Despite the scientific community agrees on positive externality of a carbon tax, it is not present in many countries as it should be. Therefore, the analysis will explain the reason of this low rate of implementation, and it will provide a comparison between two opposite cases: the British Columbia and France. The former is a successful example on how to implement a carbon tax in the country, the latter, instead, unleashed the protests of the Gilets Jaunes.
In 1988, James Hansen’s testimony at US Congress left no space for uncertainty: the NASA scientist declared that global warming is a reality caused by the human race.
The imposition of a carbon tax could be an excellent solution to cut emissions, stimulate energy efficiency without increasing the tax burden and slow down economic growth. A regular tax is usually distortionary because it generates a deadweight loss; however, in 1920, Arthur Pigou invented the polluter pays principle: since the social cost of pollution is more than the private cost to the polluter, the government should intervene with a tax at a level that makes the costs for the polluter matching the social cost. With a negative externality, a tax can be used to raise the private marginal cost[1]; since the tax equals the negative externality, the new market equilibrium will be socially optimum. A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary; it should increase every year until emissions reductions goals are met because pollution is persistent and increasingly damaging. The imposition of a carbon tax is highly contested because it is mainly anti-progressive, meaning that the burden will be heavier on the segment of the population with low income. After all, they cannot afford high-tech devices to reduce energy consumption. Consequently, this type of tax is held responsible for distinctive economic growth because it increases unemployment specifically in the industrial and transportation sectors. The majority of countries that have tried to implement a carbon tax have failed; in France, the tax burden unleashed the “Gilets Jaunes” protests but there is a successful path represented by a Canadian province.
Since 2008, British Columbia (B.C.) has imposed a uniform Pigouvian carbon tax. The B.C. climate action tax credit (BCCATC) helps offset the impact of the carbon taxes paid by individuals or families. It is available to the residents of the province, and it is equated through an income-based system, making the tax fiscally neutral. Aiming at not disrupting the economy, it started from 10 Canadian dollars per ton of CO2, and it is increasing each year; the tax is levied in addition to existing taxes at the level of a few large fossil fuel distributors, thus covering 75% of fossil emissions in the province. The tax works because it follows all the Pigouvian principles; in practice, of the $5 billion collected between 2008 and 2013, three billion were returned to businesses through tax rebates, one billion went into personal tax cuts and one billion was allocated to grants for citizens with lower incomes and for those who live in more disadvantaged climatic areas, that is, the population groups that risked being most penalized by the carbon tax. This rebate to citizens is a clever mechanism because it is devised in a way that it would make difficult to abolish it, even if a climate denier went to the government. After all, related tax cuts would disappear with it, displeasing many citizens. The rebate to citizens could solve the many shifts in policy administration, that European countries face all the time.
Domestically speaking, climate policies need continuity to be efficient and effective and the British Columbia mechanism is an excellent model to not let single politicians decide the future of the Earth. At the global level, countries should shape international treaties as climate clubs because, bottom-up coalitions are unstable and fragile because the game is the prisoner dilemma and the incentive to free-riding is higher than staying in the coalition. Since climate policy is a social dilemma, climate clubs are protecting the public good, members pay dues, and they can exclude non-members to avoid free riders. To reach the “club stability”, the treaty must implement deep abatement costs and high participation and external penalties on non-participants must be included in the form of carbon duties (countervailing duties on carbon content imports) or uniform tariffs on all imports of non-participants in those climate-club regions: these penalties will induce participation[2].
A good package of policies to save the environment must include a carbon tax modelled on the British Columbia case, have a long-term perspective and not be limited to the changes in political realms. The political arena should make the citizens aware that they are trapped in the present and, in this case, information campaign could be launched to improve understanding about climate policies and challenges, but soon the tipping point threshold will be overcome to the point of not coming back. To conclude, despite the MEP Pascal Canfin’s political awareness of the difficulty in implementing the carbon market reforms discussed but still not approved at the European level, the EU proposals concerning the extension of carbon pricing are the right response towards the growing environmental challenges the world is facing.
[1] Kate Raworth, Doughnut Economics, Edizioni Ambiente, vol. Chapter 7 (Milano, 2017).
[2] Nordhaus, ‘Climate Clubs’.
