Carbon Tax: Fiscal Exit Strategy of the Crisis

In the summer of 2008, when the fuel prices were at their highest, I published an op-ed in the European Voice. I supported the idea that president Sarkozy had at the time, namely, to reduce the VAT and excise duties on petrol, to make it cheaper. The argument was that if the CO2 is indeed the enemy then it should have a price, and this price needs to be the same regardless if CO2 is emitted by a car, a powerplant or a production of a steak.

In January on this blog I criticized the idea of NASA’s Jim Hanson to tax carbon at the port of entry. Not only it would create trade wars and will be seen as an excuse for protectionism, it will make the economies of countries with such tax less competitive to economies without the tax. Exactly the same is the problem with carbon caps and emission trading schemes. Carbon intensive industries are “leaked” to countries where such measures do not exist.

Today I am reading about president Sarkozy’s proposal for a carbon tax. This is a step in the right direction, in particular if the taxation will indeed be the same for all sources of CO2. One wonders, for example, why an additional tax on vehicle fuels that already are heavily taxed. But this can be improved in the process.

The beauty of a properly constructed carbon tax is manyfold:

1. It would save the planet and fight climate change. Cleaner would be cheaper. It would shift investment into cleaner industries and jobs, into energy efficiency. Because of a single price of carbon, the market will pick technological winners and loosers. Because it will be a tax on consumer goods, there would be no such thing as carbon leakage. Those that buy energy intensive stuff will suffer. Regardless if the product is French or Chinese.
2. It would save the budgets and reduce taxation of work and capital. Crisis is causing unemployment and lower taxation of work would make the workforce cheaper. And we will need capital to get the economy going again. It would help pay for the excessive government spending during the financial crisis.
3. It would save the market economy and welfare state. As Prof. Mario Monti wrote “To achieve their social objectives, governments must be able to use their budgets effectively or they will abuse the market.” To put it in other words, because some governments create very good tax environments, others would rig the markets or prevent competition, so that businesses from low tax enviromnets would not have the advantage over others. A consumer-end carbon tax would have to be quite uniform across the EU (like VAT is), otherwise consumers would shop for products where they are not carbon-taxed. Carbon tax would create a level of tax harmonization that would strengthen the tax sovereignty of all governments. There would be no carbon tax havens.

Carbon tax is a solution to many of the main problems of today. Because of its contribution to fighting climate change it comes from a moral high ground and carries the sense of urgency a new tax needs to fly with the voters. Besides, it would only make sense if Brussels would do the ugly job of directing it to member states.

Yes, it is a tax, and most will hate it for that, but it is fairer than just about any other tax. You live dirty, you pay! And the repayment of those deficits will have to come from somewhere. So it better come from where it can do more good than its moneys worth