Taxing carbon — is Australia alone?

With carbon emissions still being produced and a real measure yet to be implemented, the clock is ticking for a carbon tax to prove itself, ELENA ARENA reports.
There is all this talk about a carbon tax. What is it?

Many Australians are unclear about what exactly is a carbon tax despite increasing awareness of the tax since the Government’ revived the proposal early this year.. The Complete Guide to Climate Change defines it as “a specific tax levied on each unit of carbon dioxide or carbon dioxide equivalent of other greenhouse gases, emitted into the atmosphere.” And how do we get carbon emissions? Well they are generated by the burning of fossil fuels, the main three being coal, oil and natural gas. Within the Government’s proposal, this means ‘polluters’ will pay a set cost of $23 per tonne of carbon produced.

Who else is doing it?

Or should I say who else has done it? The first country to introduce a price on carbon was Finland in 1990. This developed into a general carbon tax by 1997. Starting at €18.05 per tonne of carbon dioxide, the cost eventually rose to €20 per tonne by 2010. Sweden entered the game in 1991 at US$150 per tonne of carbon, in which industries pay fifty percent of the nation’s tax. The tax exempts renewable resources and taxes on electricity were separate for non-industrial consumers. Britain introduced a climate change levy for its industry, commerce and public sectors in 2001. The levy was divided at 0.15 pence per KWH (kilowatt-hour) for gas, 0.07 pence per KWH for petroleum, 0.44 pence per KWH for electricity and 0.12pence per KWH for any other commodity. Quebec in Canada put a tax on hydrocarbons petroleum, natural gas and coal. A tax of US$0.8 per litre of gasoline and US$0.938 per litre of diesel fuel, only applies to energy and oil companies. British Columbia, which introduced a carbon tax at US$10 per tonne in 2008, plans to increase its carbon tax each year until it reaches US$30 by 2012.

Do any international guidelines exist and under what body?

The Kyoto Protocol is an international agreement which was adopted in Kyoto, Japan on 11 December 1997, under the United Nations Framework Convention on Climate Change (UNFCCC). However, it did not come into effect until 16 February 2005, when it had been ratified by a sufficient number of countries. The United States of America is not a member of the countries who have ratified the protocol. The protocol’s main objective is to limit or reduce greenhouse gas emissions by its industrialised ratified countries. Three market-based mechanisms were introduced as a means of assisting countries to meet their national targets: Emissions Trading, The Clean Development Mechanism (CDM) and Joint Implementation (JI). It is under Emissions Trading in which a carbon tax comes into play in order to give carbon a price value to trade with among other countries. This agreement was formed as a ‘first-step’ in response to climate change, but will require more substantial international support for its legacy to survive. The protocol’s “First Commitment Period” ends in 2012.

Is a carbon tax the only answer?
Carbon dioxide, particularly through the consumption of fossil fuels, is considerably the largest and most recognised greenhouse gas emission in the world.
The CSIRO’s energy economist, Paul Graham, outlines an alternative market-based method, “cap and trade”, “In a “cap and trade” scheme the amount of emissions is known with more certainty because the cap is set by the government of the day, however the carbon price is set by the market and would fluctuate similar to other financial markets”.

On the other hand, many preventative methods exist to reduce the production of carbon emissions. Ranging from production changes, such as adopting renewable energy sources, to land care approaches, such as reducing deforestation, numerous non-market based methods exist that can effectively reduce the effects of carbon emissions.

Australian National University climate change researcher Dr David Stern believes carbon pricing should be done together with environmental technology policies and other measures, “A strong policy to develop alternative energy sources that might be competitive with fossil fuels like coal and gas, even without a carbon price would reduce the necessary carbon price and
might even be able to replace it,” he said.

What’s to come for Australian industries?
It is inevitable that an implementation of an economic policy will cause structural change in an economic system. Economists suggest that some sectors, such as fossil fuel industries may decline, whilst others such as renewable energy industries may expand. Certain industries may even relocate to other countries where mitigation policies are not so tight. Preferably, the revenue from a carbon tax would be invested into such industries to find new ways to reduce emissions and therefore stimulate growth. However, this all depends on factors such as an increase in the prices of goods, strength of industrial markets and not to mention the intensity of the carbon tax itself. The Australian Government, for example, has implemented industrial assistance schemes, such as the Clean Technology program, to promote alternative paths for economic growth with production industries.

Paul Graham focuses on the rate of growth within industries, “the economy grows at a slightly reduced rate when a carbon price is introduced, when growth in new industries does not totally offset the reduced growth of other industries”.

Where did it all begin?
English economist Arthur Pigou (1877 –1959) formulated the theory of negative externalities; negative effects or outcomes of a good’s production which results in market failure. Pigou proposed that by taxing the goods which resulted in such negative externalities, the ‘costs’ associated with the production are internalised. Thus by putting a tax on fossil fuels, the source that generates carbon dioxide, its producers have to economically compensate the damaging costs. This is known as Pigovian tax and became the basis in which the carbon tax was formulated.