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Explainer: Alternatives to a global carbon tax and dividend

In the run-up to the Paris Agreement, six major European oil companies including BP, Shell and Total made an unusual declaration. In an open letter to governments and the United Nations, they explained “..we need governments across the world to provide us with clear, stable, long-term, ambitious policy frameworks. We believe that a price on carbon should be a key element of these frameworks.”

And in June of this year, an Exxon statement published in The Wall Street Journal asserted; “A straightforward carbon tax that is revenue-neutral—meaning other taxes should be lowered to offset the impact—is far preferable to the patchwork of current and potential regulations on the state, federal and international levels”

The reason oil companies have started to promote the idea of a carbon tax is that there are hidden benefits to pricing carbon if it is priced in certain ways. First of all the concept of taxing fossil fuels – which are likely to remain a component of the global economy for decades – can be counted against other taxes, such as corporate income tax. This means that oil companies’ profit margins remain largely unaffected, as alternatives to fossil fuels for many industries remain scarce.

The second reason many oil companies, who are also involved in natural gas production, welcome direct carbon pricing is that it will have the effect of pricing out their nearest competitor – coal; meaning that they will take up further market share as NG is used in power stations.

Another reason for a carbon tax is that as public opinion turns against fossil fuels, and shareholders raise concerns about stranded assets and other risks, they can be seen to be actively cooperating with such proponents of change, while at the same time shifting responsibility to governments, allowing them to operate with impunity.

A rather unpalatable final reason may be that we are witnessing a rare glimpse of honest truth from oil companies – they can see that this may be the only way to allow any kind of graceful and practical transition away from fossil fuels and therefore would prefer to take the initiative in suggesting the solution rather than have one put on them by policymakers.

As companies outside the energy spectrum start to look at the ongoing viability of their business models, it becomes clear that a carbon tax does make sense. Volatile energy costs due to dependence on fossil fuels are a reality for most businesses, and progress is starting to be made in countering these risks by initiatives such as CDPs ‘We Mean Business’ and RE100. In this way, a carbon tax shields companies not just from climate change but internal energy price volatility.

These initiatives display how companies are asking for a carbon tax as an imposed regulatory mechanism because otherwise they are being forced to self-regulate, thus making themselves less competitive next to companies who flout guidelines for short-term profit. By taxing carbon within a state or country and protecting the market from foreign competition by taxing imports, as well as having other policy measures to protect vulnerable industries, its proven that everyone can align themselves with a strong low-carbon pathway and gain from the collective progress made, as is the case in Sweden – even with a carbon tax of $150 per ton.

However, market-based mechanisms cannot do all the work.

As argued by Bjorn Lomborg, author of the Skeptical Environmentalist, the success of a carbon tax only really works when low carbon alternatives are present through the supply chain (and by extension throughout the economy), in the form of low-priced technological alternatives. While this happens through private sector innovation, it also comes about through intelligent and well-planned government intervention; and this can be off-putting for governments who need to carefully explain the complicated reasons that the pay-off is not immediate.

All of this has the effect of taking the responsibility out of the hands of the consumer and allowing the least expensive products and services to gain market share, under the pretext that lower-carbon alternatives exist. And it seems that we are now seeing this happen, as Canada has recently decided to roll out a nationwide carbon tax, advocating the private sector to source the lowest-carbon energy and materials at the least cost, and passing these savings on to the consumer.

We can only hope that the foresight exists to implement far-reaching policy change in the energy, transport and industry arenas by governments elsewhere, as we realise that it is not only a carbon tax we need but an alternative to fossil fuel based consumption patterns.

 

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