It is Time to Divest from Carbon Pricing
Piles of coal at Rizhao port in China’s Shandong Province (CNBC)
By Joya Gupta
With rich nations now acknowledging climate change as an existential threat, Asia-Pacific’s economies anticipate a carbon border tax by their key trading partners–an import tax accounting for the carbon not taxed at source. This tax threatens the region’s trade competitiveness and risks their position as exporting powerhouses. A recent UN report only stresses to address this threat, citing Asia-Pacific as the largest greenhouse gas emitter, but its transition to a cleaner economy has been ineffective. Asia-Pacific’s carbon pricing initiatives seem to be a tough political sell. When cheaper energy alternatives are unavailable and the economy is heavily reliant on these polluting energy sources, lobbying from fossil fuel interest groups and companies win.
Recently, Indonesia became only the second country in Asia to tax carbon after Singapore. But, according to the Indonesian fiscal policy chief Febrio Kacaribu, the Indonesian tax of 30,000 rupiahs ($2.10) per metric ton of carbon dioxide is meager–“less than half the proposed amount and one of the cheapest in the world.” Even though this is a fiscal policy in the right direction for climate change and the Indonesian economy, it is not high enough to make a significant impact. Indonesia is not alone. Most countries have been unable to price carbon at a cost that forces changes in behavior. Only some regions and countries have implemented high enough carbon prices, with California and Canada leading the way by “pricing 85% of such emissions at around US$12” (Wagner et al.). For most of the world, this pricing mechanism is a tough political sell for two main reasons.
Firstly, the inadequacy of carbon pricing is a real catch-22. Pricing carbon will only be politically sound if there are cheaper energy sources, but lower-cost renewables will only arrive when carbon is highly-priced. This logjam shows that in the absence of lower-cost renewables, it may be cumbersome to exit carbon pricing initiatives. However, climate scientists have extensively studied this paradox. Several climate scientists have come to a growing consensus that the best path to ending this logjam is through policies that reduce the price of renewable systems faster and further than witnessed in the past ten years. Scientists believe that politicians can more easily finance projects for renewables than tax the bad. Tax reform requires special political circumstances because of the “concentrated costs… and diffuse benefits” (Blessing). Interventions, then, should focus on building cheaper alternatives by subsidizing renewables. This will inevitably spur carbon pricing as the switch from fossil fuels will be less costly.
Secondly, the limited and restrictive implementation of carbon pricing–only 40 countries globally–is likely attributed to the myriad of political, social, and economic factors that must align to pass a carbon price. Carbon bills face significant opposition from powerful fossil fuel companies and other interest groups. If such a bill indeed passes, the carbon price is usually not “high or wide enough” (Stokes and Mildenberger) to make a significant impact. The Trouble with Pricing Carbon by Matto Mildenberger and Leah C. Stokes recalls that when Australia passed a carbon pricing policy, they were often compelled to compromise for a low price with policies not fast or effective enough to have a serious impact on the climate. Politicians and citizens often develop a false sense of achievement from the simple act of passing a carbon price, regardless of its effectiveness, promptness, or scope.
Despite the current gloomy outlook, some of the region’s recent investments show great hope for the future. Asia-Pacific is predicted to invest USD 1.3 trillion into new renewable systems— double the investment compared to the previous decade. However, renewable energy remains unsubsidized, rendering it uncompetitive with coal (the primary energy source in Asia-Pacific). Along with its massive investments in renewable systems, Asia-Pacific should strongly consider subsidizing renewables to ensure its cost-competitiveness with coal. Coal is still around 50% of Asia-Pacific’s energy source–higher than any other region in the world. To tackle this challenge, climate actions should divest from carbon pricing. Efforts need to be strengthened to subsidize renewables until they are cost-competitive with major fossil fuels such as coal, oil, and natural gas.
