In December talks in Paris involving more than 200 countries may result in a new agreement aimed at reducing carbon emissions. In the months leading up to the conference, The Economist will be publishing guest columns by experts on the economic issues involved. In our last post, Christian Gollier and Jean Tirole of the Toulouse School of Economics explained why a carbon tax, or a carbon cap-and-trade system, should be policymakers’ preferred weapon. Here, Marianne Fay and Stephane Hallegatte from the World Bank explain what governments can do to achieve their climate targets.
LAST month the G7 heads of state reaffirmed their commitment to stabilising global temperature rise at no more than 2°C above preindustrial levels. That in itself was not new: the 2°C goal was formally adopted in 2010 by the 195 member countries of the UNFCCC. What was new was the explicit mention in the G7 communiqué of what it will take to stabilise at or near 2°C: the need to reduce net global carbon emissions to zero before the end of the century.
While the science behind this may be complex (and is laid out in the IPCC’s 5th Assessment Report), the intuition is not. As long as we emit more carbon than can be absorbed by natural sinks such as forests, concentrations of CO2 in the atmosphere will keep rising, and the climate will keep warming. So while the 2°C target increases the urgency of action, stabilising climate change at any temperature requires achieving zero net emissions.
What does it take for such a fundamental transition of the global economy to happen? In their recent blog, Professors Tirole and Gollier gave us the standard economist’s answer: put the same price on carbon in all sectors and all countries. This way, the environmental cost of economic activities can become apparent to investors and consumers, and markets can efficiently work to reduce emissions, wherever they are the cheapest.
There are two shortcomings to this approach: countries have different economic and political conditions, and a carbon price alone cannot solve the climate change problem—complementary policies are necessary.
Looking at carbon prices through a narrow climate lens provides only part of the picture. Over and above environmental concerns, carbon and energy taxes make economic and fiscal sense, making them relevant for both developing and developed countries. By taxing the “bads” (carbon), countries can reduce taxes on the “goods” (labor and capital). Carbon taxes are also easier to administer as carbon sources are concentrated. Experience shows that tax evasion for carbon or energy taxes is much lower than for VAT or income taxes (e.g. 1% instead of 17% in the UK). This should make carbon taxes the darling of any tax collector, especially in countries with weak fiscal administration and a large informal sector.
Fossil fuel consumption also affects more than just the climate. Congestion and air pollution are also undesirable by-products. Estimates are that health impacts alone could justify a carbon price well above $30 per ton. Since fiscal needs and local co-benefits vary across countries and contexts, there is no reason for an “optimal” carbon price to be the same everywhere.
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