Carbon pricing should drive African development, not hinder it.

The carbon pricing matter is high on the agenda again in Germany as well for the household and transport sector with lots of support by economists. However, I think the current enthusiasm is more driven by an urgent need because of the previously sluggish policy setting for these sectors rather than by sensible thinking. What is it that speaks in favor of carbon pricing by taxation? There is only one argument, it is its simplicity of collecting it. You try to find a sensible level for the tax and you are in business. But, are you? In most cases, you aren’t. But why?

  1. Setting the level of tax so it influences behavior. Only technically this already proves to be a major challenge. Eg the domestic debate considers 20 to 35 €/t a sensible level. But this level is derived from the (estimated) prices paid by the power sector and/or industry in the ETS. However, we already know that the mitigation costs for the household/building and transport sector are about an order of magnitude higher. So the tax will be pitched at the wrong level and thus will not address changes in behavior.
  2. Setting the level in the area of the mitigation costs however (let’s say 250 €/t) would be regarded as politically impossible as it would have massive social impact. Supporters of the tax will relate to the Swiss model of a “Klima-Rappen” to “ease the burden”: in Switzerland households pay the tax on fuels and get most of the tax reimbursed by year-end, effectively paying very little if any CC-tax. So the tax does not add anything to the massive investment in infrastructure the country does to manage transport more effectively and with less environmental burden. A vivid example of a tax that does not address the issue. (the reason for the tax in fact is to make Industry either pay the tax or allow Swiss Industry to join the EU-ETS instead).  
  3. Well taxation of GHG will be based on fuels and – in a lot of jurisdictions does not start from scratch as most jurisdictions have some kind of MOT. Any GHG taxation scheme will be added to this, so the GHG taxation will be regarded as just another tax. This effect is perfectly transparent in Germany where the MOT was raised stepwise by an additional “eco-tax” at the end of the 1990s and the additional revenues were funneled into the social system (so reimbursed, kind of..). The story is mostly forgotten by now.

Carbon pricing should drive African development. There is simplicity of collecting it. The mitigation costs for the household/building and transport sector are about an order of magnitude higher. Taxation may form a part to generate necessary funds but we need not base this taxation upon carbon.

No doubt with the current knowledge of carbon costs it is easier to derive taxation for industry and power production. That might work, but for these sectors, we know how to regulate them in a trading scheme. So what to do in sectors like transport and house-holds with its millions of actors? I think this can only be done by Governments setting emission targets and funding policies for achieving them. Taxation may form a part to generate necessary funds but this taxation does not need to be based upon carbon. It is much more focused, may be addressed to individual’s countries needs and be better understood by those who eventually got to pay for it.

Article by  Lutz v. Meyerinck

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