Will carbon taxes work?
For a climate change strategy to be effective, in must deal with reducing total demand for carbon emissions, either by placing a price (tax) on carbon emissions sufficient to drive down demand, or setting a total emissions target or budget that decreases over time and is enforced by a system of carbon rationing that sets a price by balancing supply and demand.
For a price or tax on carbon to be effective, it is essential that the tax apply to all carbon emissions. Any sector with a capacity to escape carbon pricing can derail the outcome. Carbon trading schemes that deal with emissions from only some sectors cannot, by definition, produce the emissions outcome that the science dictates.
For example, for air travel, the fastest growing sector of global carbon emissions, there are few available low-carbon substitutes. The federal transport department projects air travel emissions for domestic and international (fuel uplifted in Australia) flights to increase to 21849 Gg CO2 or 5.98 million tonnes carbon by 2020. At that time the estimated population will be 24 million, so that average air travel emissions for fuel uplifted in Australia will be around 0.25 tonnes carbon per capita. Aircraft emissions have a radiative forcing effect of 2.7 (that is the total warming effect of aircraft emissions is 2.7 times as great as the effect of the carbon dioxide alone emitted at ground level) so effective total air travel emissions by 2020 will be 0.67 tonnes carbon per person (compared to a carbon sink capacity in 2030 of around 0.32 tonnes carbon per capita). So, air emissions alone in Australia would exceed our total carbon budget well before 2030!
Put simply, a carbon tax increases the price of goods with carbon content to the point where:
The incidence and social impact of a carbon tax is a key issue in considering how the socially regressive impact of a carbon tax might be alleviated by social policies or tax changes that re-distribute some or all of the revenue from a carbon tax.
The 2006 CSIRO report on energy, "The heat is on", provided a number of scenarios aimed at stabilizing CO2 at 575 ppm by 2100 "through the introduction of a globally harmonised carbon tax from 2030". This is aimed at producing a reduction of 35% in emissions compared to the "business as usual" emission scenario. Whilst the targets are ludicrously high, the results are instructive. Scenarios 2a which assume carbon capture and storage (CCS) technology is available produces a a carbon price by 2050 of 2005A$99/tCO2 or $361 per tonne of carbon. Scenarios 2b which assumes no CCS is available produces a a carbon price by 2050 of 2005A$157/tCO2 or $573 per tonne of carbon.
The Stern report introduces a cost/benefit analysis that compares the marginal cost of abatement with the social cost of carbon. That is, at what rate should a carbon tax be set so that the cost of the tax is lower than the future cost of abatement. It's on odd approach if you are talking about catastrophic climate change for which no abatement is possible, but Stern derives a figure of US$85/tCO2, or approx A$397 per tonne of carbon.
At present electricity from wind power is 40-50% more expensive than conventional power. Averaging the emissions factors between existing and new capital stock for electricity generation, and assuming that the relative capital costs of conventional and renewable generation technologies stay at current levels, it can be demonstrated that the following rates are necessary to make green energy an equally rational economic choice to carbon-fired electricity: black coal $183 per tonne of carbon; brown coal $247 per tonne of carbon; natural gas $421 per tonne of carbon.
All of which suggests that for a carbon tax to have a significant impact on emissions, it would need to be multiples higher than the figures being talked about in Australia today for emissions trading: around $300-$400 per tonne of carbon, not the $20-35 being mooted. And in the end it seems very unlikely that such a tax could force down emissions by the 90% plus that is necessary.
The alternative is carbon rationing with 21st century technology.