A carbon tax is a more viable solution than cap-and-tradePricing carbon is the cornerstone of a blueprint to contain climate change as it would provide both incentives and disincentives to reduce emissions. It would also drive investment and research dollars into renewable energy and efficiency. The best thing that governments can do to reduce emissions is to implement a cap and trade scheme or failing that, a carbon tax.

Cap and Trade

Creating carbon markets is among the most expedient ways to address climate change. Cap and trade rewards efficiency and punishes polluters. It would also increase green jobs, lower electricity bills, enhance competitiveness, and forestall a climate catastrophe.

The cap and trade strategy allows governments to set incrementally lower limits on CO2 emissions. Those who emit CO2 could either reduce their emissions to meet the targets, or they could buy emission credits from those who can come in under the targets.

Several economists, including University of Wyoming economics professor Edward Barbier, say cap and trade has the broadest political appeal because it’s a market-driven incentive to achieve emission reductions as cheaply and efficiently as possible.

Although price volatility and scandals have undermined the European Carbon trading market, others like China and Australia are looking to improve on Europe’s failings. Further, a new report on Tokyo’s cap and trade efforts suggests it has been a great success, as has carbon trading in British Columbia.

Early in 2012, BusinessGreen reported that China is getting ready to set up a direct tax on its largest greenhouse gas emitters by 2015. Seven Chinese cities and provinces are already preparing to launch the country’s first emissions trading schemes.

The results of the first fiscal year of operation of Tokyo’s cap and trade validate the city’s groundbreaking initiative to introduce a market-based approach to emissions reductions at the urban scale. Launched in 2010, new reports indicate that there have been collective emissions reductions of 13 percent over base-year figures. Cited as a “world-leading policy” by World Green Building Council (WGBC), Tokyo’s cap and trade program provides a compelling example for other cities to follow.

Nations like Australia are starting with a carbon tax, then transitioning to cap and trade. Australia’s carbon tax went into effect in July and carbon trading is scheduled to come online in 2015. The current Australian government sees the importance of pricing carbon. “The science is convincing, the threat is real, the economic and environmental benefits are tangible, the need for action imperative,” Wayne Swan, Australia’s finance minister, said in 2011.

Australian Prime Minister Julia Gillard has predicted the tax would cut Australia’s emissions by 160 million tonnes within a decade, the equivalent of taking 45 million cars off the road. Right now, the tax affects the country’s 500 biggest polluters and will be followed by a carbon trading program in 2015, which allows companies to meet 50 percent of their carbon reduction targets by paying for offsets.

Australia’s cap and trade program is expected to benefit emerging countries like Mexico.  Cool nrg International is an example of an Australian company that is providing offset projects. They are planning to distribute 45 million energy efficient light bulbs to 6.5 million low-income households in Mexico City. The project is expected to save 33,000 gigawatt hours of energy, equivalent to about a third of Mexico City’s auto emissions.

“Employment continues to grow just as strongly after we put a price on pollution…Our economy will continue to grow solidly while making deep cuts in carbon pollution,” Swan said. The renewable electricity sector is projected to grow by 600 percent by 2050. “But the only way to get these kinds of outcomes in a cost-effective way is with a market mechanism.” said Swan.

Nonetheless, it remains a tough sell with Australian voters. According to a July 23rd survey, Gillard’s Labor party has the support of only 28 percent of voters. However, a new study by the Climate Institute has found that more information could change the minds of voters.

Carbon Taxes

Historically, taxes have been a non-starter in U.S., particularly with Republicans. However, with the failure of cap and trade, many economists and a growing number of business leaders are looking towards a carbon tax to reign in emissions.

The Breakthrough Institute estimates that a carbon tax of as little as $5 per ton could result in $30 billion a year in the U.S. This could be used for R&D funding, project development, and other clean-tech supports, including a potential rebate for consumers initially hit with higher energy costs in some regions.

Business leaders like Microsoft founder Bill Gates is among those who support a carbon tax. In 2010, Gates expressed his support for a tax over cap-and-trade, stating “it’s ideal to have a carbon tax, not just a price on carbon…”

It is clear that Republican opposition makes cap and trade a dead issue in the U.S. for the foreseeable future. However, one prominent Republican claims that it is still possible to introduce a carbon tax.

In July, George Shultz said that his party could eventually support a carbon tax. The former Secretary of State for the Regan administration has called for a carbon tax to reduce U.S. greenhouse gas emissions and oil consumption. Shultz is the head of the Hoover Institution’s Task Force on Energy Policy, which calls for boosting energy efficiency, reducing dependence on oil exports to improve national security, and putting a price on carbon.

