Carbon Taxes for Clean Technology Innovation

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"Carbon taxes on fossil fuel energy production could enable renewable energy mechanisms and other “clean” energy technologies to compete on more even market-price terms."
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“Climate Change Policy Failures” by Howard A. Latin argues that nearly all of the climate change policy makers have been making mistakes, and offers suggestions for alternatives solutions to minimizing hazards.

The majority of climate change programs employed by developed nations rely heavily on greenhouse gas emissions-reduction. Rather than adopt ineffectual programsClimate Change Policy Failures(World Scientific, 2012) by Howard A. Latin suggests a shift to a “clean” technology replacement that could support current lifestyles and expanding development without further damage to our climate. The following excerpt, from Chapter 2, considers carbon taxes as an alternative to current economic incentive programs.

Carbon Taxes, Fees, or Charges

Carbon taxes, fees, and charges are synonyms for the same climate policy instrument, which could serve a number of important purposes in promoting climate improvement efforts. Greenhouse gas (GHG) taxes, especially taxes on carbon dioxide emissions, could be used to raise revenues that will support mitigation, adaptation, and technological innovation programs. The carbon taxes could be imposed to deter or penalize environmentally harmful activities. The taxes could sometimes help correct market prices that have been distorted by externalities and misplaced subsidies. Selective user taxes could also help shift consumption choices toward less destructive activities.

The revenue-collection function of a carbon tax, fee, or charges program would be vital in the climate change context because expensive technological and behavioral alternatives must be available to achieve the necessary transformation to a low-GHG economy and society. It is equally important that international climate programs receive substantial financial resources to pay for GHG-free technology transfers and other forms of foreign assistance to developing nations that would enable them to curtail their GHG discharges without sacrificing increased economic development.

A tax on GHGs supposedly could be used to “level the market system playing field” by offsetting the effects of negative externalities and inefficient or inequitable subsidies. Indeed, pollution is the classic harmful externality because polluters normally do not bear a substantial proportion of the social costs of their activities. As Sir Nicholas Stern, the noted British economist and climate expert, observed: “Greenhouse gas (GHG) emissions are externalities and represent the biggest market failure the world has seen.” A carbon tax could go beyond merely “leveling” market system prices for competing enterprises by imposing a much higher price on fossil fuel uses in order to give “clean” energy competitors a significant market advantage.

A carbon tax could sometimes help deter destructive activities, such as discharging high levels of industrial GHG pollution or high levels of fossil fuel pollutants from motor vehicles, which contribute substantially to the growth of the atmospheric GHG concentration. This kind of deterrent “sin tax” could be combined with revenue-generating and market-leveling functions to promote several desirable purposes with one fiscal instrument. The function of a carbon tax in this context is the straightforward one of attempting to reduce harmful activities by increasing their market prices. The tax may also encourage greater investments in technological innovation by firms attempting to find less costly ways to supplant targeted “dirty” practices.

It is hard to envision how many, if any, renewable energy companies would be able to compete effectively against established fossil fuel companies as long as the fossil fuel producers do not have to pay for the worldwide harms they have been causing for many decades. The fossil fuel industries and other GHG generators have benefited greatly from relatively low production costs and consumption prices because they have been heavily subsidized by low tax and royalty rates, inexpensive licenses for resource extractions on public lands, government research investments, and other de facto forms of public assistance. Indeed, a 2010 study by Bloomberg New Energy Finance concluded that the fossil fuel industries are still receiving worldwide subsidies roughly 10 to 12 times larger than the government subsidies supporting renewable energy initiatives.

Imposing a carbon tax on fossil fuel energy production could enable renewable energy mechanisms and other “clean” energy technologies to compete on more even market-price terms, or preferably on better than even terms, against the fossil fuel companies that have benefited from strong financial, political, and legal advantages during the past century. To a degree, the carbon tax could also serve as a substitute or supplement for meager law enforcement efforts that have usually imposed very small penalties on fossil fuel producers that should have been held responsible for many major damaging actions, such as severe oil spills and widespread water contamination from coal mining.

Carbon taxes, fees, or charges are versatile instruments that could be aimed at funding different methodologies requiring substantial alterations to enable conversion to a GHG-free economy. For example, gradually increasing energy-efficiency taxes could be imposed on new appliances, motor vehicles, and buildings. Pollution taxes, fees, or charges could be aimed at consumption activities that generate substantial GHGs, such as driving gas guzzling cars and taking long-distance airline flights. Taxes could be aimed at increasing the cost and reducing the volume of harmful natural resources inputs, such as coal, oil, and natural gas, which generate GHG discharges. Diverse pollution taxes and energy taxes could also be targeted at low-volume high-price luxury consumption products, such as motor-yachts and million-dollar mansions, or at high-volume low-price everyday products, such as plastic bags and recyclable beverage bottles.

A progressively increasing carbon tax could be employed in conjunction with direct regulation and public disclosure requirements to promote greater energy conservation and curtail GHG pollution, and also to help finance GHG-free replacement technologies that will eliminate many GHG discharges and enable clean-technology transfers to developing countries. We cannot successfully prevent further climate change dangers without creating substantial funding sources and improved economic incentives to deter current and future destructive activities. The point of this discussion is to emphasize the variety of ways in which pollution taxes, fees, or charges schemes could be used separately or jointly to achieve the same types of economic-incentives functions as cap-and-trade mechanisms and offset programs — to put an increasing market price on harmful GHG discharges and to create stronger incentives for businesses and consumers to replace dangerous polluting activities with more benign alternatives.

Want to learn more about economic incentive programs? Read about current carbon emissions policy in Do Carbon Offset Programs Really Help Pollution Control?

Excerpted fromClimate Change Policy Failures: Why Conventional Mitigation Approaches Cannot Succeedby Howard A. Latin. Copyright © 2012 by World Scientific Publishing Co. Reprinted with permission.