Economic instruments: taxes and trading schemes

"Economic instruments manipulate market forces to influence the behav­iour of consumers and manufacturers in ways that are more subtle and effective than conventional controls, and they generally do so at lower cost."[20] Well, that’s the idea. Taxation, one "economic instrument," might not strike you as subtle,[21] but it does seem to work better than "command and control" methods. Here are some examples.

Green taxes. Many countries now operate a landfill tax, currently stand­ing at around €50 (US$80) per tonne in Europe, as a tool to reduce waste and foster better waste management. An aggregate tax on gravel and sand, about €2 (US$3) per tonne, recognizes that extracting aggregate has envi­ronmental costs; it is designed to reduce the use of virgin aggregate and stimulate the use of waste from construction and demolition. Most nations impose a fuel duty—a tax on gasoline and diesel fuel—to encourage a shift to fuel-efficient vehicles and increase the use of biofuels by taxing them at a lower rate. Increasingly governments impose a carbon tax (at present on the order of €100, or US$160, per tonne of carbon), often based on energy consumption (using energy as a proxy for carbon), and NOx and SOx emis­sion taxes. Roughly half the U. S. states charge a deposit, a returnable tax, on bottles and cans, a scheme that has proved very effective in returning these materials into the recycling loop.

But imposing a tax—a carbon tax, for instance—has two difficulties. First, it does not guarantee the environmental outcome of reducing CO2; industries that can afford it will simply pay it. The second is one of public acceptance. Taxes carry high administration costs, and people don’t trust governments to spend the tax on the environment; fuel taxes, for example, don’t get spent on roads or pollution-free vehicles. Of those two certainties of life, death and taxes, it is taxes that people try hardest to avoid.

Trading schemes. Another way of putting a value on something is to create a market for it. The stock market is an example: a company issues shares, the total number of which represents its "value." The shares are traded (sold or purchased for real money) and they therefore float in value, rising if they are seen as undervalued, falling if they are seen as overvalued. At any moment in time the share price sets a value on the company. A notion emerging from the Kyoto Meeting of 1987 was to adapt this "market prin­ciple" to establish a value for emissions. To see how it works and the diffi­culties with it, we need to digress to explore emissions trading.

Emissions trading is a market-based scheme that allows participants to buy and sell permits for emissions, or credits for reduction in emissions (a different thing) in certain pollutants (those of global impact, such as CO2). Taking carbon as an example, the regulator first decides on a total acceptable emissions level and divides this into tradable units called permits. These are allocated to the participants, based on their actual carbon emissions at a chosen point in time. The actual carbon emissions of any one participant change with time, falling if they develop more efficient production technol­ogy or rising if they increase capacity. A company that emits more than its allocated allowances must purchase allowances from the market, whereas a company that emits less than its allocations can sell its surplus. Unlike regulation that imposes emission limits on particular facilities, emissions trading gives companies the flexibility to develop their own strategy to meet emission targets, by reducing emissions on site, for example, or by buying allowances from other companies that have excess allowances. The environ­mental outcome is not affected, because the total number of permits is fixed or is reduced over time as environmental concerns grow. The buyer is paying a charge for polluting while the seller is rewarded for having reduced emis­sions. Thus those who can easily reduce emissions most cheaply will do so, achieving pollution reduction at the lowest cost to society.

Emissions trading has another dimension—that of offsetting carbon release by buying credits in activities that absorb or sequester carbon or that replace the use of fossil fuels by energy sources that are carbon-free: tree planting, solar, wind, or wave power, for example. By purchasing sufficient

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credits, the generator of CO2 can claim to be "carbon neutral." However, offsetting has its critics. Three of the more telling criticisms are:

■ Offsetting provides an excuse for enterprises to continue to pollute as before by buying credits and passing the cost on to the consumer.

■ The scheme only achieves its aim if the mitigating project runs for its planned life, and this is often very long. Trees, for instance, have to grow for 50 to 80 years to capture the carbon with which they are credited. Fell them sooner for quick profit and the offset has not been achieved. Wind turbines and wave power, similarly, achieve their claimed offset only at the end of their design life, typically 25 years.

■ It is hard to verify that the credit payments actually reach the mitigating projects—the tree planters or wind turbine builders—for which they were sold; too much of it gets absorbed in administrative costs.