Mitigating Climate Change

What is the issue?

A large increase in global temperatures correlates with an average 5% loss in global GDP, with poor countries suffering costs in excess of 10% of GDP.

What mitigation policy can be followed?

• A global and immediate policy response is urgently required to reduce greenhouse gas emissions and mitigate the effects of climate change.
• Multilaterally coordinated imposition of a carbon tax can be a potent mitigation policy.
• A carbon tax aims to internalise the externality of climate change by setting a price on the carbon content of energy consumed or greenhouse gas emitted in the production or consumption of goods.
• Carbon tax regimes will only be effective if harmonised internationally.
• Different country-wise policies could lead to ‘carbon leakages’ where energy-intensive businesses will most likely move to less strict national regimes.

What are the advantages of carbon taxes?

• A carbon tax regime avoids the problems related to choosing a baseline.
• In a price approach, the natural baseline is a zero carbon tax.
• A carbon tax policy will be better able to adapt to the element of uncertainty which pervades the science of climate change.
• Quantity limiting policies are often accompanied by administrative arbitrariness and corruption through rent-seeking. This sends off negative signals to investors.
• In a price-based carbon tax, the investor has an assured long-term regulation to adapt to and can weigh in the costs involved.
• The most contentious issue in any international negotiation on climate change mitigation either at the level of the WTO or at the UNFCCC has been the issue of equity between high-income and low-income countries.
• The price-based approach in the form of carbon taxes makes it easier to implement such equity-based international adjustments than the quantity-based approach.
• The carbon tax will essentially be a ‘Pigovian Tax’ which balances the marginal social costs and benefits of additional emissions, thereby internalising the costs of environmental damage.
• It can act as an incentive for consumers and producers to shift to more energy-efficient sources and products.

What does the global experience say?

• Some countries and regions such as the U.S. and the European Union already have fairly successful carbon pricing regimes in place in the form of carbon taxes and emissions trading schemes.
• Some other countries have introduced general taxes on energy consumption instead of direct taxes on carbon content.
• The political consensus in favour of a direct carbon tax will be difficult to achieve in low and middle income countries that have developmental priorities and lack the capacity to administer such regimes.
• A general tax on energy consumption combined with a technology-centric policy that promotes entrepreneurs and investors who develop low-energy intensive products can be a good starting point from where they can gradually move towards a direct carbon tax.
• Another near-term approach can be a ‘cap-and-tax’ which combines the strengths of both quantity and price approaches.

What is the way ahead?

• Countries must negotiate and share policy experiences and researches in this area.
• They also must decide upon the appropriate forum to discuss and implement any such mitigation policy.
• Any prospective policy regime must give the highest importance to the African continent.

Source: The Hindu