Testimonials show carbon taxes work

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This article was published 16/04/2019 (2448 days ago), so information in it may no longer be current.

If you have trouble believing economists (including the 2018 Nobel prize winner William D. Nordhaus) that a carbon tax at the right level can reduce greenhouse gases (GHGs), here are a few testimonials from perhaps surprising sources:

“A carbon tax is the most efficient means of reflecting the cost of carbon in all economic decisions — from investments made by companies to fuel their requirements to the product choices made by consumers.” This is a direct quote in 2009 from Rex Tillerson, then CEO of ExxonMobil, who was not yet reporting to the current U.S. president.

“It’s our view government-led carbon pricing mechanisms are the lowest-cost way to develop low-carbon technologies for a low-carbon economy.” This in 2018 from Royal Dutch Shell, the largest public oil and gas company in the world.

“We know that carbon pricing works. If more governments put a price on carbon, business will follow suit and quickly.” This from Eldar Saetre, the CEO of Statoil (now under the new name Equinor), the Norwegian energy giant. This last quote might be the most interesting as it comes from the leading oil and gas company of a country that has had a carbon tax for 20 years.

Why would these oil and gas CEOs advocate for a tax on their own products? It’s straightforward: they prefer a market-based solution to reducing GHGs over government regulations, which could be more drastic and disruptive. They also understand that climate change is real and associated action is inevitable as pressure builds on governments and industry.

Those who argue that a carbon tax couldn’t possibly change decisions made by companies and individual consumers presumably also disagree with one of the fundamental tenets of free markets. The idea that people will choose cheaper products that serve the same function and that higher prices drive down demand is not just common sense, but underpins supply and demand economics — a concept popularized by Adam Smith in his 1776 book Wealth of Nations.

A common example on how a carbon rebate and tax would change decision-making goes like this: you walk into a pub and the bartender hands you a $5 bill while telling you that the price of your favourite drink has gone up by $5. You are free to use the $5 in any way you like. While some of us will continue to order the same drink, a portion will keep the money (at least some of the times) and make a different decision.

The question then is not whether carbon taxes could reduce GHG emissions, but at what level should they be implemented. Additional considerations should go into decisions about the most effective way of utilizing the proceeds, the rate of increase over time, cushioning the hardest hit individuals and companies to allow for transitions, and social/political sustainability of the policy.

We can look to other jurisdictions for useful examples. In the United Kingdom, a carbon tax was introduced in 2013, which levelled out at about $32 per tonne of carbon dioxide by 2015. This was largely credited for the reduction of coal from 42 per cent to seven per cent as the fuel of choice for electricity generation over this time. Not since the passage of the U.K. Clean Air act in 1956, which was a reaction to the great London smog of 1952, has there been such a dramatic drop in coal consumption. Driven by this rapid transition, the overall GHG emissions in the U.K. in 2017 were 43 per cent below 1990 levels (matching those in 1890, turning the clock back almost 130 years).

Closer to home, we have the widely cited case of British Columbia, which is the first jurisdiction in Canada to have implemented a carbon tax in 2008. Although starting at modest levels of $10/tonne of carbon dioxide, it is now at $35/tonne and will match the federal carbon tax of $50/tonne by 2022. Despite some of its flaws (in rollout, coverage and form of revenue cycling), the B.C. carbon tax stands as a clear example that economic growth and emission reductions can be achieved simultaneously. B.C. outperformed the rest of Canada in terms of GDP growth and GHG emission reductions during the past 10 years. B.C.’s per capita emissions, as well as per GDP emissions, are dropping and expected to lead the country in the near future.

Returning most or all of the revenue generated by a slowly rising carbon tax to the voting public (i.e. getting your $5 back at the pub) is considered to be the most politically and socially sustainable means of implementation. Although it is generally accepted that investing the tax proceeds on green infrastructure, energy efficiency and wide-scale electrification will have a larger impact on GHGs, the short-term social/political costs make this a less desirable option for decision-makers.

A powerful example of this were the wide-scale demonstrations in France that forced government to back down from a sudden and dramatic increase in fuel prices without considering revenue cycling and addressing the most affected communities and sectors.

If the goal is to reduce GHG emissions, thoughtful implementation of carbon taxes at the right level and pace works. If there are any doubts, ask oil executives. Their future depends on it.

Nazim Cicek is a professor and associate head of the department of biosystems engineering at the University of Manitoba.