As I discussed in the previous post, the problem is pretty much caused by a shared damage and privatised profits scenario. This creates the Free Rider problem; individuals are encouraged to pollute as much as possible and take as little responsibility as possible for the shared environmental degradation (Hardin,1968). Solving this issue then requires the privatisation of the costs of environmental degradation to better reflect the environmental cost of consumption (Elkins and Baker, 2001).
How can this be done?
A Pigouvian Tax - "I like to pay taxes. With them I buy civilization" Oliver Wendell Holmes
If you've ever studied economics at any level you will have seen this diagram, time to put it to use! A piguvian tax is essentially an attempt to incorporate the negative externalities (negative social costs) of consumption into the price of consumption itself. In this context, carbon taxes can be used to increase the cost of burning fossil fuels to reflect the environmental damage they cause. Given that demand for anything generally decreases with increasing price, the market equilibrium point where demand=supply is shifted to a lower consumption value and emissions are reduced (Q2).
So then, what are the benefits of this approach:
Well one of the greatest advantages is that it is tried and tested. The welfare state is fundamentally built upon taxation and revenue recycling, it simply needs to be applied in an environmental context. The revenue recycling process itself is also vital. Funds are needed to subsidise less cost-effective energy sources, and promote adaptation to changing climate. Taxes can be used to not only privatise the costs of carbon emmission, and also lower the cost of cleaner energy sources (Roughgarden and Schneider, 1999).
British Columbia: a revenue-neutral carbon-tax case study -An Environmental (and Economic) Success Story (Elgie and McClay, 2013)
In 2008 BC implemented a tax which not only increased the cost of emissions, but also brought value to climate emission reduction itself. 100% of the revenue gained from taxation is returned directly to consumers through reduced income taxes. The results have so far been impressive:
Summarised, the data exhibits that Carbon Taxes can help reduce emissions, without an economic cost.
Too good to be true?
Well I'm a sceptical person so I like to dig a little deeper when presented with information like this. An interesting criticism of the British Columbia tax is that there is evidence of arbitrage within the system.
Take a look at this link: Tax gap has B.C.ers driving south for gas: watchdog
While this is just a small flaw in an otherwise successful system, it raises a key issue when attempting to tax carbon on a larger scale. How do you prevent cheating within an individual taxation system, and avoid taxation competition between states? These are key questions I will answer in my next blog so stay tuned!
Secret Link
Well one of the greatest advantages is that it is tried and tested. The welfare state is fundamentally built upon taxation and revenue recycling, it simply needs to be applied in an environmental context. The revenue recycling process itself is also vital. Funds are needed to subsidise less cost-effective energy sources, and promote adaptation to changing climate. Taxes can be used to not only privatise the costs of carbon emmission, and also lower the cost of cleaner energy sources (Roughgarden and Schneider, 1999).
British Columbia: a revenue-neutral carbon-tax case study -An Environmental (and Economic) Success Story (Elgie and McClay, 2013)
In 2008 BC implemented a tax which not only increased the cost of emissions, but also brought value to climate emission reduction itself. 100% of the revenue gained from taxation is returned directly to consumers through reduced income taxes. The results have so far been impressive:
Summarised, the data exhibits that Carbon Taxes can help reduce emissions, without an economic cost.
Too good to be true?
Well I'm a sceptical person so I like to dig a little deeper when presented with information like this. An interesting criticism of the British Columbia tax is that there is evidence of arbitrage within the system.
Take a look at this link: Tax gap has B.C.ers driving south for gas: watchdog
While this is just a small flaw in an otherwise successful system, it raises a key issue when attempting to tax carbon on a larger scale. How do you prevent cheating within an individual taxation system, and avoid taxation competition between states? These are key questions I will answer in my next blog so stay tuned!
Secret Link
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