The carbon tax debate and irrational howls

17th September 2010 By: Saliem Fakir

No sooner was the announcement that a carbon tax was on the cards made than the hecklers from special interest groups and their lobbyists started coming out of the woodwork.

They are coming out fast and furious. Letters and op-eds have been rushed to mainstream papers, all condemning the tax idea, especially the emissions tax on cars. In the meantime, the National Treasury’s discussion paper has been released. It is only a discussion paper, and is not yet policy. There is much room for debate and for revisions to be made to the core concept. Instead of howling, all of us should be contributing to the debate.

The paper provides a useful overview of the carbon tax idea. It is quite cogent and thorough, and offers excellent examples of how carbon taxes have been applied in other countries.

At least the carbon tax proposal is starting to focus minds. Judging from the proposed vehicle emissions tax that was introduced on September 1, the reaction to carbon taxes on the source of carbon is expected to go the same way – more outrage and howls from special interests, which want to permanently fossilise our economy in a carbon straitjacket.

The conversation is too reactionary. It is too focused on the status quo, and not on the future.

And, as Mancur Olsen, an economist, long passed, consistently argued, collective action does not come about through voluntarism, but through the gentle force of hand or incentive.

He also held that national economies are often paralysed when special interests overwhelm the State. Their power is such that their gains come at the expense of the collective good.

The very same State that is everywhere infested by the industrial lobby soon becomes a pariah when things do not go the lobbysts’ way. The automotive industry is a good exam- ple in this regard. Automotive companies run to the State when they seek bail-outs, but are less supportive of new proposals aimed at shifting mobility to a more efficient trajectory and reducing our dependence on fossil fuels. The industry should be a part of the debate.

They have the privilege of excellent skills and knowledge, which they must use in the service of the country.

It is clear that a carbon tax is a more effi- cient administrative option than a trading scheme. A carbon tax is administered directly on the fuel. It is like the cap-and-trade system, a market mechanism. In a carbon tax scheme, the price is determined based on the amount of greenhouse gases the fuel source emits.

Its downside, unlike the cap-and-trade system, is that an upfront cap on emissions is not possible; however, the slow percolation of costs transferred into the market brings about a shift through change in behaviour and, with this, over time, will come the overall reduction in emissions through fuel switching.

The National Treasury’s discussion docu- ment rightly notes that, in the upstream segment of the carbon-intensive resource use sector, there are fewer players to deal with and regulate. The National Treasury is reluctant to earmark carbon tax receipts. Despite this, it is not opposed to the idea of recycling the taxes, either to lessen the impact on the poor or to encourage investment in low-carbon solutions.

This balance of low administrative costs compared with high compliance enforcement costs has to be weighed up. One suspects that some industry players prefer a trading scheme because they know that it will take much longer to implement and monitor such a scheme.

This buys the industry players time, and those feeling more adventurous would find clever ways to easily scupper the whole scheme. An emissions trading scheme will be fraught with endless logjams around the accuracy of emissions data, criteria around permit allocations and then the monitoring system itself. It could take five to ten years to sort all this out.

In the meantime, nothing will be done about our carbon intensity. The positioning of a carbon tax can be useful in that it would be more effective in stimulating behavioural change. Some of that behavioural change will come through the more efficient use of our energy and making other fuel sources, such as renewables, more cost effective in the long term.

Impacts vary, depending on which sectors are most dependent on and vulnerable to fossil fuels. Carbon taxes can also stimulate innovation and new types of economic opportunities.

The carbon tax is the first small step in laying the foundation for a transition to a low-carbon economy – it should be welcomed.