Monday, June 13, 2011

How a carbon tax should work

I have been fairly critical of the current Australian Government’s approach to a range of issues, in particular, global warming. The current proposal is for a carbon tax. While my preference for dealing with carbon emissions is to let the damages get worked out in the courts, a carbon tax can work OK, if done well. I don’t have confidence that the current government can do anything well, but it is rude to criticize unconstructively, so the least I can do is propose a sensible carbon tax which the government and the special interests who run it can ignore. So here we go:

The goal of a carbon tax is to reduce climate change, preferably to the point where the Greenland and West Antarctic ice caps don’t melt and flood Australia’s world-class beaches.

A carbon tax therefore needs to reduce carbon emissions. Australia is a large per-capita emitter, and is also a large carbon exporter, in the form of coal, and to a lesser extent, natural gas. So the basic idea of the carbon tax is to guide the transition from carbon-based energy infrastructure to lower carbon forms. In order to do this, it has to be broad-based, scaled to the potential threat, and predictable over a several decade timescale.

Luckily, there is an easy way to do this. The climate scientists tell us that atmospheric CO2 concentrations greater than 350 ppm are likely to cause troublesome warming, with higher concentrations bringing more trouble faster. We are currently at 388 ppm. So, CO2 emissions are not a problem if there isn’t much CO2 in the atmosphere, but become more problematic, the farther over the safe limit we are. Thus, the sensible thing to do is to scale the carbon tax based on the atmospheric concentration.

The easiest and most transparent way to do this is to simply tax CO2 emissions at one dollar per ton, for each ppm in the atmosphere over 350. So at the current level of 388 ppm, the rate would be 388-350= 38 dollars per ton (I’m assuming we all work in tons of carbon, but if the standard value is tons CO2, please correct me). At the current rates of rise, this rate will go up by a little under 2 dollars per year.

The tax rate will stop rising when CO2 emissions stabilize, as it should. If sequestration ever takes hold in a serious way, the rate could even come down. And if carbon producers manage to sequester our atmosphere back down below 350 ppm, then the tax rate would drop to zero, which would be entirely fair.

Economic modelers can project future CO2 rise rates, which gives them more confidence and planning abilities than they have right now, and this scheme would be far preferable to an unknown tax rate that will last for an unspecified period of time and be subject to God-knows what kind of increases, changes and repeals.

The only remaining challenge would be figuring out how to apply it to the world’s other six continents, and their respective economies.

What the money gets spent on is another issue, but damages and consumer compensation are easy places to start.

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