Incentives may work where a carbon tax fails

Dennis Posadas suggests an alternative to the politically challenging cap-and-trade laws

PUBLISHED : Wednesday, 31 October, 2012, 12:00am
UPDATED : Wednesday, 31 October, 2012, 2:43am


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As Australian Prime Minister Julia Gillard's experience with a carbon tax shows, often it is never easy to impose a tax on the vast majority of people to solve a common problem. Because of the widespread opposition to the carbon tax designed to help Australia meet its carbon emission targets, the Gillard administration has resorted to giving cash bonuses to families hard hit by the tax, up to A$100 (HK$800) per child and A$250 per pensioner.

But in a dire scenario where many countries decide to say no to a carbon tax or a cap-and-trade system to help reduce emissions, and if there is deadlock on a future treaty agreement to replace the Kyoto Protocol, what is the way forward? China has decided to pass its own cap-and-trade programme, but will others?

One way is to strengthen the nascent voluntary carbon emission markets, where companies and individuals who feel it is their duty to save the environment buy emission credits to offset their own emissions, without regard for whether there is any requirement for them to do so. For example, large companies like Google and GM purchase emissions credits from the carbon markets to offset their emissions to zero. These credits help fund other renewable energy and energy-efficiency projects to displace or lessen the need for fossil fuel.

But if there is no carbon cap in place, any voluntary trading that happens becomes weak. If a recession happens in the future, and profits drop, the first thing to be cut from budgets are non-core expenses, like these purchases of emission credits. These emission credits must make business sense, else even the most environment-friendly chief executive will find it hard to justify these expenses to the board.

One way is to grant tax credits for companies and individuals who voluntarily buy these credits. Any revenue shortfall from these tax credits will be made up by a decreased need for governments to spend on mitigation and adaptation, as the success of a voluntary carbon market ensures funding for renewable energy and energy-efficiency projects. This in turn drives an increase in green employment, with demand for more rooftop solar panel installers, energy auditors or wind turbine technicians, for example.

If governments around the world do not muster enough support for a carbon tax or a cap-and-trade system, they can still promote mitigation and adaptation in their own countries by supporting tax credits for voluntary efforts to offset carbon emissions. This is the least they can do to support the lip service they offer for climate change avoidance.

Dennis Posadas is an international fellow of the Climate Institute Centre for Environment Leadership Training in Dartmouth College and a consultant on clean energy matters