“We have to have a system where all forms of energy bear their full costs,” Shultz said. “For some, their costs are the costs of producing the energy, but many other forms of energy produce side effects, like pollution, that are a cost to society. The producers don’t bear that cost, society does. There has to be a way to level the playing field and cause those forms of energy to bear their true costs. That means putting a price on carbon.”

“We’ve studied a variety of ways to do that, and to me the most appealing way is a revenue-neutral carbon tax. That is, you distribute all the revenue from the carbon tax in some fashion back to taxpayers, so there is no fiscal drag on the economy. British Columbia has a revenue-neutral carbon tax. They started low and increased the tax over five years to a much higher level, so people could adjust. The revenue is distributed mostly to individuals, so it’s popular.”

According to a new report released in June, the Canadian province of British Columbia introduced a carbon tax that has successfully reduced fossil fuel consumption to the lowest in Canada with little economic damage. The study titled British Columbia’s Carbon Tax Shift, produced by the Ottawa-based think-tank Sustainable Prosperity, offers clear evidence that the tax has helped reduce emissions while producing tangible economic benefits.

Economist and Sustainable Prosperity senior director Alex Wood said as a consequence of the carbon tax, “you’re starting to see in B.C. a separation between economic growth and fossil fuel use.” That “decoupling,” he added, would lead to a more “resilient” economy insulated from oil price shocks.

“The B.C. model is simple, it’s elegant; it’s a lot of different things,” said Wood. “You reduce taxes on income, on corporate income, and you promise to be revenue neutral and you make sure that happens.”

Despite controversy, British Columbians are increasingly on board. Wood says the report demonstrates that dire predictions are unfounded and he further claims that B.C.’s carbon tax policy could be easily exported.

Reasons to Support a US Carbon Tax 

A solid rational for a carbon tax in the US comes from a recent book titled, The Case for a Carbon Tax, written by Shi-Ling Hsu, a professor at the University of British Columbia. According to Hsu, a carbon tax is the most effective mechanism to combat climate change and motivate the private sector while raising much-needed revenue for governments. As reviewed by the Energy Collective, here are 10 reasons to support a U.S. carbon tax from Hsu’s book.

  1. It is economically efficient.  An accurate disincentive for using carbon-based fuels could mimic the increment of damage — the marginal damage — caused by each ton of carbon dioxide released into the atmosphere. “The simple genius of a carbon tax is that it aggregates disparate pieces of information, transmitting a price signal at every stage in which there is fossil fuel usage . . . no data collection is required and no model is required.”
  2. It avoids creating physical capital that could actually harm the environment — e.g. coal-fired power plants. “The problem with capital is that once we have it, its high cost makes it difficult to dispose of.”
  3. It doesn’t interfere with other regulatory instruments or jurisdictions. “A carbon tax would have the advantage, because of its simplicity, of forming the strongest foundation upon which other policies can stand.”
  4. Government is better at reducing bad actions than increasing good actions. Taxes work better than subsidies.
  5. Incentives for innovation — price effects. It would impact emissions not only from the largest carbon sources such as power plants and industrial facilities but all carbon sources.
  6. Incentives for innovation — price breadth. It focuses new products and services no matter how much money can be saved by using less electricity or electricity from a different source, e.g. renewables.
  7. It is easy to administer. There are no “offsets” as would be needed with a cap-and-trade program. “Awarding an offset for a project that purports to avoid emissions increases rather than actually reducing them is a tricky proposition.”
  8. International coordination is doable. “An international accord based on a carbon tax scheme would avoid the unfortunate appearance of China being allocated some cap amount by an external bureaucracy.” It “would not represent  . . . a binding limit to economic growth.”
  9. It raises badly needed revenue. There is a lot of money that could be raised from discouraging carbon emissions. However, the less carbon emitted, the lower revenues would be.
  10. It avoids the risk of catastrophe. In the long-run, this is the ultimate measure of efficiency from a public welfare perspective.

A carbon tax may succeed where emissions trading schemes have failed because a tax sends a clear and consistent message to the markets with little opportunity for speculative manipulation.

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Richard Matthews is a consultant, eco-entrepreneur, green investor and author of numerous articles on sustainable positioning, eco-economics and enviro-politics. He is the owner of THE GREEN MARKET, a leading sustainable business blog and one of the Web’s most comprehensive resources on the business of the environment. Find The Green Market on Facebook and follow The Green Market’s twitter feed.

Image credit: swanksalot, courtesy flickr