A brief comment on carbon taxation

Last week I wrote about the importance of environmental economics and in particular the topic of environmental valuation. A significant and debated subject within this field is carbon taxation and there is a considerable literature that analyses different schemes around the world and tries to establish the correct ‘shadow price’ of carbon (a price that reflects the negative effects of carbon emissions), in order to determine the ‘optimal’ rate of taxation. Carbon taxation is such a large topic that an entire blog could be devoted to the subject – as dull as that may be – and so I will not attempt a summary here but instead want to explain my opinion on the subject.

The logic of carbon taxation is simple and comes straight from economics 101. Carbon emissions cause negative effects on parties other than the emitter but are un-priced and therefore occur at a level above that which maximises social wellbeing. To redress this, carbon taxes are necessary to increase the private costs of emitting so that they align with the social costs of emissions. Simply put, if you levy a tax on something people (should) do it less and therefore harmful things, like smoking and carbon emissions, should be taxed. Although this – like most economics – is a simplification, I believe that the basic principle makes sense and I therefore support economic taxation as a way to reduce carbon emissions.

Despite this endorsement, I fear that there is too much emphasis, both within academic economics and policy making, on this one policy tool. This is probably because carbon taxation requires relatively little public intervention when compared to other schemes such as cap-and-trade systems and therefore appeals to politicians who are wary of large administrative costs and accusations of being against the free market (an apparently indefensible position in contemporary politics).

I worry that carbon taxation is becoming a token green policy that politicians can flag up as proof of their environmental credentials detracting attention from the overall inadequacy of environmental policy. Statements such as this made by the OECD are increasing the problem as they suggest that governments should only engage in the most ‘cost-effective’ environmental policies instead of employing a range of tools to achieve ambitious policy aims. With organisations such as the committee on climate change stating that global carbon emissions need to peak by 2020 and then be halved by 2050 in order to avoid severe climate change, it is obvious that carbon taxation alone does not constitute adequate environmental policy.

To achieve a green transition, environmental policy needs to move beyond laissez-faire market tinkering and become more imaginative and ambitious. While carbon taxation is undoubtedly an important policy tool, academic and policy work should give up the holy-grail-like quest for the ‘optimal’ level of taxation and instead focus on developing an environmental policy arsenal capable of mitigating and tackling the considerable threats posed by climate change.