Carbon Taxes Can Be Progressive: Myth-busting and Mainstreaming Carbon Taxes

We recently published a two part Tax Justice Focus special on climate crisis and tax justice. This blog reproduces the article by Jacqueline Cottrell, in which she explains that while carbon taxes were once at the centre of discussions about tackling climate crisis, aggressive lobbying by fossil fuel advocates persuaded the public that they are regressive and would hit the world’s poorest hardest. In this article Cottrell calls for citizen’s assemblies to embed carbon taxes in a broader progressive agenda. Click here to download the first and second parts of our Tax Justice Focus special.

by Jacqueline Cottrell

Myth-busting

It is an old story of neoclassical economics that policymakers must be prepared to trade off positive environmental outcomes and GDP growth. Today, in the European Union at least, this myth has been overcome; policymakers now refer to green taxes as “growth-friendly” and are supportive of a European green deal. Myth-busting has been relatively successful – and for good reason. None of the huge body of scientific research conducted to examine the impacts of carbon taxation have produced any evidence that it has a negative impact on GDP growth. Instead, research has indicated that a carbon price is the most efficient and effective instrument to reduce GHG emissions, whether implemented by means of taxes or trading.

When it comes to carbon taxation and social equity, however, many myths persist. It is received wisdom that carbon taxes are unfair and inequitable and have a disproportionately negative impact on lower income groups. The reality is more complex. To understand it, we need to take a closer look at the different dimensions of inequity relevant to climate policy and carbon taxation.

Let us look first at policy outcomes. Without additional welfare spending, carbon taxes may lead to price increases that have negative impacts on lower-income households. On the other hand, carbon taxes can raise really substantial amounts of revenue. A tax of US$70/tCO₂ has the potential to raise revenues worth 1-3% of GDP in most countries, or 2-4% of GDP in major developing economies such as China or India. This implies that in low- and middle-income economies, with an average tax-to-GDP ratio of just 12%, carbon taxes can raise 25% more revenue.

In most of low and middle-income countries, the revenues a carbon tax of US$70/ tCO₂ could raise dwarf current spending on health, education or welfare. Carbon taxes have the potential to act as a hugely powerful engine for change, reducing inequality and establishing targeted welfare programmes and free health and education systems, as well as funding the transformative changes required to tackle and adapt to the climate emergency.

The second dimension pertains to inequity of contributions to the climate crisis. In 2015, Lucas Chancel and Thomas Piketty found that just 10 percent of the global population – amongst the world’s wealthiest – emit 45 percent of global CO₂ emissions. The bottom 50 percent of emitters, almost exclusively from developing countries, are responsible for just 13 percent of global emissions. If we do not implement a carbon tax for social equity reasons, we are letting these 10 percent of polluters get away without paying for the impact of their excesses on the global climate.

Seen in these terms, and assuming that appropriate redistributive mechanisms are in place – free installation of small-scale renewable energy such as rooftop solar, solar water heating or biogas, distribution of clean energy-efficient stoves, cash transfers, or a carbon dividend as proposed by James Boyce in this issue – a high carbon tax, of which 45 percent is paid by the top 10 percent of polluters, has an air of “Robin Hood” about it. The final dimension of inequity relates to climate change outcomes: the devastating impact of the crisis will be most felt by the poor and vulnerable groups, as they will be least able to adapt or respond.

So, why have we not reached agreement on a global carbon tax? The answer to this question is way beyond the scope of this article. But at least one of the reasons is also linked to inequity: in this case, inequity of representation in policy-making. Many industries and individuals have a strong financial interest in the status quo: oil and mining companies, energy-intensive industry, wealthy consumers (let me remind you: around 10 percent of the global population responsible for 45 percent of GHG emissions), to name but a few. These groups exert a great deal of influence in global policy debate, while the voices of the world’s poor and vulnerable are hardly represented.

In contrast to big business, which spends billions lobbying governments every year, civil society is underfunded and poorly organised in comparison, and up until now, has tended not to focus on tax policy.

The joy of tax?

Some citizens are passionately interested in taxes and recognise their potential to shape our societies, looking to Scandinavian countries as an example. All Scandinavian countries have a carbon tax: Sweden has the mother of all carbon taxes, at a rate of US£127/tCO₂. Nevertheless, life in Sweden is relatively normal: there are no blackouts, people still drive Volvos, dance to Abba and shop at IKEA, while Sweden leads the way in decarbonising electricity, heating and transport.

