Wednesday, February 4, 2015

The urgent need for a carbon tax now


The recent plunge in oil prices could lead to the unintended consequence of aiding global warming as it means fewer incentives for firms and individuals to switch to more energy-efficient products.

When oil prices quadrupled between 2002 and 2012, efficiency improvements and changes in behaviour had cut oil consumption in advanced economies.

For instance, consumption of petroleum products in the United States was 1.8 million barrels per day last year, 9 per cent lower than it was in 2005, even though the population increased by 23 million, US government data showed.

But now, those efficiency gains are under threat if oil prices remain low for a long time. As it is, British entrepreneur Richard Branson has cautioned that the collapse of oil prices damages the surging global clean energy industry.

There are also concerns in the aviation industry that jet makers Boeing and Airbus, which have been enjoying huge demand for their latest fuel-efficient jets because of high oil prices, could see business affected as airlines, which are saving billions of dollars on falling oil prices, defer their orders.

There is, however, a way out of this dilemma — by immediately legislating higher taxes on fossil fuels in the form of carbon taxes.

Leading economist and former US Treasury Secretary Lawrence Summers made this call recently. Carbon taxes will compensate the public for what economists call externalities: The social costs of air pollution, climate change and health issues that cost real money, but no one wants to pay for. Ideally, the carbon tax should pay for what economists call the Social Cost of Carbon (SCC), or what a tonne of CO2 emitted costs in terms of externalities.

For those who would dismiss these costs offhand, do remember that hospital emergency room visits, purchases of inhalers and bronchodilators, climate-change-induced flooding and drought, et cetera, do have real monetary costs that affect everyone.

But political realities will dilute the amount that can be charged to the public, and it is not likely that the entire SCC cost can be charged. Already, Australia scrapped its carbon tax last year after the Abbott government came into power.

Each country will have to discuss what is right for it, but the bottom line is, carbon emissions need to be cut. The cheap price of oil right now is not helping, in that regard.


Introducing a carbon tax now while the price of oil is still cheap takes away some of the opposition from the public, as even with a tax, the overall gross after-tax price may not even exceed the US$100 (S$135) per barrel price of oil that the public had been accustomed to in the past. This is because competition among the Saudis, the other OPEC (Organization of the Petroleum Exporting Countries) countries, and shale and tar oil producers will most probably keep the pre-tax prices in the neighbourhood of US$50 per barrel as higher prices makes pumping shale oil viable again.

As an alternative, if a carbon tax cannot be politically legislated, a market-driven solution would be some type of cap-and-trade scheme where emission credits are sold and bought.

In a cap-and-trade scheme, those who invest in clean or renewable energy such as wind and solar can get greenhouse gas emission avoidance credits, which they can sell via a carbon market to those companies or entities which exceed their allowed emission quotas.

It is also hoped that this year’s Paris climate treaty (a replacement for the Kyoto Protocol) will ensure that both solutions, either a carbon tax or a cap-and-trade-type scheme, will become more doable because it will force countries to act on their treaty commitments.

It will not be easy. But it is the job of every politician in every country to explain to their constituents that the “having their cake and eating it too” scenario of wanting fuel prices to stay low and not get affected by climate change is wishful thinking.

Perhaps one way is to point out that every time they bring out their old petrol guzzlers for a long trip, there is a cost to air quality, healthcare and the climate from the carbon they emit, compared with if they had used cleaner means of transportation.

This will be a harder sell for societies where individual liberties are extremely valued versus those with a strong sense of community. But each politician has to decide for himself how they are going to sell it.

Otherwise, aside from ill effects such as air pollution, we will have to deal with the destructive effects of runaway climate change, if we do not wean people away from their addiction to fossil fuels.


Dennis Posadas is the author of Greenergized and is a low-carbon technology consultant.

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