Implementing A Carbon Tax & Reduction Plan (2016 Masdar Blogging Contest Entry)

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Masdar blogging contestHistorically, governments have taken a carrot and stick approach towards carbon emissions, with regulations dictating maximum emissions paired with what are typically undervalued incentives for implementing emissions reduction projects. Moving forward from COP21, it is obvious that more is needed to forge the partnerships required to drive emissions down at the rates needed to avert catastrophic climate change.

The Plan

I propose an escalating carbon tax (the stick, or punishment approach) paired with an incentive program that rewards reductions of future emissions on an annualized per ton of carbon basis (the carrot, or positive reinforcement). Implementing a revenue-neutral, two-pronged approach to driving emission reductions will drive the fastest reductions and allow for the development of healthy partnerships between government agencies and carbon emitters.

The Incentive

Government programs are typically aimed at placing limits on emissions. A more effective approach to driving reductions in carbon emissions would be to use a positive feedback-focused model using the “carrot.” For example, governments would not provide incentives on a per project basis, but instead, reward direct carbon emission reductions on a per ton basis. Directly linking incentive funds with current and projected carbon emission reductions, supported by corresponding reductions in permitted emission limits, will provide positive suction for businesses to implement improvements and drive carbon emission reductions with the fastest possible timing.

Further, providing one-time incentives per ton of annualized carbon reductions based on historical emissions allows for a single lever to drive the correct behavior and, thus, can be more easily implemented, can be more easily adjusted (up or down) as the need for reductions and traction from businesses dictates.

For example, if the incentive rate were $100 per ton of annual emissions and a project would directly reduce real-world emissions from 10,000 to 5,000 tons per year, that project would be eligible for $500,000 of one-time incentives for the reduction. Permit limits would be similarly be adjusted down by 5,000 tons.

The incentive rate would be reviewed semi-annually for the first 3 years to ensure it is on track versus budget and versus carbon emission reduction goals, then annually thereafter. Reviews should tie directly to regional governmental air quality targets and associated funding. Carbon tax funds, where available, should be used to directly fund this work.

This solution will most effectively enable the private sector to develop the goods and services necessary for a global transition to a low-carbon economy, as it leverages a one-time incentive to drive carbon emissions reductions many years into the future. Regulating at the CO2e level levels the playing field and allows regulators to use data they are already capturing and using for the basis of enforcement to determine where funds should be allocated.

The Tax

To transition to a low-carbon society requires that the playing field for global businesses first be leveled. Implementing a predictable, escalating, long-term carbon tax that increases over time gives businesses the ability to calculate the cost impact the carbon tax will have on the bottom line over time. This enables each business to determine when investments to reduce carbon generation make business sense, allowing for the forecasting and implementation of projects which will help businesses to avoid future tax increases. Ramping the tax up to full effect over the next 5 years allows sufficient time to plan and to act. Further, this sets a precedent for the taxation of carbon and sets a firm foundation moving forward in the event that emissions need to be taxed further to meet regional, national and global reduction targets.

In Summary

Implementing escalating, top-line taxation on carbon emissions paired with an incentive plan for carbon emission reductions levels the playing field and provides a predictable path forward. This enables businesses to plan for and be incentivized to drive meaningful reductions in emissions as required to meet regional, national, and global emissions reduction targets.

Note: This is my entry into the 2016 Masdar Engage Blogging Contest.

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