Stop talking and start taxing carbon

Expectations for the international climate change talks in Cancún are low, but not low enough. The failure of the previous gathering in Copenhagen ought to have ended any remaining doubt: the quest for a binding global treaty to cut carbon emissions, at least for now, is over.

Lately, though, this search has been worse than merely futile. It has made incremental action on a pressing global issue harder. Far from advancing solutions, gatherings such as the one in Cancún have become part of the problem.

This goes back to the Kyoto approach to carbon abatement. The defects that yielded the fiasco in Copenhagen were there from the start: grandiosity, exaggeration, complexity and, most of all, ineffectiveness. The Kyoto Protocol, which expires in 2012, did almost nothing to deflect long-term global emissions of carbon from the path they were on to begin with.

Especially in the US, the over-selling of the process, the alarmism deemed necessary to excite support, and the harnessing of climate science to a pre-determined policy agenda, have all combined to turn public opinion against stronger action. That might have been all right, if the climate bureaucrats had been able to get on with it regardless. (Ignoring voters is easier in some countries than others.) But the other great flaw in the Kyoto approach – its focus on the maximally contentious issue of burden-sharing – ruled out that as well.

To be sure, an effective climate-change regime has to be global, since what matters is the global stock of atmospheric carbon. An efficient regime also needs co-operation, to ensure that reductions happen where they are cheapest. Equity matters too: how much can the rich countries rightly ask the poor to contribute? Even so, holding everything hostage to a minutely specified global agreement on burden-sharing was a fatal error.

The way forward is lightly co-ordinated national policies that can be offered to electorates as serving national as much as global interests. Even in the sceptical US, feasible options present themselves. But this more workable approach does pose dangers of its own.

In the US, cap-and-trade was dead even before the midterm elections. The Obama administration plans to rely on regulation instead. The Supreme Court has ruled that the Environmental Protection Agency (EPA) can regulate carbon dioxide as a pollutant, and the agency is getting ready to issue rules for utilities and other big emitters in the new year.

Republicans will resist, through new legal challenges, congressional inquiries and countermanding legislation (which would probably encounter a presidential veto). The problem is not, as most Republicans say, that the entire venture is misguided, but that this micro-regulatory approach will be costly. The bureaucratic overhead will be huge, as producers vie for waivers and other special treatment. Effort and resources will be misdirected.

The second front in the administration’s campaign, after regulatory action, will be the so-called competitiveness agenda, which is all about encouraging clean-energy innovation and “green jobs”. On the demand side, throw in tax reliefs and other incentives for energy-saving investments by businesses and consumers, and you have an industrial policy that is capable, its advocates say, of doing the rest.

Bureaucratic overhead and misdirection of resources will partly neuter these initiatives too. In addition, the green-jobs motif is false advertising. (Governments should have learnt by now that it is better to be straight about these things.) Industrial policy cannot create net new jobs. Rather, it promotes the creation of certain kinds of new jobs by discouraging the creation of others. And you do the unemployed no favours by inducing them to train for green jobs if the demand for their skills then fails to materialise, as many are finding.

Where, then, should the government concentrate its efforts? No prizes for guessing the answer: introduce a carbon tax.

In the US, many dismiss this as a political impossibility. They are wrong. Whether the country likes it or not, with or without an effective climate change policy, Americans will eventually have to pay more in taxes. The state of the public finances decrees it. However you do the political calculations, this unpopular outcome is inevitable. Therefore, start measuring a carbon tax against the relevant alternatives. At worst, a moderate carbon tax would be no more indigestible than higher income taxes or other revenue-raising options.

And, in every important way, it would be the best climate-change policy as well. Crucially, it would work, which is quite a distinction for proposals in this field. A recent paper for the Brookings Institution by Warwick McKibbin, Adele Morris, and Peter Wilcoxen compares a carbon tax (starting now at $30 per metric ton of carbon dioxide, rising at an inflation-adjusted 5 per cent a year) with a system of tax credits (similar to some already in force) for energy-efficient investments by households. The carbon tax would raise roughly $150bn a year, and cut carbon emissions by 60 per cent in 2040. The efficiency incentives would expend roughly the same amount of revenue, in order to cut emissions by less than 2 per cent.

Compared to EPA action, a carbon tax is simpler, more transparent, less susceptible to rent-seeking and more economical in bureaucratic overhead. It also provides an indicator around which future international co-operation could be organised and explained. After their break in Cancún, if the US and other governments want to get serious, this is where they should look.

clive.crook@gmail.com