Governments have long tried to price carbon to induce companies to do the kind of emission reductions really needed to deal with the climate emergency.
They did this by imposing a carbon tax, an additional fee for each ton of carbon dioxide emitted, or through “cap and trade” schemes, which give companies limited permissions on how much CO2 they can emit and then allow who buy and sell these licenses to offer more flexibility.
The idea is that carbon pricing will decrease CO2 emissions over time, making pollutants so expensive that companies will have an incentive to find cleaner ways to operate.
However, pricing carbon has not been very effective in reducing emissions to the dramatic levels necessary to avoid the most catastrophic effects of climate change. And carbon taxation has proven to be unpopular in many parts of the world because it usually means that people have to pay more for daily costs.
But that did not stop governments from trying.
Jessica F. Green, associate professor of political science at the University of Toronto, whose work focuses on global environmental policy, argues that this is partly because focusing on the technical aspects of carbon pricing is a good way to avoid the most difficult problem of really do away with the fossil fuels to use.
“We have been working to measure carbon for 30 years and we are still debating or refining what it is, because it is easier to do than actually decarbonize,” said Green.
Green argues in a new article that climate change is not a “market failure” to be addressed through mechanisms such as the price of carbon. Instead, she says, it is “a problem of social transformation” that requires “strong state intervention to reorganize the economy”.
Green says that countries should aggressively pursue taxation (one of the basic functions of the state), but rich – and use the money generated to finance climate policy.
“The climate crisis was not caused equally by everyone. The rich cause climate problems, ”said Green.
I called Green to learn more about why carbon pricing, and especially carbon taxes, did not work so well and why she thinks taxing the rich would work. Our conversation, edited for clarity and length, is below.
Jariel Arvin
What would you say is the main idea of your article?
Jessica Green
If something doesn’t work very well, we should try something else. This is the end result. And what we know from the empirical record on carbon pricing is that it does not do much to actually reduce carbon emissions, let alone to facilitate decarbonisation.
When countries see reductions in emissions, they are usually due to things like efficiency improvements or switching from coal to fossil gas. These things are not bad, but they will not lead to zero net emissions until 2050, which is what countries have agreed to do under the Paris Agreement.
Jariel Arvin
So are you saying that we should completely forget about carbon pricing? Do you think there is an aspect of politics that is worth saving?
Jessica Green
It is a really complicated problem, but I think that in an ideal world, we would simply get rid of it. Because today, for example, there is an article in the Washington Post that explains how the American Petroleum Institute is strongly considering supporting a carbon tax – which is a sign that this policy has been completely co-opted by the people it should be regulating.
When you have big, powerful oil and gas companies that are also supporting a carbon tax, that should be a sign that the ideal conditions under which such a policy could work are unlikely to materialize, because those interests are very powerful, and they are so entrenched in governments that they are trying to regulate them.
Jariel Arvin
What about the European Union’s experience with carbon pricing? I think the EU has been effective in implementing a carbon tax, right?
Jessica Green
The EU’s story is positive, but it took a while long Time. The EU Emissions Trading System was created for the first time in 2005 and, in the first three years, the program was a washout in terms of reducing emissions. (Which is understandable because they were making politics take off).
But over the past, I would say 11 or 12 years, they have made many improvements in the functioning of the market. Carbon prices were very volatile, but now they are more stable – in fact, they have increased.
They actually dealt with their supply problem – because they had a large oversupply, which was causing an overabundance in the market and lowering prices. They created a stability mechanism, a market stability reserve, which functions as a central bank, controlling supply.
Jariel Arvin
It looks very good to me! What did the EU not get right?
Jessica Green
I looked at studies of the EU’s real performance: if you try to isolate how many emissions have fallen because of the EU Emissions Trading System, estimates have only put it around one to three percent a year, which is not much.
In addition, the EU is a group of very rich countries with significant regulatory capacity. I mean, they are literally armies of bureaucrats who are working on this issue. And they have a lot of political will. So, in many ways, the EU has been the most likely case of success – and it is still not so good.
