Emission Trading or Global Carbon Tax? An Examination of Drawbacks and Advantages in both models
Table of contents
Drawbacks of Global Carbon Taxes (GCT)
Drawbacks of Emission Trading Scheme (ETS)
Evidences of (Global) Carbon Tax
Climate Change is a global phenomenon which has already been one of the most important issues in global political arena. It is a global issue because no single country can escape the consequences caused by global warming or avoid it. This can be in the form of rising sea levels, changing landscapes, risk of drought, fire and floods, stronger storms, emergence of more heat related illnesses, crop failures, deaths of many species, ozone layer depletion etc. (NRDC,2008) which will place immense economic burden and to many developing countries it is going to be a very serious issue. Hence, it has been generally agreed that countries in the whole world have ‘common but differentiated responsibilities’ to tackle this problem. However, the series of climate negotiations since the previous decades have shown that, this is everything but a simple negotiation between the nations. Developing Countries (DCs), Small Island Nations and Developed Countries differ with their views about the climate change itself, the ways to mitigate this and the extent of cost bearing. The milestone of reducing the global warming by limiting GHGs emissions was the Kyoto Protocol which set the target of internationally binding treaty by its parties. After second commitment, it was agreed to reduce at least 18% GHG emissions in the period between 2013-2020 compared to the level of 1990 (UNFCCC-2014). To reduce or limit the emissions, various policies were brought either in country level or globally. Two of the important instruments are ‘Carbon Trading Scheme’ and ‘(Global) Carbon Tax’. There is no simple answer which one is better. Both Carbon Trading Scheme and Carbon Tax have advantages as well as drawbacks and as Global Carbon Tax has not been implemented yet, it is unsure either it will be a reality. The aim of this Essay is to compare both approaches within the context of North-South divide.
The Essay is structured as follows: Following the introduction, few important terms will be defined. Arguments about the advantages and disadvantages of both approaches will be dealt briefly followed by a closer look into some scholarly evidences. Finally, a conclusion will follow.
Carbon Emission Trading Scheme: Aimed at reducing emission, Carbon Emission Trading Scheme (hereafter only ETS) is the major element of Kyoto Protocol (Article 17) and allows countries to trade the spare emission certificates they have based on market mechanisms (UNFCCC-2014). The fixed emissions (also called ‘cap’) are divided into transferable unit (like 20,000 permits for 2 tons of carbon) which can be used as tradable commodity (Baumert, 1998) .
The European Union Emission Trading Scheme (EU ETS) – is one of the many such regional schemes worldwide but a largest of its kind which was adopted in 2003 to start operating in three phases, Phase I, 2003-2005 (learning by doing phase), Phase II from 2008-2012 and Phase III after that, covering roughly half of whole EU CO2 emissions with 17% energy related CO2 emissions globally (Ellerman and Buchner 2007). The main objective of this scheme is to reduce CO2 emissions and realise the goal targeted by Kyoto Protocol significantly in the most cost-effective way (EC,2005). All 28 member states plus Iceland, Norway and Liechtenstein are included in the scheme and during the first year 2005, 320 million allowances worth about 6.5 billion Euros were traded (World Bank,2012). About 5000 operators with combined 12,000 installations are the participants of this scheme in mainly four sectors, energy, production or processing of iron and steel, minerals like cement, gas etc pulp and paper (Weishaar-2007) and recently to aviation sector. Other ETS exist in Australia, New Zealand, South Korea is planning to implement it and China is initiating a test phase in seven cities (Goulder,Schein-2013)
Carbon Tax: is simply a form of carbon pricing referring to a tax for the level of carbon dioxide emission which can be expressed as 'Value per tonne' CO2 equivalent (World Bank-2013). In other words, it is simply a tax for consuming a fuel that emits carbon dioxide. This is also a method that taxes the externality directly and makes sense both environmentally and economically (Baumert-1998).
A Global Carbon Tax (hereafter GCT): is simply a tax but with global implementation. It has not been born yet but is a matter of huge debate. Considering the global consequences of Climate Change with huge burden placed on developing countries and the importance of economic growth, North-South division about climate change exist. Developing Countries (DCs) do not prefer the emission reduction fearing economic growth which is vitally necessary to eradicate poverty. Public intellectuals like Bjorn Lomborg and others are calling poor countries 'too poor to be green' and environment is a problem of tomorrow whereas poverty is of today. Other scholars call for 'grow and clean up later' approach and point to Environmental Kuznets Curve. As a result there is a huge 'North-South' division regarding CO2 emission. Hence, it has been advocated that, only with a GCT with financial support from industrial countries, DCs will play their role to tackle climate change (Klein, Moehner, 2007).
Additionally, which instrument to choose to tackle the problem is still unsettled. The viability of EU ETS is yet to be seen but if proven effective it can be an example to the rest of the world. However, if successfully implemented, tax is a ‘simple and flexible’ way to internalize the GHG emission cost (Nordhaus-2007). If GCT is to be introduced, scholars opt for two models, 1) Where only industrialized countries pay the tax and 2) where the burden is shared globally. Model 1 might not be a feasible strategy as the industrialized countries might not want to participate in such schemes which will hamper the abatement strategies (Biccheti et al-2010). However, with model 2, developing countries might not participate. Still, an important advantage of uniform global tax is that it will avoid the relocation of firms that opt to move to a country with lower taxes (Cooper-2004). The advantages and disadvantages of GCT are incorporated in the arguments below. While arguing, it is also assumed that GCT is implemented globally.
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