By Rick Wackernagel
We need to transform our energy system faster to stop global warming. Canada just took a big step toward that, announcing plans to enact a national carbon tax6. The tax will accelerate their transition to a low-carbon society, while growing jobs and their economy.
A carbon tax, pollution fee or compensation fee is one way to put a price on carbon pollution. The World Bank says pricing carbon is a key to cost-effectively reducing carbon emissions, with a potential to reduce the cost of decarbonizing human society by 30% through 2030. Canada is joining about 40 countries and 20 other jurisdictions pricing carbon. These pricing systems cover 13% of global CO2 emissions. Adding China’s emissions trading system (the other pricing method) in 2017, coverage will reach 20 to 25% 7. Canada will start in 2018.
Twenty of the pricing systems are carbon taxes. The big differences among them are in use of tax revenue (more complicated) and tax rate (simpler).
When the banking crisis occurred, the governments of Iceland and Ireland needed revenue. They put all or nearly all their carbon-tax revenue into their general funds.
Some countries wanted to accelerate the transition to a low-carbon society more than just raising the costs of fossil fuels would and/or wanted to accelerate adaptation to global warming. They put some of their carbon-tax revenue into green spending, including:
research, development and deployment of new technologies in energy efﬁciency, renewable energy, and reducing net greenhouse-gas emissions from agriculture, forestry, and landﬁlls, and
infrastructure to support alternative vehicles, mass transit and adaptation to global warming3.
Other countries wanted to protect their citizens, especially vulnerable populations, (e.g., low-income households and coal miners) from effects of the tax. They “recycled” revenue through dividends, reductions in other taxes and/or tax credits.
Most carbon taxes divide the revenue among at least two of these uses. In 2013, in the 13 largest carbon-tax systems, totaling more than $21 billion in annual revenue, 28% of the revenue went to general funds, 15% to green spending and 44% to revenue recycling.
Carbon fees deal with one of the barriers to adoption of low-carbon alternatives – the low price of fossil fuels. Other barriers exist, including:
high upfront costs of energy efficiency and renewable energy,
limited financial resources,
lack of knowledge of low-carbon alternatives, and
lack of confidence that low-carbon alternatives will perform as advertised.
The success and cost-effectiveness of carbon taxes depend on addressing all the barriers together and complementing the tax with policies addressing other barriers and making the consequences of the tax acceptable to society7. While a carbon tax will not directly address the other barriers, revenue from it can be used to address them.
Public-sector R&D can reduce the cost of low-carbon alternatives. It complements private efforts. In the energy crisis of the 1970s, Natural Resources Canada tasked a group of engineers, architects and builders with developing low-cost, energy-efficient building practices. Canada became a world leader in energy-efficient building.
Carbon-tax revenues can be used to help limited-resource households make investments in energy efficiency and renewable energy. Information and education campaigns can address both lack of knowledge and lack of confidence, as well as reducing risk of making ineffective changes. A Solarize pilot in the Upper Valley of Vermont and New Hampshire tripled installed photovoltaic capacity in the year in which it operated in participating communities.
Recycling revenue has led to small increases in economic growth, jobs and disposable household income in economic models of states and countries with carbon taxes. Reducing taxes with perverse incentives, such as income and employment taxes, redistributing carbon-tax revenue and reducing outflows to pay for imported fossil fuels account for the growth4.
While concerns have been raised that carbon taxes will negatively impact economies, so far, the risks appear to have been managed successfully. Economic analyses of areas with carbon prices show little impact on competitiveness of countries and industries. For example, a study in British Columbia (BC) found only that two cement manufacturers had lost market share2. Meanwhile, BC’s clean-energy sector grew to more than 200 companies, producing about $1.7 billion in revenue each year.
Carbon tax rates vary considerably. In 2016, they ranged from US$1 to US$131/tCO2e7. That would be equivalent to 0.9¢ to $1.15 per gallon of gasoline.
A well-designed, well-managed carbon tax that addresses barriers to rapid adoption will solve problems, and be hugely beneficial to economy and planet.
Rick Wackernagel is a former extension farm-management specialist, currently an itinerant climate activist and carbon wonk. He can be contacted at firstname.lastname@example.org.
Samso is an island in Denmark about twice the size of Manhattan. In 1997, it won a competition to become a 100% renewable-energy-powered island, which it achieved in 2005. Electricity is now generated by 21 wind turbines, with enough surplus sent to the mainland to compensate for fossil fuels used in vehicles. District heating systems fueled by straw, wood chips and other biomass have replaced 75% of all space heating.
Investments in the turbines by the 3,800 residents were supplemented (or overshadowed) by funds from Denmark’s carbon tax, 40% of which was then devoted to environmental investments1. As a result of those environmental investments, Denmark’s per-capita carbon emissions in 2005 were 15% below those of 1990. Norway’s were then 43% above 1990 levels.
Soren Hermansen, the community organizer who led Samso’s transformation, spoke at the Vermont Energy and Climate Action Network conference December 3. He strongly recommended that Vermont implement a carbon tax, as well, and said Vermont is in a great position to lead the nation by doing so. That would be a huge help to getting us to 100% renewable.
1. Bae, Cindy. February 7, 2013. Denmark’s Carbon Tax Policy, In Commodity Price Analysis and Policy Analysis
2. Carbon Pricing Leadership Coalition. June 2016. Executive Briefing, What is the Impact of Carbon Pricing on Competitiveness?
4. Nystrom, Scott. 2014. The Economic, Fiscal, Emissions, and Demographic Implications from a Carbon Price Policy in Vermont. Regional Economic Models, Inc. (REMI), Washington, DC
5. Prasad, Monica. MARCH 25, 2008. On Carbon, Tax and Don’t Spend, New York Times
6. Wingrove, Josh. October 3, 2016. Trudeau Unveils Carbon Price as Canada Acts on Paris Pledge, Bloomberg markets.
7. World Bank. 2016, October. State and Trends of Carbon Pricing 2016, World Bank, Washington, DC.
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