How Effective Are Carbon Taxes Really?

Is a carbon tax the best way to cut GHG emissions?
Economists generally agree that carbon taxes are the most effective and efficient ways to combat climate change. Unlike emissions standards, taxes follow Adam Smith’s idea of the invisible hand, gently guiding total emissions to their market equilibrium. One positive externality is that revenues collected can be used towards a plethora of government funded projects.

Example 1: Copenhagen Accord
When Canada signed the Copenhagen Accord in 2009, it had committed to reducing GHG emissions to 604 Megatonnes (Mt) by 2020. So far, it looks like efforts made have been successful in decreasing emissions output. Without government measures, the GHG emissions would be 65 Megatonnes higher, at 850 Mt relative to the projected 785 Mt (Figure 1). One key factor to its success is a large focus on taxing emissions.

However, this projection states that we are still 54 Mt above 2005 levels. Key drivers to this increase are mainly attributed to overall economic growth and energy demand. Sure, we are slowing down GHG growth, but we are nowhere close to hitting any emissions target.

Figure 1 Total GHG Emissions and Projections, Canada
Figure 2 Total GHG Emissions and Projections, Canada

Example 2: Paris Agreement

Adopted in 2015, the Paris Agreement is the first ever globally binding climate change agreement that vows to keep global warming levels at 1.5 degrees Celsius. Currently there are 196 countries bound to the agreement.

In effect since 1991, Norway’s carbon tax policy has had one of the highest carbon tax rates, at around $52 USD/tCO_2 in 2017, yet they are not reaching their carbon goal (Figure 3). In fact, the majority of countries are set to miss their target.

Figure 3 Paris Agreement — Current Status of Countries

Although there have been improved efficiencies from government intervention, the overall GHG emissions has increased from 51.7 million tonnes in 1990 to 52.7 million tonnes in 20174. Much of the emissions can be attributable to their energy exports, supplying around 25% of the EU gas demand. Canada is similar in this sense as well, exporting a majority of their energy production to its neighbouring countries.

Figure 4 Carbon prices by country, 2016

With so many countries implementing GHG reduction measures why is the earth still heating up?

Carbon reductions may improve ambient quality, however, global warming, as the name suggests is a global concern. Demand has not been curbed in other countries. Paired that with the efficiencies brought on by international trade, countries are better off purchasing energy. Even if we place national charges in Canada, it is economically unviable to reduce trades of energy in high volumes to make an insignificant dent in our aggregate emissions if there is demand from others.

What if we have every country to implement their own carbon tax under the Paris Agreement?
Generally, high approval rates on carbon pricing are associated with high political trust and low corruption levels. The willingness to pay ties greatly in the community’s political and economic status as well as accessibility to information. This means that we may not be able to implement such policies in countries with political unrest, especially not in those with lower abilities to pay.

1. Fairness
On an individual household perspective, the poorest households spend a higher percentage of their income on fuels for transportation and housing. Whereas higher income individuals spend a significantly less on a percentage basis. However, some may argue on an individual perspective that it may bring more inconvenience. For instance, living in a neighbourhood with poor public transit system, a car is probably the easiest way to get around. With hefty taxes, taking public transit may add an extra hour into my daily commute. This hour may not make up for the tiny bump in my individual carbon footprint. In economics, we refer to this as marginal abatement costs. Those who are willing to pay more will have less troubles adopting to these rules.

2. Carbon taxes disproportionately affect industries.
The energy sector is by far the largest contributor to GHG emissions, representing 73% of global GHG emissions in 2017 and growing. Those livelihoods that depend on this industry will take a drastic hit compared to others who do not depend on energy specific industries.

With little alternatives, citizens are expected to adapt by curbing their energy consumption. This is extremely ineffective under markets with inelastic demand, resulting in increased costs and less than ideal emissions reductions. The solution should not exclusively be curbing their energy consumption. I argue that moral suasion and community pressures help achieve more than carbon pricing.

Alternative Solution
Increased access to clean energy sources. It is extremely difficult, especially on lower income households and small to midsize businesses to be burdened with the additional costs of a mandated emissions tax.

I believe that unless we set a carbon tax at significantly higher levels (e.g., $80/tonne, up from $40 in BC in 2020), we will never reach our GHG target. Working in conjunction with a carbon tax, we need to seek out alternative energy sources rather than putting the burden solely on each individual citizen. Working towards low-cost, safe, and accessible alternatives to properly harness, transport and store clean energy will accelerate the decline.

Overall, emissions taxes are an amazing option for regulatory bodies to implement, only if the current situation of the market allows it. However, it is clear that this only scratch the surface. Economists and scientists across the globe have urged us to take immediate action to fight climate change. Frankly, I believe a tiny carbon tax will not cut it, and the data shows that. The only way to meet our emissions targets is all hands-on deck.

Works Cited
Parker, Clifton B. “Stanford Research Finds Carbon Regulation Burden Heaviest on Poor.” Stanford University, 28 Feb. 2014, https://news.stanford.edu/news/2014/february/kolstad-carbon-tax-022814.html.

Barry Saxifrage | Analysis |May 27th. “Surprise! Most of Canada Is on Track to Hit Our 2020 Climate Target.” National Observer, 8 Nov. 2019, www.nationalobserver.com/2019/05/27/analysis/surprise-most-canada-track-hit-our-2020-climate-target.

Canada, Environment and Climate Change. “A Healthy Environment and a Healthy Economy .” Canada.ca, Government of Canada, 11 Dec. 2020, www.canada.ca/en/environment-climate-change/news/2020/12/a-healthy-environment-and-a-healthy-economy.html.

“The Paris Agreement.” Unfccc. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement.

Friedrich, Johannes, et al. “This Interactive Chart Shows Changes in the World’s Top 10 Emitters.” World Resources Institute, 17 Dec. 2020, www.wri.org/blog/2020/12/interactive-chart-top-emitters.

Government of B.C. (2018). Climate Action in B.C. 2018 Progress to Targets. Retrieved from https://www2.gov.bc.ca/assets/gov/environment/climate-change/action/progress-to-targets/2018-progress-to-targets.pdf

Government of B.C. (2020). Climate Reporting. Retrieved from https://www2.gov.bc.ca/gov/content/environment/climate-change/planning-and-action/climate-reporting

“Carbon Tax in Norway Has Been a Success since 1991.” Medicine Hat News, 23 Jan. 2019, http://www.medicinehatnews.com/commentary/letters-to-the-editor/2019/01/23/carbon-tax-in-norway-has-been-a-success-since-1991.

Environment Canada. 2011. Canada’s Emissions Trends. Retrieved from https://www.ec.gc.ca/doc/publications/cc/COM1374/ec-com1374-en-s3.htm#s3-1.

“Ambitious EU Emissions Target Needs Nuclear, Says Foratom.” Ambitious EU Emissions Target Needs Nuclear, Says Foratom : Energy & Environment — World Nuclear News, http://www.world-nuclear-news.org/Articles/Ambitious-EU-emissions-target-needs-nuclear-says

“Exports of Norwegian Oil and Gas.” Norwegianpetroleum.no, 7 Oct. 2020, https://www.norskpetroleum.no/en/production-and-exports/exports-of-oil-and-gas/#:~:text=Norway%20supplies%20between%2020%20and,commodities%20in%20the%20Norwegian%20economy