In 1896, Arrhenius published results indicating anthropogenic warming, yet over one hundred years later, this issue of rising global temperatures still remains. Most researchers agree increasing greenhouse gas (GHG) emissions are to blame for rising worldwide temperatures. Unfortunately, GHGs are global pollutants, so climate change cannot be contained to certain areas – GHG emissions from one country will affect temperatures around the world. Thus, to successfully combat climate change, countries must work together to lower global GHG emissions. Because carbon dioxide (CO2) and methane (CH4), the main GHGs emitted by humans, both contain carbon atoms, international carbon regulation is the most effective form of control for decreasing GHG emissions and slowing climate change.
The two main forms of carbon regulation are cap and trade and taxation. Cap and trade involves allowing companies to pollute up to a certain point, and then forcing these companies to buy extra permits to pollute past this point. On the other hand, taxation charges a simple fee on each unit of carbon emitted to the atmosphere. While both methods of regulation have their respective flaws, I believe carbon taxation is a more effective form of carbon regulation. The reasons for this belief are outlined in the rest of this post.
Economics of an International Carbon Tax
The private cost (explicit cost) of releasing GHGs into the atmosphere is negligible. The individual polluter bears little cost or damage from emitting GHGs. On the other hand, the social cost (implicit cost) of GHG pollution is much larger. Because the social cost is greater than the private cost, a negative externality exists. A carbon tax fixes this externality by forcing polluters to pay for their GHG pollution and to internalize their negative externality. A carbon tax shifts the supply curve for carbon upwards. This shift leads to a higher equilibrium price and a lower equilibrium quantity. At the new equilibrium point, the negative externality from carbon pollution is internalized, leading to an economically efficient market.
Not only will the tax decrease consumption of carbon and consequently combat climate change, but the tax will also raise revenue. With this additional tax revenue, governments have various options for how the money is used. The revenue, for example, could fund renewable energy research or could be pumped into education reform. When tax revenue is used properly to benefit the given country, a carbon tax is the best solution for helping slow carbon emissions and combat climate change.
Issues with International Cap and Trade
Although most researchers believe a carbon tax is the best way to slow climate change, international cap and trade is another form of market-based regulation that has been proposed. In cap and trade systems, polluters are given a certain amount of pollution permits each year (e.g. 10 permits for 100,000 tons of carbon dioxide emissions). The cap on the permit declines every year until the acceptable level of pollution is reached. For example, the first year, a polluter may be granted 10 permits for 100,000 tons carbon dioxide, yet the second year, this same company may be granted 10 permits for only 90,000 tons carbon dioxide.
If a company emits less than their given cap, the company can sell off their extra permits. On the other hand, if a company wants to pollute over their given cap, they can purchase extra permits. The market for pollution permits functions like a typical free market, reaching an equilibrium price and equilibrium quantity.
Advocates of implementation of an international carbon cap and trade system state that cap and trade is a better form of market-based regulation because, unlike taxation, cap and trade automatically accounts for inflation.6 Taxation, however, is still a better form of international carbon regulation for numerous reasons. Unlike cap and trade, taxation systems are already in place in nearly all countries (e.g. Internal Revenue Service in the United States). A carbon taxation system would be easily to implement, whereas an international cap and trade system would take years to develop.
Current Carbon Taxation Systems
Numerous places already have carbon taxation systems. Although the United States does not have a nationwide carbon taxation system, various parts of Maryland, California, and Colorado have implemented carbon taxes. Many other countries have carbon taxes, too, including Ireland, Great Britain, and Finland. In all of these locations, a carbon tax has been successful in raising revenue and reducing emissions. After the carbon tax was enacted in Ireland, emission rates dropped 15 percent.
Based off the number of countries that have implemented at least some form of carbon tax regulation, there is clearly interest in an international carbon tax. Unfortunately, although many locations have implemented carbon taxes, there is little consistency in the actual cost of the tax. Around the world, carbon taxes range from $5/tC to $150/tC. International research and debate must zone in on an effective tax rate for international carbon regulation to be successful.
Issues with Current Carbon Regulation
The Kyoto Protocol has been the main international treaty regarding carbon regulation and climate change. In this treaty, various countries committed to lowering carbon pollution by different percentages. Unfortunately, this treaty was practically ignored by the international community. In most countries, carbon emissions continued to rise at an alarming rate, and no penalties were imposed on countries that did not reach their emissions target. After the Kyoto Protocol, worldwide carbon emissions increased by almost 40 percent. Although most policy analysts agree the Kyoto Protocol failed, this treaty set the groundwork for initial ideas of an international carbon tax.
Issues with an International Carbon Tax
An international carbon tax comes with problems. First of all, determining a proper carbon tax is extremely difficult. With environmental taxation, a Pigouvian tax is typically applied that is equal to the marginal social cost per unit of pollutant.6 Although determining this cost seems straightforward, the social cost of carbon (SCC) is still highly uncertain. In one study, researchers examined past estimates of the SCC. By looking at hundreds of past estimates, the researchers found the average SCC was $43/tC with standard deviation of $83/tC. Luckily, the United States is taking steps in the right direction. President Obama recently directed various government agencies to zone in on a more definitive estimate of the SCC.
The other main issue with international carbon taxation is countries are at different stages of development. Developing economies, such as India, argue that an international carbon tax is not fair because developed countries were allowed to pollute without restrictions while developing their economies. In essence, environmental quality is a luxury good — different countries value the environment differently. In many countries, nationwide poverty, hunger, or violence is occurring, and working on a carbon tax is at the very bottom of their priority list.
Proposals for Forming an International Carbon Tax
In forming an international carbon tax, the first step is determining the proper tax rate. Although an exact number will never be agreed upon, negotiation can yield a reasonable estimate. International collaboration is essential for determining a fair, effective tax. Then, after determining this proper tax rate, a clear set of standards must be set on how the tax revenue can be used. Around the world, people dislike additional taxation, yet analysis has shown that environmental taxation typically increases long-run economic growth if tax revenue is used properly. One option for how the additional revenue could be used is to fund green energy projects. Another option is using the tax revenues to provide subsidies for people in the lower income class brackets, as carbon taxation is regressive.
The next step in forming an international carbon tax is recruiting as many countries as possible to sign and ratify the treaty. Although all countries will never agree to enact a carbon tax, developed countries such as the United States, Canada, and the United Kingdom must take charge to set an example for the international community. Many researchers believe one of the main reasons the Kyoto Protocol failed is because the United States failed to ratify the treaty. Without developed countries backing the international carbon tax, other countries will be less likely to sign and ratify the resulting agreement.
The final and most important step when forming an international carbon tax is designing an effective enforcement mechanism. The international political process often waters down the enforcement mechanism to almost nothing.16 Effective penalties must be applied to countries that do not comply with the international carbon regulation.
Since the Kyoto Protocol, climate change has continued to develop. A new form of carbon regulation must be implemented before it is too late. An international carbon tax is the best solution for decreasing carbon emissions and slowing climate change. Although the path to an international carbon tax is difficult, the path is not impossible. By working together, countries can determine a fair, effective carbon tax, and carbon emissions can finally be brought down to sustainable levels.
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