Arguments for the introduction of a Global Greenhouse Gas Tax instead of the current system of EU Emission Allowances
Jamie Morgan is professor at Leeds Beckett University, lecturing in the areas of economics, analytics and international business
Heikki Patomäki is professor of world politics and global political economy at University of Helsinki.
From “THE FUTURE OF EUROPE AND THE FUTURE OF THE PLANET”, a collection of papers on the occasion of the Conference on the Future of Europe edited by Guido Montani
The idea that the EU should place a carbon price on certain imports from less climate-ambitious countries implies a recognition that not only climate change itself but also the implementation of climate measures is a global problem. The European scale does not ensure structured coherence among the economy, political organization, and rational responses to salient problems. In the EU Emissions Trading System (EU ETS), many firms are required to acquire permits for the climate-warming carbon emissions that their production generates. A key concept is “carbon leakage”, which refers to the possibility that because of the cost of permits and regulations at home, EU production may be moved to non-EU countries that have less ambitious emissions rules. To combat this “leakage” large corporations that dominate sectors such as steel continue to receive their initial allocations for free in the EU ETS. This, however, only exacerbates underlying problems of carbon trading systems. Carbon taxes are a different approach to carbon pricing. For example, a carbon border tax or levy is a unilateral attempt at rescaling. The levy is targeted against outsiders: it can be used to sanction those countries that fail to meet their Paris Agreement or other reasonable climate objectives and firms that try to exploit regulative laxity to increase their “competitiveness”.
Although the need for a carbon border tax stems from global interconnectedness, it is a one-sided measure and thus speaks to the need for a more broad-based approach to carbon taxes. Some actors may take it as a violation of the principle of free trade. According to the European Parliament, the carbon border tax is WTO-compatible and will not be misused as a tool to enhance protectionism. Moreover, the aim is to use revenues as part of a basket of EU’s “own revenues” to support the objectives of the Green Deal. Despite these qualifications and promises, John Kerry, the current US envoy on climate, has told the EU that a carbon border tax adjustment should be seen as a “last resort”, to be adopted only when all other attempts fail. Even as a last resort, it remains conceivable that some states will challenge the EU carbon border tax in the name of free trade, to which the EU itself remains committed.
A new explicitly market disruptive and globalist approach is needed. The Paris Agreement is premised on the institution of state sovereignty and is based on voluntary commitments. For some limited international purposes, the EU is functionally equivalent to a sovereign state. Moreover, its climate policies occur in a field constituted by free trade, market competitiveness, an emissions trading system, and technological changes. The notion of the EU carbon border tax arises from the consequent problematic. The aim is to create a global level playing field in global markets: all states have to play by the same set of rules. The problem is that unilateral attempts to impose rules on others tend to result in tit-for-tat responses. A further problem is that market-based measures to tackle global warming have been inefficient and rely too much on uncertain future technological developments. We argue that a global greenhouse gas tax (GGGT) is a rational global Keynesian solution to this aporia.
Reliance on free markets and technology
The EU ETS covers around 40% of the EU’s greenhouse gas emissions. The Commission is currently proposing to revise and possibly expand the cap and trade system. Firms can trade emission allowances with one another as needed. This trade is taking place within a wider context of internal single market and, more generally, worldwide system of free trade. For the system to be efficient, the ceiling on emissions must be aggressive, making permits both a constraint for any individual participant and scarce in general. However, the more aggressive the ceilings, the more the incurred costs will affect the competitiveness of EU firms in world markets. Because the system imposes a fixed overall quota without regard to the cost of attaining that quota, cap, and trade lack cost certainty.
Moreover, it is difficult (especially in some sectors) to measure emissions and estimate numbers of permits for some future duration to enable reasonable foresight and planning for and by entities. Given also the effects of uneven economic developments, business cycles and various economic crises, it is excessively difficult to determine the appropriate amount of emission permits to induce rapid emissions reductions. The likely consequence of the combination of these uncertainties and concern for competitiveness is that too many permits will be available and the ceiling on emissions will be too generous. This is what the available empirical evidence suggests. For example, Patrick Bayer and Michaël Aklin (2020) estimate that the EU ETS reduced emissions by 3.8% of total EU wide emissions between 2008 and 2016 compared to a world without an EU ETS.
A further problem is that a cap and trade system is an administratively created synthetic market that requires detailed regulations. Setting up caps and emission certificates and their trading system is complicated by many intricate technical issues (e.g. the proposal needs to determine how allowances will be created and distributed), typically entailing high administrative costs. Moreover, a system of tradable permits entails significant transaction costs to the actors themselves, because they have to search for traders, engage in negotiations, seek approval for deals and take insurance.
What is more, the market-based approach to emissions reductions relies on strong expectations about technological change. While the research done in the laboratory or research and development units may be publicly funded and organized, the assumption is that price mechanism is sufficient for the commercial spread of new technologies. The costs generated by the cap and trade system is assumed to create further incentives for technological change. While innovation for profits is an essential part of the dynamics of capitalist market economy, it is not plausible to assume that a desired rate of particular technological change will automatically result from these dynamics. A further set of assumptions concern the acceptability and feasibility of new technologies. New technologies may be too risky or incompatible with basic human rights or various social and ecological values. Their side-effects or unintended consequences may be more important than their intended effects.
