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A Carbon Tax Could Solve the Climate Crisis, So Why Isn’t There One?

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Powerful vested interests have everything to lose if carbon emissions are taxed

Carbon emissions are the greatest market failure of all time. They’re a ‘failure’ because polluters like oil companies profit from emissions while society is left to deal with the costs. A global carbon tax would fix the failure by internalising the cost of emissions into prices; doing so could transform the global economy and create the incentive that’s needed to move towards a low-carbon economy and achieve net zero. Failing to achieve net zero by 2050 simply isn’t an option if we are to avoid the worst impacts of the climate crisis, so why would a global carbon tax be so effective, and why isn’t one being implemented?

The reason there isn’t one is wrapped around the reason a global carbon tax would be so effective. Free markets are believed to be the most efficient way to manage an economy. A reason why is that the price of anything sold in markets is determined in a decentralised way through the laws of supply and demand. If demand exceeds supply at a given price, prices increase, leading to decreasing demand. If supply exceeds demand, prices decrease, leading to increasing demand. Based on supply and demand, increasing the price of the things we don’t want will help decrease the demand. 

A tax on carbon emissions would bake the environmental cost within products or services, revealing their true cost to the environment. The result would be that the price of any products or services with a large carbon footprint would increase, helping to decrease demand. At the same time, alternative products and services that produce low emissions would remain cheap, helping to increase demand. The obvious example of how this regulation would correct the market failure is with energy. 

A global carbon tax would increase the price of fossil fuels, making them uncompetitive against other energy sources with low emissions. High fossil fuel prices would lower demand, leading to decreasing supply — exactly what’s needed to achieve net zero. A carbon tax would also result in investors pulling money out of fossil fuels in droves as it would become increasingly clear they have no long-term future in the world economy. At the same time, cheap prices for renewables would encourage investment and send a clear signal that renewables are the energy sector’s future. And the more investment being directed towards renewables, the larger the sector would grow, increasing the attractiveness of further investment.

The potential impacts of a carbon tax show markets can instigate a transformation of the energy sector, but only if markets are regulated appropriately to ensure prices internalise costs. At present, government regulation is doing the exact opposite. In 2020, fossil fuel subsidies amounted to $5.9 trillion and are expected to rise further over the coming years. Governments are enabling the fossil fuel industry by keeping prices artificially low. This incentivises continued investment and demand in an industry that is undermining any chances of reaching net zero by 2050. 

There are reasons for this. Oil plays such an integral role in the economy that the price of oil has a knock-on effect on everything else. Our addiction to oil has made it so integral to everything we do that a quick phase-out is unlikely without massively destabilising the economy. As there is no ready-made alternative, it would hardly be sustainable to quickly wean ourselves off oil when doing so would have disastrous economic ramifications.

While this argument is valid, it seems worryingly shortsighted when you consider short-term economic benefits are being prioritised over the long-term health of the climate. If necessity is the mother of invention, a carbon tax would create the necessity to overcome our addiction to oil. All current prices are doing is reinforcing the problem. 

But self-interested governments who desire to remain in power, are unlikely to take any radical steps that could hinder growth because doing so wouldn’t go down well with voters. There is also the small matter of market fundamentalists being so opposed to any government intervention. Market fundamentalists argue intervention distorts prices and, with it, the smooth operations of the market system. These cheerleaders for non-intervention argue that the free market will self-correct through prices, and prices alone. This argument might be valid if it weren’t for the fact governments are intervening to keep the price of fossil fuels low. If they weren’t, a transition to renewable energy would be progressing far quicker.

Another issue with a carbon tax is that any tax would need to be implemented globally. But national governments aren’t set up to create legislation on a global level. On top of this, some countries depend almost exclusively on fossil fuel revenues. So any such proposal would receive fierce pushback from powerful oil companies and countries rich in oil, coal and natural gas reserves.

If markets are regulated appropriately, it is possible to create a low-carbon economy. Unfortunately, powerful vested interests who have everything to lose if we transition away from fossil fuels seem content to prioritise their own short-term interests over that of the planet and humanity. Their greed and a level of selfishness that goes beyond the comprehension of any normal person are driving us towards a catastrophic future. And the bitter irony is that the wealth they have created from destroying the planet will mean they can enjoy living in decadent splendour while everyone else is suffering from the consequences of their actions.