With the USA (at a Federal level) going down the regulatory route instead, the Australian Prime Minister touring the world arguing against it and the UNFCCC struggling to talk about it, perhaps it is time to revisit the case for carbon pricing. Economists have argued the case for carbon pricing for over two decades and in a recent post I put forward my own reasons why the climate issue doesn't get solved without one. More recently, former US Treasury Secretary Hank Paulson argued for one.
Yet the policy world seems to be struggling to implement carbon pricing and more importantly, getting it to stick and remain effective. Part of the reason for this is a concern by business that it will somehow penalize them, prejudice them competitively or distort their markets. Of course there will be an impact, that's the whole point, but nevertheless the business community should still embrace this approach to dealing with emissions. Here are the top ten reasons why;
- Action on climate in some form or other is an inconvenient but unavoidable inevitability. Business and industry doesn't really want direct, standards based regulation. These can be difficult to deal with, offer limited flexibility for compliance and may be very costly to implement for some legacy facilities.
- Carbon pricing, either through taxation or cap and trade offers broad compliance flexibility and provides the option for particular facilities to avoid the need for immediate capital investment (but still comply with the requirement).
- Carbon pricing offers technology neutrality. Business and industry is free to choose its path forward rather than being forced down a particular route or having market share removed by decree.
- Pricing systems offer the government flexibility to address issues such as cross border competition and carbon leakage (e.g. tax rebates or free allocation of allowances). There is a good history around this issue in the EU, with trade exposed industries receiving a large proportion of their allocation for free.
- Carbon pricing is transparent and can be passed through the supply chain, either up to the resource holder or down to the end user.
- A well implemented carbon pricing system ensures even (economic) distribution of the mitigation burden across the economy. This is important and often forgotten. Regulatory approaches are typically opaque when it comes to the cost of implementation, such that the burden on a particular sector may be far greater than initially recognized. A carbon trading system avoids such distortions by allowing a particular sector to buy allowances instead of taking expensive (for them) mitigation actions.
- Carbon pricing offers the lowest cost pathway for compliance across the economy, which also minimizes the burden on industry.
- Carbon pricing allows the fossil fuel industry to develop carbon capture and storage, a societal "must have" over the longer term if the climate issue is going to be fully resolved. Further, as the carbon pricing system is bringing in new revenue to government (e.g. through the sale of allowances), the opportunity exists to utilize this to support the early stage development of technologies such as CCS.
- Carbon pricing encourages fuel switching in the power sector in particular, initially from coal to natural gas, but then to zero carbon alternatives such as wind, solar and nuclear.
- And the most important reason;
It's the smart business based approach to a really tough problem and actually delivers on the environmental objective.