Tax as an alternative to emissions trading
Because of uncertainties and concerns over competitiveness, the market-based approach gravitates toward, from a climate perspective, inappropriately generous ceilings. The market-based approach generates unnecessary administrative and other costs and relies on unwarranted optimism about markets and technological change. There is an alternative: a tax. In terms of scope and dynamic effects, a tax is more efficient than a trading system. A carbon tax extends to all carbon-based fuel consumption, including gasoline, home heating oil and aviation fuels. The scope of tax on carbon and sources of other greenhouse gases is thus wide and covers comprehensively different sources of emissions. A further advantage of the tax is that it offers a permanent incentive to reduce emissions. As long as there are emissions, a tax incurs costs and thus contributes to technological dynamism as well. Moreover, a tax-system can be relatively easily specified in a concise legal text, whereas cap-and-trade proposals are more complicated.
There are further important reasons to favour a tax. The cap and trade system includes also trade with various financial derivatives of the certificates. Like speculative finance more generally, this encourages the search for quick profits and reinforces short-term temporal horizons. In the secondary markets of pollution permits, ecological sustainability appears as a secondary concern. What matters is money-making. Given this orientation, it is no wonder that the profit-oriented carbon trading has been liable to systematic manipulation leading to, in worst case scenarios, instances of outright corruption. Apart from cases of fraud and bribery, abuses of power, and other conventional forms of corruption, “corruption in this sector has also taken more original forms, such as the strategic exploitation of ‘bad science’ and scientific uncertainties for profit, the manipulation of GHG market prices, and anti-systemic speculation” (UNEP, 2013).
A further problem of emissions trading is that it undermines the sense of shared sacrifice necessary to future global cooperation on the environment, while also encouraging an instrumental attitude towards nature (see Sandel, 1998). Institutions are liable to fail when they do not support and cultivate commitment to relevant conceptions of “the good” involving adequate norms and virtues. Regard for nature, long temporal horizon, and moral sense of shared sacrifice – to the extent and whenever necessary – are essential for achieving the purposes of an effective global climate change regime. As cap and trade encourages short-term profit making and is predisposed to manipulation, it does not seem “fit for purpose”. Moreover, markets enable the outsourcing of one’s moral obligation to reduce excessive greenhouse gas emissions. If the rich can pay themselves off this obligation and thus buy the right to pollute legally, the whole point of climate governance is compromised. It reinforces a counterproductive attitude – that nature is a dumping ground for the wealthy.
Moreover, while the purpose of greenhouse gas taxes is not primarily to generate revenue but rather to influence activity, the two purposes complement each other. A tax system can be designed to recredit, compensate and redistribute and this may be critical from the point of view of feasibility and viability of the system. Taxes, and specifically global taxes, can generate revenues for purposes of planetary common good such as climate stability. The auctioning of emission allowances generates some revenues (in 2019, the generated total revenues of the EU ETS were 14 billion euros), but the revenues from taxes can be many times higher. In other words, global taxes and funds would be essential for creating the resources needed for tackling the consequences of climate change and for global sustainable development. The funds now available to, say, the UN system are minuscule (the UN budget approved for 2020 was mere 3 billion US dollars) and have no effect on the overall developments of the world economy. Global taxes and their revenues could be used to steer and regulate economic activities across the planet for the common good.
Why the Greenhouse Gas Tax must be Global: toward global Keynesianism
Climate change is a global problem. The EU accounts for considerably less than 1/10 of world’s carbon dioxide (CO2) emissions. Because of carbon leakage, a greenhouse gas tax within the EU would make an EU carbon border levy even more necessary than the ETS and other current measures. There has been a major transfer of produced emissions from wealthy countries to China, while China has increased its global share of the problem also for other reasons (Smith, 2020). As indicated, a key difficulty is that such a levy can be seen as protectionist and, as such, challenged. There are thus many reasons why the European scale is insufficient for expanding the temporal horizon of policy in a manner that would be consistent with tackling the climate change. A shift toward a more globalist framework can help to overcome the aporia that under the prevailing assumptions appears unsurpassable.
We suggest a “global Keynesian” approach for future development. According to the holistic perspective of Keynesian theory, economic developments, and especially the formation of effective aggregate demand, are seen from the standpoint of all actors and countries at once. The conditions of actions form a whole in which the various parts are dependent on each other. Applying this perspective methodically is the basis of global Keynesianism. The term “global Keynesianism” entered the literature in the early 1980s. First it was mainly used by critics of the Brandt Report, published in 1980. Soon advocates of the approach also adopted the term. The Brandt Commission developed the idea of a world civilization and proposed a new international and global economic system. A key theme of the Report concerns the urgency of transition away from fossil fuels and to renewable sources of energy. Fossil fuels are limited and their emissions can “produce climatic change with potentially catastrophic consequences”. The basic principle is that “the biosphere is our common heritage and must be preserved by cooperation”. Therefore, the Report advises, “all nations have to cooperate more urgently in international management of the atmosphere and other global commons”. Broadly conceived, the point is not only to facilitate transition to post-fossil fuels economy but, more generally, also to shape the direction, composition, distribution and speed of economic change towards more sustainable paths. For this, strong public policies and new kinds of global institutions are required.
