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Why is There No Global Carbon Tax?

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A carbon tax could trigger a transformation of the energy sector

The energy sector is responsible for around three‐quarters of greenhouse gas emissions, so it’s safe to say it holds the key to averting the worst effects of global warming. A global carbon tax would be right at the top of the list of effective measures that can support a transformation of the energy sector so we can achieve net zero by 2050. Seeing as the future of humanity just so happens to depend on preventing a climate disaster, why on earth hasn’t a carbon tax been implemented? In fact, why is the idea of a carbon tax barely uttered as a viable solution to the climate crisis?

Well, the thing about a carbon tax is that it would set a price on greenhouse gas emissions. The problem (for vested interests) is that baking the price of emissions into products and services would reveal their true cost. Based on the laws of supply and demand, doing so would send fossil fuel prices spiraling upwards, which would lower demand. This would see investors turn their back on fossil fuels as it becomes increasingly clear they have no long-term future in the world economy. At the same time, renewables would become far more competitive, helping to increase demand. Increasing demand would attract investment, enabling further growth of the sector. The potential impacts of a carbon tax show markets can instigate transformative change, but only when they are regulated to ensure prices reflect environmental and social costs.

Current regulation is doing the exact opposite. The IMF estimates that fossil fuel subsidies amounted to $5.9 trillion in 2020, and they’re expected to rise further over the coming years. Governments are enabling the fossil fuel industry by keeping prices artificially low, but there are reasons for this. As the lifeblood of the economy, the price of oil has a knock-on effect on everything else, so a cheap oil price is vital for price stability.

That the global economy depends on cheap oil is an unintended consequence of social evolution. Rapid increases in social development accompanying industrialisation wouldn’t have been possible without this energy-dense wonder fuel. As there is no ready-made alternative, a quick phase-out of oil is hardly sustainable when it would have disastrous economic ramifications. It’s also understandable when self-serving governments are motivated to remain in power, so they’re unlikely to push for a carbon tax when doing so would hinder economic growth, a surefire way to be booted out of office.

There is also the small matter of market fundamentalists who 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, because as natural resources become scarce, prices increase, which lowers demand. Increasing prices creates the incentive to develop new technologies or markets, which will either increase production of the resource, lead to efficiencies in its use, and provide alternatives. 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 much quicker. On top of this, some countries depend almost exclusively on fossil fuel revenues. So any concerted effort to introduce a carbon tax would not only receive fierce pushback from powerful oil companies but from countries rich in oil, coal, and natural gas reserves.

Another issue with a carbon tax is that it must be implemented globally to work. But nation-states aren’t designed to implement legislation on a global level. Efforts to curb the manufacture of single-use plastics highlight the issue. In 2022, 117,000 people signed a petition to place pressure on the UK government to ban single-use plastics. This is precisely the kind of regulation that could have a transformative impact. Coca-Cola (and other drinks companies) continue manufacturing single-use plastic not because consumers like it (as Coca-Cola’s head of sustainability claims), but because it’s durable, lightweight, and cheap. There’s also the small matter that governments allow them to do. Even if there wasn’t an outright ban and governments created a tax that accounted for the environmental destruction caused by single-use plastic, it would lead to an increase in price.

An argument against doing so is that there is no ready-made alternative. But necessity is the mother of invention. Increasing the price of single-use plastic would lower demand and create the necessity to innovate. A major stumbling block is that governments can create regulations on a local level, as Canada has done by banning certain types of single-use plastics. But they can’t do so globally, leaving multinational companies with far too much freedom to do what they want. While Coca-Cola has a vision of a ‘World without waste’, pledging to recycle as many bottles as they sell by 2030, this still doesn’t resolve the problem of waste ending up in landfills and oceans. It just makes a bad problem, less bad.

Efforts to clean up plastics from the ocean highlight how our focus remains on solving the effects of problems rather than questioning their causes. While well intended, the cleanup effort can only do so much if single-use plastic waste continues to flow into the oceans. The same can be said for fossil fuels. The argument that the economy depends on cheap oil is flawed when looking at the bigger picture. The benefits of a cheap oil price in the short term don’t compare to the enormous costs of a changing climate in the medium to long term. Oil is also a nonrenewable resource, so it’s a matter of when, not if, we reach peak oil; all the more reason to transform the energy sector before reaching that eventuality.

Governments continue papering over systemic failures by subsidising industries that are undermining efforts to achieve net zero by 2050. There is a malaise in efforts to transform the energy sector, underpinned by a fear from governments that change would hinder economic growth. These fears are buttressed by resistance from self-serving oil companies who have everything to lose if the age of fossil fuels comes to an end. The result? We remain entrenched on the path of business as usual and continue to hurtle toward a climate disaster that will bring unimaginable pain and suffering.