Environmental economists have long been proposing carbon taxes. This would be the quickest and most effective way to reduce greenhouse gas emissions from vehicles and power plants, and thus prevent catastrophic global warming.
But carbon taxes can pose political problems. As a recent example, the French government's efforts to raise fuel taxes sparked weeks of protests that left more than 200 people injured and millions of dollars in losses from the destruction of buildings and the closure of shops.
A high carbon tax punishes owners of polluting technologies
The problem is that carbon taxes can punish those who have invested in polluting technologies such as gas-guzzling cars or coal-fired power plants. They can also punish those who lack green alternatives to commuting to work such as trains, buses or subways.
Is it possible that alternative policies, such as incentives for new investments in clean energy, are more politically acceptable and therefore more effective in some cases? This is the question I ask in a paper published with Julie Rozenberg and Stephane Hallegatte, in which we examine the advantages and disadvantages of different climate policies.
Economists typically view carbon taxes as the best route to a zero-carbon future, not least because they reduce emissions through two main mechanisms: first, like other policies, they encourage investment in clean infrastructure and equipment such as solar panels, wind farms, and hybrid or electric vehicles. And second, by making polluting equipment more expensive to use, they discourage its use and may even incentivize owners to dispose of it before the end of its useful life. This leads to rapid emissions reductions, thanks to the premature abandonment or reduced use of polluting vehicles, low-efficiency equipment, and fossil-fuel power plants, among others.
But ending or reducing the use of polluting equipment means reducing its value. And that loss of value (often called stranded assets) can be perceived as unfair, because it comes from a sudden change in the rules of the game. Because that loss is so obvious and affects primarily the owners of polluting vehicles, homes far from work sites, and coal-fired power plants, it can make it easier for all of them to organize in opposition.
More politically acceptable options
Other policies to reduce greenhouse gas emissions have been much more popular. These include:
- tax incentives for the purchase of less polluting vehicles, such as the tax credit that Americans receive when they buy an electric vehicle;
- mandates requiring power generation companies to use a certain amount of renewable energy;
- energy efficiency standards for new buildings and vehicles;
- a ban on the use of incandescent light bulbs.
The common denominator of these measures is that they create incentives to invest in less polluting assets and equipment without harming the assets that people had before the policy was implemented.
The problem is that these policies, while more popular, are less effective in reducing greenhouse gas emissions in the short term. Our research shows that using investment-oriented instruments alone makes ambitious climate goals unattainable. If the goal is to meet the Paris Agreement objectives, it will likely require stranding some polluting assets: we already know that limiting global warming to 1,5°C or 2°C cannot be achieved without phasing out one-fifth of coal, oil and gas power plants before the end of their useful life.
However, we may need to start with something less ambitious in some cases. Clearly, we cannot give up on carbon taxes, where possible, as long as we do so in a socially acceptable way. But in cases where this is impossible, it may be worth exploring the next best option, rather than waiting for our favourite to become politically feasible.
Reducing emissions while waiting for the carbon tax to be accepted
We cannot afford to wait another 10 years for carbon taxes to gain wider acceptance. Every year that passes without incentives for green investments leads to more energy-inefficient vehicles, buildings and fossil fuel power plants, condemning us to continued high emissions and making the political economy of our climate goals more difficult.
Instead, we must apply all available cost-effective measures to influence investment patterns through subsidies, regulations and tax incentives that discourage investment in polluting assets. Similarly, we must begin to organize the gradual retirement or conversion of existing polluting assets, in consultation with stakeholders to ensure a just transition. As the economy shifts towards greener assets and technologies, carbon taxes could become easier to implement.
The solution that seems most obvious to us as economists is not always the easiest to implement. Perhaps we need to explore more politically acceptable solutions that will get us on a net-zero emissions path.
By: Adrien Vogt-Schilb, economist in the climate change division of the Inter-American Development Bank (IDB).
This article was published on the IDB's Ideas that Matter blog.
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