While it seems like everybody is talking about carbon pricing these days, few have tackled the issue from the perspective of finance ministers.
Last week on the sidelines of the World Economic Forum in Davos, former U.S. Treasury secretary Larry Summers and a group of financial mandarins came up with a carbon-pricing cheat sheet for finance ministers at a dinner discussion hosted by Corporate Knights.
The dinner generated seven propositions.
First, there cannot be any question that it is an imprudent risk to put business-as-usual levels of carbon into the air. One can debate just what the risk is or just what the minimum levels are. But no sentient person can fail to appreciate that the current trajectory is enormously dangerous. The scientific arguments on this are reminiscent of the smoking debate. No sensible person is in any doubt that there needs to be a large-scale adjustment.
Second, if achieving our carbon aspirations comes only at the expense of global economic growth, no change will be made. Environmentalists hurt their own cause by arguing that saving the planet should be expensive, and suggesting that the nobility of the cause rightly outweighs the cost. In fact, more progress could be made by taking a pragmatic approach and treating lowering carbon emissions as simply a necessary operational task.
Third, there is a great deal of evidence to show that when markets are harnessed, technological innovation is surprisingly effective. Putting a price on carbon and making the move toward a low-carbon economy costs less than people believe and estimates of high costs have to be approached with great skepticism.
As a general rule of thumb, for initiatives like hosting the Olympics, upgrading nuclear plants or building stadiums and bombers, it is safe to take estimates and multiply by two to three to get a sense of the true cost. Conversely, environmental cost estimates tend to overstate the costs by a factor of three. This was the case for Los Angeles tackling smog after the Second World War and, more recently, controlling sulphur dioxide to beat back acid rain. The logic is simple: Those estimating costs for bombers have a vested interest in acquiring them, and those estimating costs for transitioning to the low carbon economy have a vested interest in the status quo. We need to recognize that if you force environmental improvements, they usually end up cheaper than what anybody expects.
Fourth, markets are powerful and elasticities in the long run are really much higher than they are in the short run. Given a choice, would we rather tax things that we want to discourage like carbon and tobacco, or things that we want to encourage like work and saving? There is a compelling case for increases in the prices associated with carbon pollution. From a climate change point of view, a carbon tax that is proportional to emissions is most effective.
Fifth, this is an incredibly good moment to price carbon. The price of oil is half of what it was four months ago. This is the moment to put a price on carbon.
Sixth, focus more on carbon price rather than carbon quotas; a carbon tax is much less volatile than an emissions-trading scheme. Cap-and-trade systems have proven to be more complicated to operate than expected in Europe, and in the U.S. where they have struggled to get off the ground. Be wary of carbon markets as many can game cap and trade to generate private profits for little carbon benefit.
Finally, eschew the absolutist rhetoric and don't let the best be the enemy of the good. Putting a price on carbon is a precautionary adjustment necessary to guard against the risks of climate change. With governments facing fiscal and growth pressures, reducing taxes on things that we want more of by placing taxes on things we want less of like carbon pollution is an idea ripe for implementation.
The time to act is now.
Toby Heaps is the chief executive officer of Corporate Knights.