How Not to Freak Out About a Carbon Tax


Indonesia is proposing a carbon tax of about $5 per ton of emissions in a bid to raise state revenues and meet climate goals. That’s less than a tenth of the current price of carbon permits in the European Union’s Emissions Trading System. And yet it has faced criticism from industry that it will slow down economic growth.

To reach net-zero emissions by 2050, the International Energy Agency estimates that advanced economies will have to pay an effective carbon price of about $75 per ton by 2025, and up to $250 per ton by mid-century. For some emerging markets, the IEA sees prices starting as low as $3 per ton, rising to $55 per ton by 2050.

Those might seem like large numbers, but a high carbon price does not mean a huge increase in everyday expenses. 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%, according to the Energy Transitions Commission

As the world gets serious about cutting emissions, many countries will turn to pricing carbon dioxide as a policy tool. The benefits are backed by years of research. And yet, whenever there’s a conversation about a new carbon tax, political and industrial backlash is guaranteed.

I spoke to Sam Fankhauser, professor of climate change economics and policy at Oxford University, to understand how to resolve the opposition. The interview has been condensed and edited for clarity.

Do we really need carbon taxes?

Atmosphere doesn’t care where carbon comes from. That means, if we want to get to net-zero emissions globally, both developed countries and developing countries will have to cut emissions. The difference might be speed, with developed countries having to do it sooner.

A carbon tax is a potentially good instrument everywhere. In developing countries, there is an additional challenge that large sectors of the economy may be informal, which makes it harder to levy a tax. A large amount of Indonesia’s emissions maybe tied to the land-use sector [such as through the production of palm oil], where it’s more difficult to monitor and measure. That might mean only a narrow base of the economy is taxed, so it’s important to try to levy a carbon tax that broadly covers all emissions.

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 giving citizens tax rebates from the carbon revenues raised.

So be transparent about it. What is the tax that’s been raised, and what has the state done with it?

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.

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.

Does the EU’s move to charge carbon border tariffs make a big impact?

There are two motivations of the border carbon adjustment. First, it protects domestic industry. Second, it gives an incentive to other countries to levy their own carbon tax. 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?

Akshat Rathi writes the Net Zero newsletter, which examines the world’s race to cut emissions through the lens of business, science, and technology. You can email him with feedback.

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