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April 16, 2007
The Case for a Global Carbon Tax
The only way to slow climate change is to make coal more expensive and
alternatives cheaper.
The Bush administration
made two notable statements on energy policy early in its tenure. They
were both highly controversial. The first was that the Kyoto accords,
as negotiated, were "dead." The second was Dick Cheney's declaration
in a 2001 speech that "conservation may be a sign of personal virtue,
but it is not a sufficient basis for a sound, comprehensive energy policy."
As it happens, both are accurate and should be at the heart of any new,
ambitious policy to tackle global warming and energy use. If you haven't
fainted yet, let me explain what I mean.
The administration had several narrow-minded and callous
reasons for rejecting Kyoto, but among its main arguments was that the
accords did not include developing countries and thus were ineffective.
To understand why that is correct, consider one simple statistic. During
the Kyoto time frame (that is, by 2012), China and India will build almost
800 new coal-fired power plants. The combined CO2 emissions from those
plants will be five times the total reductions in CO2 mandated by the
accords.
Here's the math. These 800 new plants will burn about
900 million extra tons of coal every year. By 2012 they will have emitted
about 2.5 billion tons of CO2 into the atmosphere. During that period,
if the countries that have signed the Kyoto accords implement them fully—a
big "if"—they will cut their CO2 emissions by 483 million
tons.
Understanding the causes and cures of global warming
is actually very simple. One word: coal. Coal is the cheapest and dirtiest
source of energy around and is being used in the world's fastest-growing
countries. If we cannot get a handle on the coal problem, nothing else
matters.
Kyoto represents old thinking: if the West comes together and settles on a solution, the Third World will have to adhere to that template. It's the way things have been done in international affairs for decades, perhaps centuries.
But today power is shifting to the emerging markets.
China, India and Brazil will have a greater impact on the globe in coming
years than Europe will—for better or worse. A new Kyoto would start
the other way around. The United States should work out an agreement with
these three countries. That would become the new template, defining what
further actions are necessary and possible.
Getting China and India to stop burning coal will
not be easy. It's the cheapest way to fuel their growth. While officials
in China are more attentive to environmental issues these days—in
part because China now has the dirtiest air and water in the world—they
are highly unlikely to do anything that will significantly undercut economic
progress.
Nandan Nilekani, CEO of the Indian technology giant
Infosys and one of the few Asian executives genuinely concerned about
environmental issues, says that ultimately the industrialized world will
have to provide subsidies to developing countries to build "clean
coal" plants. "Right now in India, and I assume in China, plants
are built through competitive bidding. The lowest bid usually wins. You
will have to create a subsidy for clean coal to make it the lowest bid.
Otherwise, the dirtiest will win."
There's an obvious problem with this model—where
will the money for subsidies come from?—but there's another glitch
as well. The technology for clean coal doesn't really exist yet in a form
that can be widely used. There are various pilot projects and experiments
but nothing that is, as yet, economically viable. Both problems can be
solved by the same simple idea—a tax on spewing carbon into the atmosphere.
Once you tax carbon, you make it cheaper to produce clean energy. If burning
coal and petrol in current ways becomes more expensive because of the
damage they do to the environment, people will find ways to get energy
out of alternative fuels or methods. Along the way, industrial societies
will earn tax revenues that they can use, in part, to subsidize clean
energy for the developing world. It is the only way to solve the problem
at a global level, which is the only level at which the solution is meaningful.
Congress is currently considering a variety of proposals
that address this issue. Most are a smorgasbord of caps, credits and regulations.
Instead of imposing a simple carbon tax that would send a clear signal
to the markets, Congress wants to create a set of hidden taxes through
a "cap and trade" system. The Europeans have adopted a similar
system, which is unwieldy and prone to gaming and cheating. (It is also
unsustainable if Brazil, China and India don't come onboard soon.)
A carbon tax would also send the market a clear and
powerful signal to develop alternative energies. Daniel Esty, a Yale environmental
expert whose new book, "Green to Gold," is a blueprint for new
thinking about the environment, argues that the only way forward is a
"transformational approach that creates incentives for innovation
and alternative energy. The way we think about these issues is old-fashioned.
We're still trying to limit, regulate, control and inspect. We need to
become much more market-friendly. Put in place a few simple rules, and
let the market come up with hundreds of solutions. We're not even 10 percent
of the way down such a path."
In the end, everyone realizes that innovation is the only real solution to the global-warming problem. And that's where Cheney is right. Conservation and energy efficiency are smart policies, but not enough. In America over the last three decades, almost all machines and appliances we use to power our lives have become significantly more efficient (with the exception of cars). And yet we consume three times as much energy as we did 30 years ago. Why?
Because rising living standards mean rising energy
use. We can slow down the growth, but some increase is inevitable. We
have more efficient air conditioners. But now we air-condition our whole
houses. Our bed lamps conserve power. But we also plug in two phones,
a BlackBerry and three iPods.
And yet the Bush administration's record on energy and the environment is shameful. While they may have the right critique of Kyoto, they have used it as an excuse to do nothing, surrendered energy policy to special interests, subsidized polluters and killed or watered down every measure that would spur innovation or create a new energy framework for the future. They have been weak leaders, bad policymakers and poor stewards of the world we live in. That's not a sign of "personal virtue," it is personal and public vice.