From a global Keynesian perspective, it is possible to address the ambiguities of the EU carbon border levy. Building a global tax system is a process. A border levy becomes defendable if it is a part of an increasingly inclusive global system, and if that system is widely seen as vital for the future of the life systems on Earth. A process of establishing a global tax can be started by a coalition of willing states with the support of global civil society movements and organisations. At first some twenty states, including the EU, would be sufficient for establishing a tax organization. The aim is to increase the number rapidly over time. If all countries applying the global tax imposed countervailing duties or levies on imports from countries outside the tax regime, it seems plausible to assume that over time – under the changing circumstances – other countries would find it favourable to opt in. Thus, this scheme is dynamic: the levy serves as an incentive to join the system and adopt greenhouse gas taxes within a common global framework, as specified in its constitutive treaty.
Establishing a global climate tax is a political problem but also an issue of justice. A uniform global tax would treat everyone similarly, thus favouring those who are already relatively energy efficient as many EU countries are. The situation is similar or analogical also with regard to other greenhouse gases. Any tax would affect the developmental potential of many, whereas the tax must be set at a relatively high level in order to be effective. The problem is that the world economy is characterised by uneven geo-economic developments. Historical paths of different countries and parts of the world have been and are diverse – there is also the issue of colonial and imperial past. So far, the early industrialisers have made by far the biggest contribution to the problem, whereas some of the least industrialised areas seem especially vulnerable to the effects of climate change. Moreover, the Asian growth centres have been rapidly increasing their share of emissions (again, see Smith, 2020). The role of the new centres of growth has been central to the debates about the Kyoto Protocol and Paris Agreement especially in the US. There is a relative wide scope of legitimate disagreements, but also a need to find common solutions. This not only suggests a quest to facilitate dialogue about different understandings of justice but, most importantly, also a need to organise common global institutions in a democratic manner.
This line of argument raises complex new issues, but it also suggests that instead of giving the task of setting up a Global Greenhouse Gas Tax (GGGT) to an existing international organization, a coalition of the willing should establish a new democratic organization. There is no existing organisation that would match the membership and aspirations of those setting up a GGGT, or provide the needed functions. What, then, should the organising principles of the GGGTO be? There are many possible ways to combine different understandings and principles of democratic legitimacy: equality of states, representation of populations, and active civil society participation. For example, states’ votes would vary from one to three depending on their population. The Council of Ministers could follow qualified majority decision-making with secret ballots, and by empowering the representative and participatory pillar of the system with real powers such as motions, veto-rights and budgetary rights. This system encourages all states to join the organisation and their governments to participate fully in its Council of Ministers, but in its second chamber (or whatever it will be called), it gives full rights of representation only to national parliaments elected in free and fair multi-party elections. It verifies the spontaneity of civil society actors by a combination of a screening process and lottery, thus putting some ancient Greek procedures to work in a new context.
According to Earth system scientists, climate change is just one of several conjoint problems of environmental and ecological breakdown. Resolving climate change problems depends on whether stabilising negative feedback loops or self-reinforcing, positive feedback loops dominate. We have now entered a period of recognised “climate emergency” (Ripple et.al., 2021), while many pundits argue that most of the dire warnings of the past forty years have been on the mark (for example Kanninen, 2013). As the Earth is approaching or already passing boundary-tipping points, the positive feedback loops are being drastically strengthened, with potentially catastrophic consequences (see for example Pearce, 2019). Uncertainty about the future continues to prevail and uncertainty can work both ways, but what seems increasingly clear is that all the warning signals are flashing red. The 1990s approach based on markets and voluntary commitments has proven inefficient and counterproductive (in spite of some minor intended effects).
We have argued in this short text that there is an alternative: a global Keynesian GGGT. While the tax relies on market mechanism for some of its effects, it is also market disruptive and meant to open up a space for global public policy. Our preliminary proposal is to establish a new, democratically organised but inclusive global organization. Moreover, we have argued that building a global tax system is a process. From a global Keynesian perspective, a border levy is defendable as a part of an increasingly inclusive global system – especially if that system is widely seen as vital for the future of the life systems on Earth.
Jamie Morgan is professor at Leeds Beckett University, lecturing in the areas of economics, analytics and international business. A well-known heterodox theorist and scholar, Jamie co-edits Real World Economics Review with Edward Fullbrook and is especially concerned about the impact of climate change.
Heikki Patomäki is professor of world politics and global political economy at University of Helsinki. A well-known activist scholar and theorist, Heikki has published a number of academic and popular books and articles and participated in transnational movements. During the past 15 years, he has also been involved in developing the idea of world political party.