Carbon Prices, Not Quotas

Governments will have to grapple with tough choices under any global emissions policy strategy. We can’t escape the fact that somebody somewhere–and soon–will need to start paying the price for such a policy. It’s not useful or fair to represent mitigation as a costless endeavor or–as some have claimed–as “good business.” It can certainly be good business for some but hardly for all…

And yet–if only to insure against catastrophic global climate change that could irreversibly damage the world’s human, natural and physical capital–an effective global agreement on mitigation must be achieved and put into force by the time the Kyoto Protocol’s implementation period ends in 2012.

To be genuinely useful any post-Kyoto agreement must meet many conditions. First and foremost, it will have to achieve universal long-term participation, with binding obligations for all countries. If some countries remained outside the regime or were exempted from obligations there would be a leakage effect; e.g., industries in countries with emissions reductions would migrate to those without them. This would give rise to calls for the imposition of tariffs on carbon-intensive imports, as is already happening in the EU. Universal participation is critical to avoid having the environment used as an excuse for protectionism. Putting trade restrictions on carbon-intensive imports would lead to trade wars that would prove counterproductive to economic growth and the environment itself.

The new agreement must also provide clear and predictable market signals that will encourage the generation and deployment of new cost-effective energy technologies. It must have low transaction costs, avoid significant income transfers among countries, be practically invulnerable to fraud and corruption and lend itself to easy verification of compliance.

Frankly, a Kyoto-type framework–one with global quantitative emissions targets allocated among countries–that meets the above conditions is not feasible. The only approach that will fulfill the conditions and relieve countries’ apprehensions regarding sovereignty and free riding is one in which all countries agree to penalize their carbon emissions in such a way that, over time, an internationally harmonized carbon price prevails. Consequently, the negotiation’s focus would not be on emissions quotas but on the harmonized carbon-price trajectory.

Of course, carbon taxes (on burning fossil fuels) would provide the easiest way for countries to comply with the system, and each country could then decide what to do with the tax revenue. Some might make their carbon tax revenue-neutral by reducing other taxes. The regime would allow countries (or associations of countries such as the EU) to comply with the internationally agreed-upon carbon price by means of their own national cap-and-trade systems. It would also let poor countries move toward the agreed trajectory of carbon prices more slowly than rich countries.

If you’re worried about climate change but don’t like carbon taxes, think about the messy or even impossible alternatives!

(via Forbes)

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