A Sustainable Climate Policy

In the wake of Typhoon Haiyan, one of the strongest to ever make landfall, the Philippine delegate to the climate talks in Warsaw made a desperate plea for nations to act on climate change. President Aquino when asked by CNN’s Christiane Amanpour whether he believed the warming of the planet had a direct link to the severe weather event affirmed the position. British Prime Minister David Cameron made a similar statement.

The Inter-governmental Panel on Climate Change says that severe weather events will be the consequence if carbon pollution is not abated. And yet what we find is advanced countries like Australia, Canada andJapan, that are all led by conservative governments, back-tracking or weakening their stance on the issue. 

Governments around the world from Beijing to Washington are grappling with the problem to avoid what economists call “the tragedy of the commons”. This is a situation where when a certain market activity has a negative by-product (such as emitting GHG into the atmosphere) and people are free to do (no cost is attached to it), then it will be engaged in excessively to the detriment of all. The only way to avoid this outcome is to make economic agents absorb the cost associated with abating the negative by-product.

The question that policymakers worldwide are grappling with is who should absorb the cost and what mechanisms are needed to make them absorb it? A carbon tax gives residents the right to free air and imposes the cost of abatement on the polluter. The problem is that polluters will then pass on the cost on to consumers.  An alternative would be to pay polluters to stop polluting using taxpayer’s money.

From an economic perspective, it does not matter which mechanism is used as long as no one has the ability to "game" or influence the system. From a political point of view, however, framing the policy as a tax or incentive may have enormous consequences as the Australian Labor Party painfully realised in the last election.

Beyond the theatre and drama of the climate change debate, the political players have to find some kind of common ground, though to make whichever solution is opted for credible and sustainable. One prime example of this is the climate change policy adopted by British Columbia (BC), which has been in place since 2008 and whose popularity remains intact and has even increased.

It involves a tax that puts a price on carbon that is returned to citizens and businesses through reduced income taxes and increased tax credits or benefits. The tax is broad based covering the use of fossil fuels for electricity and vehicles. The policy has reduced the consumption of taxed fuels per capita by 19 per cent in the BC relative to the rest of Canada. GHG emissions in the province fell 10 per cent between 2008 and 2011, compared to a fall of 1.1 per cent for the rest of Canada.

The carbon tax was originally set at C$10 per tonne of carbon dioxide equivalent emissions and was increased by C$5 each year until it reached C$30 in 2012, when it was subject to a review and fixed following the release of a report in 2013. The report suggested that the tax did not seem to have an impact on BC’s economy, although certain sectors such as the agri-food and agriculture sector needed additional relief, which is forthcoming.

The success of BC’s climate change policy matches that of Quebec and California, which introduced a cap on GHG and an emissions trading scheme. BC and other North American states in the Pacific coast, Oregon and Washington have been encouraged to set up similar schemes and to link their systems together. They could soon be joined by provinces along the coast of China. China is working to develop a nationwide approach after 2015.

Getting to a harmonised global scheme is quite challenging, but not impossible as the efforts of some of these jurisdictions are showing.