocol expires in 2012 show, it is very difficult to set new global emissions baselines. Also, where should baselines be established for rapidly growing economies like China, India, and Brazil whose energy use and emissions are expected to more than double by 2030? Under the Kyoto Protocol, the natural baseline is what emissions would be without any restraints. However, calculating or predicting what a country’s emissions will be 20 to 30 years in the future is impossible to do with accuracy.
Under a pollution tax scheme, argues Yale economist William Nordhaus, “The natural baseline is a zero-carbon-tax level of emissions, which is a straightforward calculation for old and new countries. Countries’ efforts are then judged relative to that baseline.”
Another advantage is that the tax could be phased in as the average incomes of poor countries reach a certain threshold. For example, carbon taxes might start to kick in when national income reaches $7,000 per capita, which is slightly higher than China’s current level. More generally, having a defined tax rate makes it easy for firms in developed and developing economies alike to predict the future impact of climate policy on their bottom line—something that is considerably harder to do when the government is handing out permits every year.
A tax avoids the messy and contentious process of allocating allowances to countries internationally and among companies domestically. For example, nations could negotiate a much more transparent treaty than the Kyoto Protocol and establish a system of globally harmonized domestic carbon taxes. Harmonized taxes offer relative price stability and taxes on carbon emissions can be raised gradually and predictably over time so that governments, industries and consumers all see what the price of carbon-based fuels will be over future decades and make investment and purchase decisions accordingly.
Nordhaus argues that carbon markets are “much more susceptible to corruption” than are tax schemes. “An emissions-trading system creates valuable tradable assets in the form of tradable emissions permits and allocates these to different countries,” writes Nordhaus. “Limiting emissions creates a scarcity where none previously existed and in essence prints money for those in control of the permits.”
A carbon tax offers less opportunity for corruption because it does not create artificial scarcities and monopolies. Of course, governments can engage in chicanery by dispensing tax breaks and subsidies to favored companies and industries. But Nordhaus analogizes carbon allowances to quotas in international trade and carbon taxes to tariffs: overall, it’s been a lot easier to manage tariffs than quotas.
However, as John Locke Foundation economist Roy Cordato has explained: "A higher tax today means lower production and output of goods and services tomorrow, making future generations materially worse off. In setting a carbon tax you must show that future generations would value the problems solved by reduced global warming more than they would value the goods and services that were foregone." Cardato argues that it's not possible to know the preferences of future generations, but providing them with more wealth and better technologies will give them more options to express whatever preferences they have.
Climate change is a technological problem. After all, the goal of all carbon rationing schemes—limiting permits or imposing taxes—is to encourage the development of low-carbon and no-carbon energy technologies as substitutes for fossil fuel energy technologies. So why not aim directly at fostering the development of advanced energy technologies? In a fascinating recent report, two McGill University economists, Isabel Galiana and Christopher Green, look at the benefits and costs that an energy technology research and development push might yield.
In the report done at the behest of the Danish think, the Copenhagen Consensus Center, Galiana and Green argue that climate change negotiations are engaged in what they call "brute force" mitigation strategies (e.g., carbon markets and/or taxes), and that those strategies have already proven to be losing propositions. "Attempts to directly control global carbon emissions will not work, and certainly not in the absence of ready-to-deploy, scalable, and transferable carbon emission-free energy technologies," assert the authors. "The technology requirements cannot be wished, priced, assumed, or targeted away."
Why won't brute force mitigation strategies like carbon markets and taxes work? Galiana and Green point out that current proposed emission targets imply vastly faster rates of reduction than have been the case in past decades. Consider a global emission reduction target of 80 percent by 2100. That would require carbon emissions to fall by 1.8 percent per year. But say economic growth averages 2.2 percent between now and 2100: That implies a 4 percent average annual decline in the amount of carbon-based fuels used to produce goods and services.
To date, Galiana and Green note, the annual global average rate of decarbonization, the amount of carbon that is emitted per unit of goods and services produced, has been 1.3 percent. To illustrate the economic consequences of trying to boost the rate of decarbonization through brute force mitigation, they generously assume that the decarbonization rate could rise to 3.6 percent annually. But this would still entail a cut in global economic growth from 2.2 percent annually to 1.8 percent. Such a reduction in economic growth would cost an undiscounted $86 trillion in 2100 alone and add up to an undiscounted $2,280 trillion over the next 90 years. And without new low-carbon energy technologies, the authors argue that the assumption of 3.6 percent rate of annual decarbonization is just a fantasy. So the likely economic damages will be even larger. "Climate change is a technology problem," Galiana and Green conclude, "and the size of the problem is huge."
Their solution is spending $100 billion per year on energy research and development financed through a $5 per ton tax on carbon dioxide emissions that would be funneled into Clean Energy Trust Funds. The tax would be scheduled to double every ten years as a way to give a forward price signal to encourage the deployment of the new low-carbon energy technologies that they hope will emerge from the labs. They calculate that every dollar spent on new low carbon energy R&D would avoid $11 in climate damages.
"It is much easier to spend on R&D than assure the monies are well spent," Galiana and Green admit. They also acknowledge that much current government R&D funding is politically directed and largely wasted. Robert Fri, a former deputy administrator of both the U.S. Environmental Protection Agency and the Energy Research and Development Administration, told Chemical & Engineering News: "The government is very good at starting energy projects that it believes will solve energy problems, but it is not very good at generating the intended results."