Carbon tax – an important step towards a transition towards a climate smart and resilient economy?

by Gunnel Axelsson Nycander, International Policy Adviser, Church of Sweden


Gunnel picThe SPII report SADC Poverty alongside mineral wealth: The case for a universal basic income grant gives several reasons for why a regional BIG could and should be financed through an increased and better implemented taxation on extractive industries.

It also cautions not to rely on only one source of finance, and discusses several alternatives and possibilities of complementary financing. A carbon tax is one of the options mentioned. An interesting aspect of a carbon tax is that it is not only a potentially important source of finance, but it would also be an important step towards a transition towards a climate smart and resilient economy. Putting a price on carbon emissions is perhaps the most important strategy to reduce emission and create incentives for low-carbon development. It would indeed be a way to improve the efficiency of the economy and reduce the current de facto subsidization of carbon emissions.

Earlier this year the government of South Africa announced that a proposed introduction of carbon taxation was postponed. The reason cited was the impact it could have on South Africa’s industrial competitiveness and on households. The effect of the tax on electricity prices and the extent to which Eskom would pass on the cost to consumers was a major concern. (Mail and Guardian 26.2.2014)

The same arguments can be heard all over the world. Whenever the polluter pays principle (PPP) should be put into practice there are always voices that say “yes, we support the PPP in principle, but not here and not now. Because pricing carbon emissions will make our companies loose out in competition with others, and it will hurt poor people.”

However, it is increasingly seen and experienced that it is a competitive advantage to be the first, rather than the last, to leave the fossil economy. Companies tend to complain loudly before environmental policies are introduced, but once these have been implemented they often accept them. Years later they may even admit that environmental policies have created incentives to make their operations more resource efficient and created new business opportunities. The cost of solar energy is falling at a spectacular rate and large institutions are starting to divest from fossil fuels not only for ethical reasons, but because fossil energy resources are increasingly seen as risky assets.  In Better Growth, Better Climate: The New Climate Economy Report, The Global Commission on the Economy and Climate clearly states that “countries at all income levels have the opportunity to build lasting economic growth and at the same time reduce the immense risk of climate change”.

We should be aware of the fact that it is the well-off who use most energy and would have to pay most of the carbon tax. Today, the low-emitting poor people are actually subsidizing the rich, by letting them emit for free. However, the fact still remain that a carbon tax would increase electricity bills for and fuel prices, hitting people living poverty hard.

So, should we refrain from pricing the carbon emissions because of concerns for poor consumers? Or should we make sure that those who really cannot afford to pay higher electricity bills are compensated? Indeed, is there a more beautiful way to compensate for such increasing costs than through a universal grant, like a BIG? I would argue that such a solution would motivate a higher BIG than originally proposed. In addition to giving everyone a basic income support, BIG would compensate for increased costs of living caused by a carbon tax.

By introducing ambitious carbon taxation, and finding a way to overcome the problem of how to compensate poor consumers, South Africa would set an important international example. South Africa is the world’s 12th highest emitter of greenhouse gas carbon dioxide. Per capita emissions are in the region of 10 metric tons per annum, similar to per capita emissions in Sweden. If South Africa were to implement strong domestic climate mitigation policies, this would be a very brave and positive signal for the rest of the world.

In fact, it could contribute to breaking the current stalemate in global negotiations, where historically large emitters such as the US and the EU refuse to cut their emissions drastically as long as the new large emitters – such as the BRICS countries – do not commit to emission reductions.

The first recommendation of The Global Commission on the Economy and Climate in the above-mentioned report is to get energy pricing right, specifying thatcountries should:

  • Eliminate price distortions that perpetuate the under-investment that in turn imperils growth in energy access;
  • Account for social objectives, including by complementing reform with compensating measures to protect the poor; and
  • Put an effective price on carbon emissions as a foundation for overall efforts to reduce climate risk and a more.

To me, it seems the struggles for Climate Justice and for a Basic Income Grant could go hand in hand. Including financing through a carbon tax in the BIG campaign could be a way of linking popular movements and campaigns on two of the most pressing issues of today: the need to decrease poverty and vulnerability through a BIG, and the need to fight climate change in a socially just manner.