There is now scientific consensus that carbon dioxide emissions cause global warming and that this is harmful. The important question is then how the reduction in greenhouse gas emissions should come about.
New research by John Hassler, Per Krusell, Conny Olovsson and Michael Reiter evaluates the main suggestions that have been put forward and shows that with the exception of ‘global quotas and a well-functioning global emissions trading system’, only a global carbon tax can be expected to reduce emissions at the scale and speed that is necessary.
Basically, all the other options are highly hazardous – they may not work in managing to reduce emissions sufficiently or be so costly that they will not be adopted broadly enough.
The benefits of a global carbon tax are several. First, it works. Even a relatively modest tax will make coal and non-conventional oil and gas stay in the ground. Then warming is contained.
Second, unlike the alternatives, it works very efficiently: it minimises the costs of reducing emissions. This is key not because of a general need to save on costs/be thrifty, but because the propensity to adopt the measure rises when it is cheaper.
Adoption is the most important thing of all. Especially important in developing economies where monetary income is crucial.
The authors also evaluate three alternative sub-optimal climate policies.
First, they look at the right kind of tax – a global carbon tax – but at the wrong magnitude: a tax that is set based on worries about climate change that ex post turn out to be overly pessimistic and a tax based on the reverse mistake (an optimistic view that turns out to understate vastly the climate challenge ex post). The researchers find a sharp asymmetry: the former is not very costly at all to human welfare whereas the latter is very costly.
Second, they examine taxes that differ significantly by region and discuss the cost of implementing them instead of an optimal – uniform – scheme. Here they find that the welfare costs of letting some countries and/or regions off the hook are very large.
Third, they look at efforts to promote green energy – a sub-optimal policy in isolation – and argue that reliance on such efforts is highly hazardous. We will, of course, eventually need green energy, but if coal-based energy remains in use, all green energy does is increase energy use: it does not help the climate. As a result to hope these efforts will work is, precisely, hazardous
Conny Olovsson
Researcher at Sveriges Riksbank
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