New green taxes in China and Australia are part of an accelerating trend
It is one of the few things on which economists agree. Externalities result in market failures, and the most effective means of correcting those market failures is to internalise the externalities by pricing them.
The millions of pages written about climate change policy and low-carbon economics boil down to this simple fact: greenhouse gas emissions are an externality that companies have been allowed to ignore for decades. This has resulted in what Nicholas Stern famously recognised as the greatest market failure in history.
You can argue about the extent of the externality, the appropriate mechanism for pricing it, and the means of enforcing that mechanism, but only the most swivel-eyed climate sceptic could dispute the link between pollution externalities and the market failure that is climate change.
Incredibly, this consensus among economists is mirrored by something approaching a consensus among politicians on the desirability of taxing "bads", rather than "goods".
In the UK, the coalition agreement contains a pledge to increase the proportion of tax revenue raised through green taxes, while the opposition has similarly signalled support for green levies. More broadly, all but the most extreme libertarians agree it makes sense for a society to raise taxes on things that do social harm – pollution, drugs, weapons – and cut taxes on things that society wants, such as jobs, income, education and philanthropy.
Sadly, this consensus in favour of green taxes only holds when they are deployed in principle.
In practice, short-term concerns about driving up the cost of energy, motoring or flying quickly outweigh the unimpeachable academic case for green taxes. As a result, environmental levies are often too modest to properly tackle the pollution externality, while politicians face constant calls for them to be scrapped in pursuit of a fleeting political victory at the same time. Witness Exhibit A: George Osborne's decision at the last budget year to defy the coalition agreement on green taxes and cut fuel duty.
And yet the case for green taxes remains pretty much unanswerable, despite these political pressures. If you are going to deliver deep cuts in greenhouse gas emissions in a market economy, there is no real alternative to putting a price on emissions. Whether that price is imposed through an emissions trading scheme, a straight tax or a combination of the two is irrelevant. What is important is that the full economic cost of greenhouse gas emissions has to be recognised in the price signal.
With the exception of climate sceptics, this fact is recognised across the political spectrum. As such, the march of green taxation is slowly, but surely gaining pace. The constant undertow of short-term political concerns remains, but the direction of travel towards more green taxes is clear.
Further evidence of this fact emerged this week with the confirmation of two hugely significant green tax regimes. In Australia, prime minister Julia Gillard defied the odds to pass legislation that will enable the introduction of a carbon tax which will provide the foundations for a national emissions trading scheme. And meanwhile, in a strangely under-reported development, the Chinese government confirmed that next month will see the introduction of a national resource tax featuring major new levies on oil, gas, coal and rare minerals.
In both cases, the governments recognised that short-term harm may be done to carbon-intensive industries (forecasts for several of China's largest state energy companies are now likely to be cut). But they ultimately ruled that the long-term gains that come with pricing externalities outweigh any increase in costs for carbon-intensive companies and their customers.
These latest developments are undoubtedly part of a trend. New Zealand and the EU already have extensive emissions trading schemes in place and the price of carbon in the EU scheme is set to increase significantly from 2013 onwards. Similarly, South Korea and California are also planning carbon pricing mechanisms, while countless jurisdictions are moving to increase levies on everything from carbon emissions to plastic bags.
Significantly, growing numbers of businesses either vocally or tacitly agree with elements of this green tax trend. The UK's CBI this week reiterated calls for a global climate change deal that includes a clear carbon price signal, and countless green businesses want to see green taxes increase, even if they have reservations about the competitive implications of different environmental tax regimes in different countries.
However, it is ultimately irrelevant whether businesses agree with green taxes. The march of green taxes is moving inexorably forwards and astute firms should be preparing for it now.
The scale and scope of green taxes remains hard to predict, but politicians committed to tackling climate change will inevitably look to increase the extent to which they are pricing pollution externalities. All businesses need to recognise that the financial as well as the environmental cost of carbon-intensive activities will rise. As a result of this, the businesses that take steps to curb their energy use, air travel and reliance on scarce raw materials will find themselves better protected against rising prices.
Economists and politicians are broadly agreed on this once-in-a-generation reconfiguration of the tax regime, and now it is time for business leaders to join the consensus.
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