On the whole, however, interest in tax policy is limited, including carbon taxes. Josephine Public does not know much about carbon tax, and certainly does not appreciate its potential to raise revenue worth between 1-4% of GDP. Neither does Josephine know that these revenues could be redistributed in whatever way governments see fit, or that they have the potential to transform our societies and economies through redistributive mechanisms, increasing investment in health, education, jobs, low-carbon industries, and access to sustainable energy for all.

Josephine also doesn’t know the best news of all: carbon taxes are fair, as the wealthiest and the biggest polluters pay the most.

Unfortunately, in reality carbon taxes generally hit the headlines when they are perceived as being too high, unfair, or punitive. Articles in favour often cite policy wonks arguing about “externalities”, “the social cost of carbon” and “market failures”. Even if this jargon means something to tax justice campaigners and climate activists, it does not serve well as a call to arms for the typical wo/man on the street. How can we change this?

Mainstreaming

In the past, we did not take the climate crisis seriously enough. Initial responses to “global warming” were not proportionate to a threat to our continued existence on the planet.

In the Northern hemisphere, many joked about warming sounding quite promising. In the global South, governments prioritised GDP growth, calling on high-income governments to tackle climate change given their historical responsibility.

Climate scientists were rightly cautious about drawing a causal link between individual extreme weather events – hurricanes, typhoons, droughts, desertification, devastating floods – and the climate crisis, a reticence which has served as ammunition to climate deniers.

Today, our vocabulary and our understanding has changed. Where public discourse once referred to “climate change” or “global warming”, we now talk about the “climate crisis” or the “climate emergency”. The good news is that this reflects a growing shared understanding of the seriousness and immediacy of the problem.

All over the world, street protests are putting climate action centre stage: schoolchildren and students are participating in “Fridays for Future” strikes, while citizens old and young are joining the Extinction Rebellion’s calls for decarbonisation. In October 2019, 400 scientists joined protests on the streets of London, several of them contributors to IPCC reports on climate change.

Yet to go further and achieve decarbonisation, these movements need to identify and articulate specific policy demands. Policy wonks contend that the best carbon tax would be a global one – to prevent distortions between countries and keep decarbonisation as efficient as possible. The question is: How might a global carbon tax be achieved?

The Extinction Rebellion in the UK is calling for a citizen’s assembly. Taking a global approach and creating a number of citizen’s assemblies, one for each continent, or part of a continent, would take the instrument debate out of clandestine meetings between big business and policymakers and move it into the public domain, to a place where evidence is public and subject to scrutiny.

Citizen’s assemblies would put the evidence in favour of carbon taxation, alongside other instruments, before a wide audience. It would give experts the opportunity to explain why carbon taxes are a good thing, that they can be effective, fair and equitable, and that their revenues can be used to reshape the societies and economies we live in. I believe that under such circumstances, the case for a carbon tax would win out.

Mainstreaming climate policy discussions through citizen’s assemblies would create a platform for the planet’s inhabitants all to be vocal in our support of ambitious climate policy in general and carbon taxes in particular. The results could be fed into UNFCCC negotiations and drive the step change in climate policy which is both urgently necessary and sadly lacking. What a coup for the UK government at the COP26 in Glasgow if they could negotiate a global agreement to implement a series of global citizen’s assemblies in 2021?

Ultimately, we have to recognise that one way or another, we are all going to have to deal with the climate crisis. We can choose to address it now with a carbon tax, reducing GHG emissions and using revenues as an engine for enhancing social equity and transforming our economies and societies according to our democratic wishes. Alternatively, we can pass the problem on to future generations and leave them to look on, powerless, as the climate emergency transforms our societies and economies in ways that we cannot imagine. Putting this choice in the hands of global citizens now is the only equitable way forward.

* Jacqueline Cottrell is an environmental fiscal policy consultant active in the field of development cooperation for numerous international organisations. She is a Senior Associate at Green Budget Germany and a member of the international programme committee of the Global Conference on Environmental Taxation. Her publications include a study on fiscal policies to address the health impacts of the transport sector in Jakarta, Indonesia (UNEP, forthcoming), A Climate of Fairness: Environmental Taxation and Tax Justice in Developing Countries (VIDC 2018), andEnvironmental Tax Reform in Developing, Emerging and Transition Economies(German Development Institute, 2016).