Carbon pricing, and specifically carbon tax, has been criticized as false panacea to the emission problem. Overrated, Jomo wrote last week.[1] In the Financial Times, an opinion piece warns pricing carbon is a shock therapy doing more harm than good, recalling the hardship experienced by many in the former Soviet Union during Russia and eastern European countries’ sudden and forced transition from communism to free-market.[2]
A brief rationale for carbon tax
Carbon tax treats carbon emissions (and other greenhouse gases, which we tend to forget) as a negative externality. That means the emission costs are unaccounted for, and because polluting is free, too much is being emitted much to the detriment of the overall society. Carbon tax (there are other mechanism as well) is designed to price the emissions, put ownership on the emissions and make somebody pays for it. Once somebody pays for it, then that somebody would be more mindful about emitting carbon, thus reducing emissions to a more reasonable level, with respect to average global temperature rise. That is the theory at least.
Carbon inequity argument
But since emissions and human-induced climate change is a global problem—an example of the tragedy of the commons—carbon tax requires global coverage and cooperation. And this goes to the root of the problem: Who should reduce emissions? Who should pay what?
The question gets complicated when we understand emission reduction scheme, in this case carbon tax, affects rich countries differently from poorer ones. A growing country seeking economic prosperity will need to emit more and more emissions, unlike an industrialized economy that has already emitted a lot to reach its current affluence. Pricing ongoing emissions while ignoring past emissions is clearly unfair to the former set of countries.
Yet, the humanity does not have the luxury to take much more emissions. Emissions from non-rich countries like China, India, Indonesia and Nigeria cannot be ignored. Emissions from these big developing countries have to be addressed.
Cap and trade, and failure
There is a way to do this without resorting to carbon tax: set emission quotas and allow trading. For every cap and trade scheme, there is an equivalent carbon tax. Since there is an equivalence, theoretically, a cap and trade scheme should be able to reproduce carbon tax outcome.
The old Kyoto Protocol (and subsequent treaties) provides exactly such a cap and trade mechanism, which countries (and companies) with excess emission quotas could sell it to those who need it. However, it does not seem to be working 20+ years on. Most of the times, it feels more of a greenwashing, or virtue signaling at the corporate-level (Look! We are an environmentally-friendly company!) than a real attempt at reducing emissions economy-wide.
In Malaysia, the government wants to replicate the cap and trade system through a voluntary mechanism, which makes the system more flawed than what envisioned at Kyoto (see the Ministry of Environment and Water document here). The problem is, if it voluntary at the national level, the worst emitters would likely avoid entering the market. This will leave the market with inconsequential companies. Of course, the government can possibly force big carbon emitting companies like Petronas and Tenaga Nasional through their shareholding influence. But what about the more private companies like YTL Cement, Press Metal and the likes? Why would they participate voluntary and raise their cost? Maybe their greenwashing investors would apply pressures, but who knows. The bottom line is, a cap and trade system cannot be voluntary, else the worst emitters would avoid it.
A voluntary system, I would think, would have a very, very low carbon tax equivalence. And that will hardly incentivize companies and individuals to reduce emissions.
I would go as far as say carbon trading has been a failure globally, while carbon tax has not been introduced as widely as it should to be effective.
Cash transfer
One tool to address the emission inequity is for richer countries to pay off developing countries for reducing the latter’s emissions. Income from industrialization could partly replaced by income transferred from industrialized economies. It is a way to address historical emissions and ongoing emissions simultaneously.
But from the recent Conference of the Parties in Glasgow, and from years before, the approach is unpopular among the would be payers. Without enough such transfers happening, a globally carbon pricing will be hard to achieve.
Technological progress and transfer
Technological transfer comes in the same spirit of cash transfer. In-kind, instead of in cash.
The good news on this front is that all kinds of technology have improved significantly over the past two decades. I have an example: solar power.
During my undergraduate years in the early 2000s, I joined the school’s solar car team. The price tag of the vehicle then was roughly a million dollar if I remember it correctly. Most of it was due to high-grade solar panels used. Today’s car costs around a million still, but with better battery technology, better motor, better design and higher panel efficiency. I remember, the old early 2000s car had panels with efficiency in the teens or low twenties. By 2017, the newer generation of panels had an efficiency of 35%.[3] Efficiency here means the ability to convert light into electricity. In fact, top of the line panels have an efficiency close to 50% now.[4]
That better technology has become cheaper as well. Panel prices have come down significantly, from USD106/watt in the 1970s to about USD4-USD5/watt in the 2000s to USD0.2/watt in 2020.[5] This is only solar, and not yet other sources of energy like wind. Or efficiency of internal combustion engine. Or the proliferation of electric or hybrid cars. All of which have improved.
Yet, the fact remains, the world even with impressive technological progress is not cutting emissions fast enough. This includes progress on tech transfer between rich countries and the rest of the world.
Green investment
There are green investments happening, that is possibly a proof of tech transfer happening. In Vietnam, the rise of solar power in a short few years through aggressive government incentives have been the country as the largest producer in Southeast Asia. Unfortunately, solar represents just 5% of their generation mix, with approximately half coming from coal.
Yet, not enough investments are being done as well (if it was enough, we would not have the current emission problem). That shows the problem that we have: green investment is helpful, but it has become a bit of a sloganeering MMT-style.
Other tech
There are other stuff going on: carbon capture. Some of the crazier ones including launching the captured carbon into space. Or burying it underground. But those do not seem realistic at the moment.
Adaptive measures
Bottom line is, all this will require global cooperation, but it seems that cooperation is not happening as big as it should. And I think, any credible cooperation with respect to emission reduction needs to include carbon tax, and along with transfers to lessen the shocks. Other measures seem… half-measure and will not cut emission fast enough.
But perhaps what is left are adaptive, and perhaps a little of mitigate, measures. When we resort to adaptive measures, it signals that we have given up.
That is a shame. We had and still have global cooperation when it comes to the ozone hole through the Montreal Protocol, which, in many ways a precursor to the Kyoto ways of doing things. It was and is successful. Maybe, the ozone hole above Antarctica is an easier problem to deal with.
[1] — Jomo Kwame Sundaram. Carbon tax over-rated. Jomo. November 9 2021.
[2] — Daniela Gabor. Isabella Weber. COP26 should distance itself from carbon shock therapy. Financial Times. November 8 2021
[3] — Top U.S. solar car team goes small to win big in 2017. Michigan News. July 8 2017.
[4] — Nikos Kopidakis. Reported timeline of research solar cell energy conversion efficiencies since 1976 (National Renewable Energy Laboratory). National Renewable Energy Laboratory. Wikipedia.
[5] — Evolution of solar PV module cost by data source, 1970-2020. International Energy Agency. June 30 2020.
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