Global warming and the case for a coal tax

While carbon trading schemes such as Kyoto might help in the fight against higher emission levels, they are currently insufficient to solve the problems posed by global warming. Not all countries are included and, for example, China’s projected carbon dioxide emissions to 2050 are five times what Kyoto will save.

Something else needs to be done. The question is, what?

The problem is one of market failure, in the sense that the market price does not include the external environmental cost of greenhouse pollution. The main alternative solutions are ‘cap and trade’ mechanisms for emissions control or a carbon tax. A tax would be better but the former has been favoured because there has appeared to be no way that a global tax could ever be agreed upon.

However there is a way that a global carbon tax could be introduced, and Australia would have a key role.

It could start with an export tax on coal. Coal is the most greenhouse polluting fossil fuel because coal is primarily composed of carbon. Most electricity generation world-wide comes from burning coal, and most of China’s projected emission increases come from coal fired power stations.

Australia, as the world’s leading coal exporter, is uniquely placed to play a key role in implementing a global carbon tax, starting with an export tax on coal. This may be a radical proposal but there is no doubt that a radical solution is necessary. To avoid a catastrophic sea level increase we are advised that we need to reduce global emissions by 50 percent by 2050. The scientific evidence for this becomes clearer by the year. Yet under business as usual assumptions, emissions are projected to increase by 50 percent. Even the best scenarios still show significant increases. We need to do much more.

Trading schemes are not really the market solution that is claimed. There are all sorts of administrative difficulties in setting and allocating the so-called ‘permits to pollute’ and they do not provide the clear long term price signal that industry needs. By contrast a carbon tax would be administratively simpler, would provide a universal price signal, and would provide revenue that could be used to compensate those who may be worst affected. The key stumbling block is finding a way to implement the unprecedented concept of a global tax.

It may seem counter intuitive that the first step to a global carbon tax can be an export tax on energy goods. But given that demands are inelastic, exporters will collectively gain from the uniform implementation of such a tax. Exporters, or governments on their behalf, acting collectively, can benefit from use of their market power to raise prices, in the form of an export tax on carbon. The idea of an export cartel is of course not new. OPEC was able to prove, at least for a time, that such a cartel could be very effective. The difference would be that implementing price increases in the form of a carbon tax, via a cartel arrangement, as a solution to global warming, is something that could be promoted as beneficial, not self-serving.

Such a tax would ideally apply to all fossil fuels, including oil and gas as well as coal. However, a tax on coal alone, at least as first step, would still be effective. This is because coal is the most carbon intensive fuel and it is also the cheapest and most plentiful. Therefore it would be the most beneficial target for a tax. A tax affecting the international traded price could then be extended to domestic coal markets. Generally, there would be a flow on into other fossil fuel prices.

The initial implementation of a coal export tax would be more feasible than a general tax because the agreement of only a small number of exporting countries would be required and each would have an incentive to participate. The revenue earned from an international coal tax can be used to invest in alternative energy production. A proportion of tax revenue could be used to compensate importers with greenhouse abatement assistance, or tax payments could be used as a credit in other abatement schemes. The export tax would need to be matched by similar domestic taxes on coal consumption and then extended to other emission fuels.

Australia has a key role because it provides almost 40 percent of world coal exports.

Six APEC countries together provide 80 percent of world exports, and three APEC countries consume 40 percent of world coal imports. APEC therefore includes all the major players in the coal trade, including China. Recent discussions at APEC would have been more productive if they were addressed at considering ways to implement a tax on traded coal, as a precursor to a more general global carbon tax.

Studies conducted at National Institute of Economic and Industry Research (NIEIR) indicate that a 25 percent increase in the price of coal exports could benefit the Australian economy by around AUD$4 billion. A tax at this rate would be the equivalent of less than $5 per tonne of carbon dioxide emitted. It provides a window of opportunity for Australia to decarbonise its economy.

It may have been assumed that because Australia is so richly endowed with coal, providing most of stationary domestic energy needs as well as the being the major export commodity, that it would be inconceivable to contemplate that coal reserves should be substantially kept preserved for future generations. Yet it can be seen that such a policy is not only environmentally wise but could be economically beneficial.

Current knowledge of the severity of the possible consequences of global warming, indicate that the situation can justifiably be described as a global emergency. Given Australia’s dominant role in the world coal trade, it is incumbent upon Australia to take a leading role in finding a solution to this crisis. The proposals put forward here hopefully provide indication of the direction in which such a solution may be found.

This article is based on a
paper presented to the Energy Working Party Conference, NIEIR, Melbourne, July 2007.

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