In a recent article on Project Syndicate entitled “Carbon Majors and Climate Justice“, Naderev (Yeb) Saño and Julie-Anne Richards suggest that fossil-fuel entities should be taxed, envoking the polluter pays principle. They note that
It seems only fair and reasonable, therefore, that all fossil-fuel entities, but especially the carbon majors, pay a levy on each ton of coal, barrel of oil, or cubic meter of gas they produce to a new International Mechanism for Loss and Damage, which would help to fund efforts to address the worst effects of climate change. Furthermore, given that the effects of climate change today are the result of past emissions, the carbon majors should pay a historical levy, too.
According to the authors, the money raised should then be used for e.g. climate-vulnerable countries, or disaster preparation.
There are, however, four points that one may advance against this idea.
Firstly, this additional tax makes only sense if the current tax on fossil fuels is inefficiently low. Here opinions differ substantially on what is the optimal carbon tax. Faced with this uncertainty, one could make a case for increased carbon taxation in order to incorporate the cost of this uncertainty into the carbon price. Nevertheless, taxing consumers and producers at the same time may easily give rise to inefficiently high taxes and simply adding additional taxes to existing ones may make you end up on the wrong side of the Laffer curve.
Secondly, the authors may want to think more carefully as to what is the difference between their current proposal and cap-and-trade as is e.g. the case in the European Union Emissions Trading Scheme (EU-ETS)? In my view, much of the mechanisms that the authors propose are already incorporated to a more sophisticated extent in the various cap-and-trade agreements across the globe.
Thirdly, what stops producers from simply transferring this additional tax onto the consumer? Any direct tax levied on a producer can essentially be easily transferred through higher prices onto the consumers. Hence, a direct tax itself may simply be inefficient to curb the climate externality, unless it is high enough. This is one reason for which the international society has preferred a cap on emissions with subsequent trading of emission rights. Since the whole point should be to internalize the externality of climate change while at the same time benefiting from the double divident that arises through the money raised from the taxes, this proposal forwarded by the authors at least falls short of the internalization of the climate externality.
Fourthly, advocating the polluter pays principle in this case is somewhat questionable in my view. Who is really responsible – the firm that takes the fossils out of the ground or the consumer who chooses to rely on fossil-based products despite having several alternatives at hand? Should not, according to this view, the consumer be viewed as the polluter and thus be required to pay?