Azara Blog: The world should allegedly introduce a miniscule carbon tax

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Date published: 2008/06/25

Matt Prescott says on the BBC:

The principle of costing carbon emissions is not new - the international carbon trade, led by the EU market, turns over billions of dollars a year.

But the majority of the world's countries, companies and citizens play no part in the exercise. It is remote and aloof, so we need something that touches everybody.

I propose, as a first step, the establishment of a low rate of carbon tax; implemented globally, but raised and spent at the national level.

This tax could quickly be applied to every source of greenhouse gases in every nation, where it would act as an incentive for everyone to reduce his or her emissions.

To date, most carbon tax proposals have advocated that the full environmental and social costs of climate change should be reflected in the introductory rate of a carbon tax.

Sweden deliberately did this in 1991 and now has a carbon tax equivalent to $151 per barrel of oil. It has been a huge success and enabled the country to achieve a 9% reduction in its emissions while simultaneously achieving economic growth of 44% between 1990 and 2006.

Clearly, not every society can afford such a high upfront cost.

My suggestion would be to introduce the global carbon tax at a rate that everyone could afford and that allows every country and human activity to be brought on board from the outset.

A rate equivalent to $1 (£0.50) for every tonne of carbon dioxide (CO2) released into the atmosphere would meet these criteria and also create a global minimum price for carbon.

Assuming a credible global carbon tax was established, this initial rate could then be increased using a pre-determined price escalator or further international negotiations.

The rate of $1 for every tonne of carbon dioxide would add roughly $0.0023 to the price of a litre of petrol, or $0.32 to a barrel of oil. This would raise a total of $6bn (£3bn) in the US, $5.5bn (£2.75bn) in China, $600m (£300m) in the UK and $700,000 (£350,000) in Afghanistan.

To help put these carbon tax costs in perspective, since December 1998 the price of a barrel of Brent Crude oil has increased from $9.10 to its present price of more than $135. So it's not going to wreck any economy.
At present human activities, such as burning fossil fuels for energy and clearing rainforests for agriculture, release approximately 29bn tonnes of CO2 into the atmosphere each year. This means that a $1 tax would generate $29bn.

Yes, there should be a carbon tax (or equivalent). Yes, the carbon tax should be global (otherwise rich people can get around the tax by getting poor people to produce the emissions on their behalf). But that is about where this article stops making sense.

You can always cherry-pick statistics, so quoting any one country (here Sweden) for any specific time period as alleged proof of anything is misleading. So Prescott claims that Sweden has achieved a "9% reduction in its emissions" between 1991 and some unspecified year (presumably around 2006). Well, the UK reduced its emissions by 15% between 1990 and 2006 (this is using total emissions, not just those due to CO2). The UK did this not by introducing a carbon tax but via a "dash to gas" for electricity generation, away from coal.

Further, you have to be careful exactly which GDP statistic you quote (so whether in constant-price local currency or in current-price local currency or relative to the US dollar, or ...). Prescott does not say which one he is quoting. According to the IMF in terms of US dollars (so allowing a semi-sane comparison between countries) between 1990 and 2006 the GDP of Sweden went up 50% but the GDP of the UK went up 124%.

All in all this hardly represents a great vindication of the Swedish model. But you can spin the story a zillion and one ways, needless to say. And, for example, the EU has successfully exported a fair amount of EU emissions to China (by getting China to make everything for the EU). Without taking that into account (because the figures might be quite different for Sweden and the UK), comparing emissions is not being done correctly.

Prescott proposes a carbon tax of 32 cents per barrel of oil. But he quotes the Swedish carbon tax as being 151 dollars per barrel, so around 472 times the amount. And the Stern report recommended a carbon tax of around 32 dollars per barrel, so around 100 times the amount. Although one might not want to immediately introduce a large carbon tax, introducing a pathetic little one will have no impact. Prescott effectively admits as much.

Well, needless to say, once any carbon tax is in place, no matter how small, the governments of the world will immediately ratchet it up. Presumably this is the real Prescott game plan. It will also not be revenue neutral, no matter how many people suggest this. (For example, in the UK car drivers pay a whacking great carbon tax already, in fact around the Sweden level, but it is not even close to being revenue neutral and only car drivers pay it.)

And finally, Prescott seems to want to tax not only obvious and easily quantifiable carbon emitting processes such as burning fossil fuels, he also seems to want to tax processes such as "clearing rainforests" where it is bloody difficult to estimate how much carbon is emitted. This is not very practical. His carbon tax is not going to raise nearly as much money as he thinks.

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