Jariel Arvin
In a way, it is a success story, but it is still not effective enough. I would like to talk more about what you are proposing that countries do instead of, or at least beyond, carbon prices. The argument involves getting countries to change their fiscal policies to eliminate corporate tax havens, right?
Jessica Green
The basic idea is for each country to make its own laws about how much they tax individuals and corporations and the rules around transparency. A handful of countries, including the United Kingdom through [overseas territories] like the British Virgin Islands, they set their corporate tax rates too low or nothing.
So, if you’re a multinational company like Google or Amazon, or an oil and gas company, you can say, “Okay, well, I’m going to incorporate part of my company in the British Virgin Islands. And if I report my profits, they will only be taxed at 3%, as opposed to 15% in the UK. So this is literally money in the bank. And as long as I don’t repatriate that money to the UK, I don’t have to pay taxes on that money. “
It gets very complicated – international tax law is very complex. But there are ways to create subsidiaries or parts of a company and direct your money in different ways to take advantage of the most advantageous tax laws.
Jariel Arvin:
Is there any country that you would say is worse than others when it comes to doing this?
Jessica Green:
There are a handful: Switzerland, the Netherlands, the United Kingdom with their overseas territories and protectorates such as the Cayman Islands, Jersey, the Isle of Man and Bermuda; and the Bahamas.
Jariel Arvin
Okay, so I think I understand how these corporate tax havens work and why companies use them. But how does this relate to climate change? Does this type of financial secrecy allow companies to behave badly without facing economic consequences?
Jessica Green
There are two ways. One is straightforward: we know, for example, that [many] the companies that offshore their wealth are linked to deforestation in the Amazon. These are companies that are doing bad environmental things and have the money to do it partly because offshore part of their equity.
The second way is indirect. If you believe – as I do as a political scientist – that money is power, well: we know that fossil fuel companies are outsourcing part of their profits, which makes them richer and therefore more powerful in their ability to influence political processes to slow decarbonization policy.
Jariel Arvin
Closing fiscal gaps seems to be a relatively simple thing for governments to do, so why do you think this is not being done?
Jessica Green
From my point of view, it is actually easier political selling. Taxing the rich has a far greater impact on people than taxing carbon. First of all, people are like, “What is carbon? I do not know. What does this mean for me? Rising costs for the basic things I use every day? “
On the other hand, taxing the wealthy is like saying that countries must take care to ensure that there is enough revenue and to go to the bad guys who are not paying their fair share.
Jariel Arvin
How do countries really “collect taxes from the rich”?
Jessica Green
There are a few ways to do this. One is one-sided: countries can simply say, “If you have assets or employ people in country X, this is where you should report your profits, you cannot report your profits elsewhere.” This is a unilateral measure. And politically, it can be difficult. It is a matter of political will.
But I think that political selling is easier and, technically, in many ways, much less complex. We are not discussing how to quantify and sell the absence of something [which is what carbon offsets would require] – we’re talking about getting the rich to pay their fair share.
Jariel Arvin
Once countries have that extra money to close fiscal gaps, how can we be sure that it really goes into climate policy?
Jessica Green
That’s where the problem lies. There is no guarantee that the money will go to the “right” climate causes, but what really matters is to think about climate change as a matter of inequality in the distribution of wealth. What closing corporate tax holes will do is make these corporations and individuals less wealthy – and that is, in fact, an important goal in its own right.
Because, you know, if one percent of the global population has emitted as much as the poorest 50 percent, then climate change is really a problem of wealth inequality. And so, to the extent that you can restrict the extreme wealth of these actors, you are taking a step in the right direction. That is my best answer to that question because it is a very difficult question.
Jariel Arvin
I agree that this is definitely the question of the future, and it is difficult to answer as you say. But I think it’s an easier question to answer than, “How do we really make carbon pricing work?”
Jessica Green
I also think. We already have 30 years of experience in carbon pricing, and we don’t have much to show for it.