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Free Markets, Carbon Tax Best Way to Fight Climate Change: View

December 12, 2011

Dec. 12 (Bloomberg) -- The Durban climate-change talks ended in what negotiators agreed to call a success. Governments, including China and India for the first time, said they would devise a new global system for curbing emissions of greenhouse gases and make it operational by 2020. This promise, however, has uncertain legal force, the form of any new regime is unclear, and the meeting failed to set any new binding targets.

Don’t be too disappointed. The ambition to replace the Kyoto Protocol with a similar but truly global set of quantitative limits in two weeks of talks in South Africa was mistaken all along. In this vital effort, the world needs a new and more realistic measure of progress.

The U.S., China and India are as reluctant as ever to be bound to nation-by-nation limits. Even if the governments meeting in Durban had agreed to them, what would such limits have been worth? As the about-to-lapse Kyoto Protocol showed, countries can ignore limits as soon as they start to pinch.

Quantity targets enforced by treaty don’t foster effective cooperation, they hinder it. Politically sensitive questions about which countries should bear how much of the burden must be confronted explicitly; failure to do so has stymied this venture from the start. Moreover, to succeed, measures to curb emissions need to be sustained for decades. Over such a long span of time, political and economic circumstances change. Binding emissions targets are too rigid. Governments that take their commitments seriously are right to be wary of making promises they may be unable to keep.

The world’s governments need a framework that will allow them to build on efforts they’re already making to curb greenhouse gases. The aim should be to extend, coordinate and accelerate those initiatives.

The best instrument for coordinating climate-change efforts is the price of carbon. The impact of any carbon-abatement plan -- emission quotas, cap and trade, carbon taxes -- can be measured by its effect on this price. The aim should be to equalize worldwide a gradually rising price of carbon.

As a matter of practical politics, this flexibility is essential. It would allow governments to more easily tailor their climate-change policies to political and economic circumstances, altering them on the run if need be. The price of carbon would provide an international gauge of their abatement efforts, so that peer pressure could be brought to bear.

For most countries, the simplest and clearest way to hit the price target would be with an outright carbon tax. The economic benefits are well known: By letting markets work, a tax achieves a given amount of emissions abatement at the lowest cost. The world needs to cap its greenhouse gas emissions, but there’s no obligation to do this in the most expensive, painful or disruptive way.

Climate-change campaigners made a great mistake early on in opposing this approach -- arguing, in effect, that sin should be prohibited not taxed, and that cuts of a certain size had to be assured. The cost of this inflexibility is now apparent: Insist on known and guaranteed cuts in emissions, and the wheels of international cooperation turn too slowly.

So far, explicit carbon taxes have not been widely adopted (though where they have been, as in British Columbia, they have worked). It’s not only environmentalists who aren’t enthusiastic. In many countries, especially the U.S., conservatives are bitterly opposed as well. A carbon tax, after all, is a tax.

Yet with many countries in a fiscal crisis, a carbon tax is more attractive than before. A carbon tax could lift some of the burden from spending cuts and increases in other taxes. As this sinks in, what was once politically impossible may soon be merely hard.

Where a carbon tax cannot be done, other methods can be used. Cap and trade with a price ceiling (where the government sells additional permits into the market once they are being traded at a certain price) closely mimics an outright carbon tax, for example. The effectiveness of this and other approaches in pressing down emissions can always be measured in terms of carbon price.

With price rather than quantity as the organizing principle, international negotiations would still be necessary. Governments would need to set and maintain a schedule for the intended price, ensuring that it is high enough to provide an incentive to cut emissions significantly. These talks, to be sure, would be contentious. All manner of other agreements would need to be reached, as well: on the treatment of international trade, on support for poor countries, on the respective roles of adaptation and mitigation, and more.

But, fundamentally, negotiators would have greater flexibility in accommodating and aligning various national approaches to the world’s most pressing common problem. It is a compromise with political reality that’s well worth making, and long overdue.

--Editors: Clive Crook, Mary Duenwald

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To contact the Bloomberg View editorial board: view@bloomberg.net.


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