COP21 and British Columbia’s Carbon Tax

BY: RAHUL ROKKAM, CONTRIBUTOR

From November 30th to December 11th, 2015, over 30,000 representatives and diplomats converged in the Sorbonne, near the University of Paris, to draft a global pact committed to reducing greenhouse gas emissions. This meeting was the COP21 (the 21st annual United Nations Conference on Climate Change) and resulted in a historic agreement between 195 nations to address the world’s dependence on fossil fuels. The agreement sought to tackle the issue through 5 crucial “spheres of development:”

  • Mitigation: reducing emissions fast enough to achieve the temperature goal
  • A transparency system and global stock-take: accounting for climate action
  • Adaptation: strengthening ability of countries to deal with climate impacts
  • Loss and damage: strengthening ability to recover from climate impacts
  • Support: including finance, for nations to build clean, resilient futures

In light of the overwhelming wealth of scientific literature citing the devastating effects of climate change, French President Francois Hollande said, “Never have the stakes of an international meeting been so high, since what is at stake is the future of the planet, the future of life.” Behind Hollande’s remark is truth—the world’s leaders have acknowledged that decades from now, the loss of sea ice, higher sea levels, widespread coastal flooding, and heat waves will be the norm. In fact, President Obama, Xi Jinping, Vladimir Putin, and Narendra Modi all took a certain degree of responsibility for the crisis.

The private sector is becoming increasingly involved as well. Elon Musk, founder of Tesla, Paypal, SpaceX, and OpenAI, gave his case for what is called a “carbon tax.” This notion comprises of a tax levied on the carbon content in fuels; it hopes to mitigate any market activity that creates negatives externalities (pollution, adverse health effects, to name a few). The revenue from this tax could be used to alleviate current marginal tax rates, reduce budget deficits, or counter the costs the tax would impose on certain individuals and corporations.

Now let’s analyze a carbon tax in a hypothetical economy through a cost-benefit analysis. By raising the price of fossil fuels, a carbon tax would increase the prices of goods and services related to CO2 emissions (electricity, transportation, etc.). This cost increase would be largely distributed to the average consumer—decreasing the purchasing power of people’s incomes and net wealth. In turn, this could lead to a decline in investment and a reduction in the supply of labor, given that wages are lower. Furthermore, the additional cost resulting from a carbon tax would be largely placed on low income households, given that a vast majority of countries see that income bracket spend more on emission-heavy goods and services.

Positives also arise from the implementation of a carbon tax. One option is to use revenue from a carbon tax to reduce government deficits. This generally increases economic output, considering the fact that a burdensome debt crowds out private sector investment. Thus in the long run, this policy would be beneficial, as we would see the increased investment come to fruition.

The second option is a tax swap, in this case reducing marginal tax rates to counter the adverse effects of a carbon tax. This would act as an incentive for individuals to work and invest, by increasing corporate and individual incomes. The amount of revenue that a carbon tax could raise depends on the tax rate, how broadly it was applied, and the extensiveness to which it decreases CO2 emissions in the future. The Congressional Budget Office (CBO) estimated that a $20 price on a metric ton of carbon, raising that rate nominally by 5.6% a year, would yield $1.2 trillion in the US economy over the period from 2012 to 2021. At face this seems like a massive amount of revenue, but concerns still remain.

Now left’s shift to a real-world application of the carbon tax in British Columbia (BC), Canada. Stewart Elgie, Professor Emeritus of Economics at Simon Fraser University cites numbers from Statistics Canada that show the policy has been successful, both environmentally and economically, over 6 years. Put into effect on July 1, 2008, B.C.’s carbon tax covers a broad spectrum of fuel use and carbon emissions. Starting at C$10 per ton of C02, and rising C$5 annually, the rate has peaked at C$30 per tonne. Interestingly, the law is “revenue neutral,” meaning that it must produce the same economic benefits as it yields economic harms. The oil-rich province saw its fuel consumption rising at 1.1% per year relative to the rest of Canada, but in 2008 after the tax’s implementation saw that figure decrease by 4% per year. It now raises $760 million more in income and tax credits than needed to offset the aforementioned negative externalities.

A carbon tax is one of many solutions lawmakers must continue to develop as the effects of climate change play out in the near-future. An idealistic approach, like increasing recycling in individuals’ homes, may seem easier to accomplish, but the large-scale solutions are necessary to combat this global problem. COP21 is a good first attempt. Let’s keep working.