Recent emphasis on taking action against climate change and the demand for strong policy to reduce carbon emissions has lead many to question whether the efforts to develop a carbon market in recent years have been successful. Mark Purdon addressed this subject at the McGill School of the Environment Speaker Series, Is the Carbon Market Failing? The moral limits of climate change policy (October 23, 2009). Two economic institutions have emerged from climate change policy, the cap and trade market and the carbon offset market. Mr. Purdon’s research focuses on the carbon offset market, and in particular clean development mechanisms (CDM); which are projects that are aimed to assist developed countries meet emissions reduction targets while facilitating the implementation of sustainable development strategies in developing countries. While his work is still in the preliminary stages of analysis, he found mixed results with regards to the success of the CDM projects; with the major uncertainty surrounding whether the carbon credits ascribed to the projects actually represent carbon emissions.
If the established carbon markets are indeed inefficient in achieving the objectives of reduced atmospheric concentrations of carbon dioxide, we are in need of a much more stringent climate change mitigation policy. One such measure, which has been well discussed yet implemented by only a few governments, is a carbon tax. Policy-makers could set the level of acceptable green house gas emissions, based on the science of climate change, and adjust the price of carbon dioxide equivalent emissions accordingly. The tax should be designed to increase with time, to encourage companies to invest in renewable and other non-carbon energy sources. Governments must couple such a tax with investments in public transit and reductions in other forms of taxation, such as income tax and sales tax. Reforestation and land conservation could be rewarded by awarding tax credits to participants in these activities. The benefits of the carbon tax are clear, curbing behaviours away from the environmentally and socially damaging combustion of carbon-based fuels provide incentive for development and innovation in alternative and more fuel-efficient technologies. While perhaps less popular than the carbon offset markets from an industry perspective, I believe a strict taxation system is more likely to be effective mitigation strategy for climate change.
Glad to see you liked my talk, but disagree with your interpretation.
The problem with your argument is that tax regimes in developing countries, where emission abatement opportunities are relatively less expensive, are often not as transparent as in industrialized countries. The administrative dexterity required to ensure a carbon tax is revenue neutral is generally not there. Because of this, a global carbon tax may not deliver on it’s acclaimed benefits and could actually hurt the poor more. So a harmonized tax would largely be confined to the industrialized world resulting in a loss of cost reductions possible through engagement in the developing world. While some may disagree, in my view higher costs would mean that industrialized countries will not go as far with their emission reductions. Furthermore, economists tend to idealize a carbon tax’s administration even though the tax system is complicated by loopholes and exceptions. There’s a real risk of “instrument hopping”.
So perhaps the CDM is not perfect, but their is potential for reform. And there are maybe even ways of building some of the advantages of price-mechanisms such as a carbon tax into the CDM. But one should be cautious in dismissing the international offset system because, I believe, there is a real risk to do very little if we decide to wait for an ideal (global) tax regime before trying to get a handle on emissions. Note that the EU tried for 10 years to implement a carbon tax and abandoned it for cap-and-trade. So keep the CDM but continue exploring other avenues for mitigation and engagement with the developing world on climate change.