Addressing climate change through true cost pricing

Over the past few decades we have been burning the fossil fuels that took 400 million years to accrete, changing the climate in the process. The air now contains about 35 per cent more CO2 than in 1700, far more than in any period in the past 800,000 years. CO2 build up over the past 17 years has been 60 times faster than in any period revealed by ice core analysis.

Clearly, urgent action is needed, but care must be taken to choose the right urgent action. The Howard plan of carbon trading by 2012 is neither soon enough nor the right action. Carbon trading is inadvisable for several reasons. First, it is a new tax which makes it politically unpalatable. There is no need for a new tax, but merely a tax shift. That is, there should be concomitant tax relief on punitive taxes on income or production (which will have wide-ranging electoral support).

So, as part of a revenue-neutral tax shift, a carbon levy should be applied “at source” on the assessed carbon content of fossil fuels. Carbon emissions from a set volume of oil, coal and gas vary, but these variations can be assessed.

At source, the monitoring, collection and compliance costs are far easier and less expensive than at points further on in the production and distribution cycle (where carbon trading is focused). In addition, this gives every incentive for industries which choose to use oil, coal or gas to minimise use.

In contrast, if charges are applied at the end point (on the consumer), few discretionary market choices can then be exercised. Another advantage of taxing carbon at source is that there are far fewer points of taxation, facilitating compliance.

Currently, the concentration of CO2 is 379 ppm and it is rising at a rate slightly above 2 ppm a year. By 2020, the concentration will have passed the 400 ppm mark. During past ice ages the global average temperature was only 4C lower than today. In the past sea levels were 2 metres higher yet the average temperature was only 2C higher than the present. If Earth’s average temperature rises by over 2C by 2050 it is predicted to drive up to 30 per cent of known animal species to extinction, with migrating birds especially vulnerable.

If non-linear positive feedback gets out of hand temperatures will soar, and no amount of emissions controls imposed by governments will halt the increases. The danger point is somewhere not far above 500ppm in the atmospheric concentration of C02. To avert catastrophe we must reduce CO2 emissions to 90 per cent below 1990 levels by 2050. But can this be achieved without massive societal and economic upheaval?

Traditionally we deal with problems in four ways:

1. wealthy philanthropists donate large sums to special projects;
2. aware citizens change their lifestyles and voluntarily pay extra to help address a problem;
3. governments impose regulations requiring change; and
4. governments adjust taxation to modify behaviour.

All four methods are needed now, and fast. Philanthropy and voluntary action by citizens are laudable and will contribute, and new regulations will help, but ultimately defeating climate change will require a government-led overhaul of the tax structure to empower the invisible green hand to do the heavy climate change lifting.

The genius of the global marketplace is that billions of informed economic decisions are made daily. Every purchase of a toothbrush, a vegetable, an automobile or a factory is an informed economic decision that impacts climate change. It affects climate change every time someone attends the symphony, gets a haircut, has a car accident, is hired or fired, makes a profit or loss. Every one of the billions of informed economic decisions is a choice between closely competing options, and even a small tax change will alter the marginal cost and thus influence, if not change, almost every economic decision made daily. In short, once we get the tax structure right, the market will take care of the rest.

Industry and consumers follow the path of least tax resistance, always purchasing the cheapest comparable product or service. Businesses and shoppers will modify lifestyles and purchasing habits to avoid taxation, taxes can be a tool to achieve policy objectives. To most effectively remediate climate change government should move its source of tax revenue off climate change neutral choices and onto climate change inducing choices.