By John Rennie Short
Government and business have a common interest in keeping the planet from overheating. How can they combine to foster this mutual concern?
Governments can even the playing field. In many countries there are tax benefits and subsidies for energy production. More than 40 countries currently subsidize fossil-fuel production or consumption to the tune of half a trillion US dollars. Governments in the Middle East subsidize 75 percent of the costs of fossil fuels. In the USA, oil drillers receive close to US$5 billion in tax subsidies while the solar energy sector gets US$2 billion. We need a global commitment to reduce all energy subsidies. Subsidies undermine the operation of free, efficient markets and send the wrong message to business. Unleash market forces on a level playing field of unsubsidized energy costs. Cut subsidies for all energy industries but tax CO2 emissions to motivate business. Imagine a gradual reduction of subsidies and a steadily ratcheting pollution tax that allows business a chance to adapt. Maintaining steady fiscal pressure will result in the private sector finding ways to reduce their carbon footprint and so reduce global warming.
We need to cover the social costs of CO2, the main gas responsible for climate change. Estimates of the total social cost vary, but one commonly used figure is US$60 per metric ton of CO2. We could impose a tax, with annual increases up to US$120 by 2030 that is paid into a Global Carbon Fund (GCF). At the outset, we make each nation’s government responsible for collecting this tax. Different governments may use different methods of assessment and this variety will allow us to test different forms of tax implementation and collection. By 2030 we will be in a better position to decide what works best.
Governments are good at collecting money, much less successful in allocating funds efficiently. The GCF could then be used as an interest-free bank available to the private sector. Business can apply to the GCF, in cooperation with local impacted communities, for innovative programs of adaption and mitigation. Again, by 2030 we will have better ideas of what works and what does not, what is efficient and fair and what is a waste of money.
The allocation of funds can be decided in a series of five year tranches to allow the benchmarking of successful loans in the short-term before a major reassessment in 2030. A formula could be devised to lighten the load of countries that have a limited CO2 footprint but have very high adaption and mitigation costs. The predicament of low-lying Pacific islands comes to mind: they have tiny carbon footprints, but face huge challenges of sea-level rise.
Businesses require long-term stability in order to make equally long-term investments and to undertake ambitious changes in their trajectory. When governments provide a stable and clearly understandable global set of incentives, they harness the enormous power of the private sector to reduce global warming. A commitment by each country’s government to abolish energy subsidies, to tax carbon in order to fund the GCF will give business around the world a stable and transparent environment in which to make long-term plans and play a vital part in moving towards a low-carbon economy.
With a steadily increasing carbon tax, the private sector will look for ways to reduce their carbon footprint while the GCF will provide them with fiscal incentives to work on climate change adaption and mitigation.
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