Temperature-linked carbon tax could be effective - expert

by Erin Berger | @erineberger | Thomson Reuters Foundation
Thursday, 4 July 2013 16:45 GMT

Steam and other emissions rise from a coal-fired power station near Lithgow, 120 km (75 miles) west of Sydney, July 7, 2011. REUTERS/Daniel Munoz

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With a carbon tax, "you end up doing the right thing no matter what. You just didn’t know it at the time," one expert says

LONDON (Thomson Reuters Foundation) - A temperature-linked carbon tax could be the most cost-effective way to reduce carbon dioxide emissions and slow the pace of climate change. But getting one in place could be an enormous challenge, not least because of political conflicts, says a leading proponent of the taxes.

Ross McKitrick, professor of economics at the University of Guelph in Canada, proposes a tax that would start at a low rate, then rise or fall with the temperature of the earth’s atmosphere.

Such a system would help investors and potentially politicians understand how the climate – and tax rates – would change in the future, and create clear incentives for action.

Investors could make decisions based on how confident they are of their climate predictions, and the system would reward whoever had the closest guess. “You end up doing the right thing no matter what. You just didn’t know it at the time,” he said.


“A huge amount of effort would be put into accuracy, which would result in the world’s best climate model,” McKitrick said during a talk at the House of Lords in London on Thursday.

Theoretically, a carbon tax is the most effective way to reduce CO2 emissions, McKitrick said. In practice, however, carbon taxes – such as those used in Australia, Finland and the U.S. state of Colorado - succeed to varying degrees and often become bogged down in political conflict.

Much disagreement arises over how the tax rate ought to change over time, McKitrick said, and “even if people could agree on the starting rate, they couldn’t agree on the adjustment path” in many cases.

One problem is conflicting opinions on the risks associated with global warming. Those most concerned about the effect of CO2 on the climate generally favour a quick rise in the tax rate over time to best slow emissions. Those who aren’t worried about global warming object to what they consider an unnecessary tax increase.

McKitrick believes his proposal would eliminate the need to have that argument. But setting up the tax in a way that really works would require changes that McKitrick admits would not appeal to most countries.  “You need to get rid of the other hodge-podge,” he said.  “No country can benefit from this until they dismantle all of their other inefficient climate policies.”

Because of this, he thinks that a country with an emerging or developing economy could be most interested in giving it a try. “It’s a very low-risk policy, but also a valid undertaking,” he said. “The least likely to try this would probably be places like Britain, where there’s a heavy overhang of existing policies and invested interests.”

One question is what the best use of revenue from a carbon tax would be. One key to a politically successful carbon tax, McKitrick said, is that income from it must be used to reduce other forms of taxes. Otherwise, the tax could become an extra economic burden – and political risk, he said.

Erin Berger is a Thomson Reuters Foundation intern, writing on climate change issues.


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