Carbon Fee versus Cap and Trade in Developing Countries, Robert Archer, 2015 PDF
Preview Carbon Fee versus Cap and Trade in Developing Countries, Robert Archer, 2015
CARBON PRICING: THE UNEXAMINED CASE FOR THE CARBON FEE AND DIVIDEND POLICY (“CARBON TAX”) by Robert A. Archer SUMMARY: The growing support for carbon pricing leads to two systemic approaches: a revenue neutral carbon fee (“carbon tax”) and household dividend versus cap and trade. The U.S. analyses on these options do not address their viability in low-‐ and middle-‐income countries where the greatest emissions occur. They do not recognize two characteristics of many of these countries that must be considered in the choice between the two policy options: weak institutional capacity and corruption. Carbon pricing must work in the major emitting low-‐ and middle-‐income countries with institutional weakness and serious corruption including China and India. Just nineteen countries with these characteristics, excluding China and India, constitute the second largest emissions group ahead of the U.S. and behind only China. In this context, cap and trade is a mismatch due to its complexity, administrative burden and discretion, “flexibility” and non-‐transparency. Such a system will facilitate the growing concentration of power and wealth among the political and economic elites. A carbon fee and dividend does not have these disadvantages. It is “administration-‐lite”, transparent, would reside in the strongest ministry (finance/tax authority), and provide predictable revenues for household dividends, unlike cap and trade. A carbon fee and dividend, a fiscal tool, would receive oversight as part of the countries’ IMF relationship. Regular distribution of the revenues to households would cover household costs of the low-‐carbon transition, build political will and address a key policy problem: uneconomic energy prices and affordability. The U.S. and international community need to advocate the advantages of the carbon fee and dividend as the workable alternative and avoid the slow faux implementation of cap and trade and disappointing CO2 reductions. The world cannot afford another lost decade of cap and trade. I. BACKGROUND For a considerable time the climate change dialogue has focused on the science and impacts and less on systemic solutions. Concern is shifting to systemic solutions, specifically carbon pricing. The World Bank Statement on Carbon Pricing has been signed by 73 countries, 1000 companies and investors and 37 © 2015 Robert A. Archer 1 non-‐governmental organizations.[1] This discussion will grow as the December 2015 Paris U.N. Framework Convention on Climate Change negotiations approach. Carbon pricing is the systemic economic and efficient policy approach to address climate change, unlike regulatory approaches. Two options are broadly considered: a carbon fee (commonly referred to as a tax) and cap and trade. While both are being tested increasingly, cap and trade has a longer mixed history in Europe and sub-‐nationally in the U.S. due to U.S. advocacy in the early Kyoto negotiations. [2] There is, however, growing discussion and support for a revenue neutral carbon tax policy. U.S. advocacy will be essential to advance the policy. A three part revenue neutral carbon fee concept is gaining increased support in national and international discussions. It consists of: (1) a steadily increasing carbon fee imposed at the source on coal, oil and gas; (2) all revenues returned in an equal per capita “dividend” via monthly or quarterly check to all households; and (3) a “carbon duty” imposed at the border to stimulate harmonization of carbon fees among nations and address adverse competition from countries without a carbon fee (“free riders”). The purpose of this paper is to compare the applicability of the carbon fee and dividend versus cap and trade in low-‐ and middle-‐income countries based on their critical characteristics—institutional weakness and corruption. Finally, it is essential to keep in mind that climate change is global and requires multiple national systemic responses. [3] The response needs to: (i) achieve support across the political spectrum; (ii) create on-‐going broad-‐based support; and (iii) provide economic incentive for all countries to act. U.S. regional and state approaches and energy regulatory sub-‐sector approaches are not cost-‐ effective, not systemic and cannot provide the economic incentive for other countries to act. They will not achieve the global systemic impact needed to change the carbon emissions trajectory globally. © 2015 Robert A. Archer 2 II. CARBON PRICING: DEFINITION OF CARBON FEE & DIVIDEND AND CAP & TRADE Carbon pricing is a widely accepted economic concept that addresses the negative external cost on others of generating carbon pollution. There are two systemic approaches to carbon pricing. “It’s not a tax if the The carbon fee and dividend is a price-‐based system government doesn’t that affects prices throughout the economy and keep the money.” alters consumption and investment decisions. Cap Former Secretary and trade is a quantitative system that seeks to limit George Shultz (cap) the amount of emissions from polluting entities. Carbon Fee and Dividend Defined The term “carbon fee” is used rather than carbon tax. This is not an effort to hide a tax but because of the succinct observation of Former Secretary of State and Treasury Secretary George Shultz (and Citizens’ Climate Lobby Advisory Board Member) that: “It’s not a tax if the Government doesn’t keep the money.” [personal communication, Peter Joseph, 2014] Hence, the principle of full return of all revenues to every household is a significant element. It is “revenue neutral.” For purposes of this analysis, the “carbon fee and dividend” is defined as the three part revenue neutral concept of: (1) a steadily increasing carbon fee imposed at the source on coal, oil and gas; (2) all revenues returned in an equal per capita “dividend” via monthly or quarterly check to all households; and (3) a “carbon duty” imposed at the border to stimulate harmonization of carbon fees among nations and address adverse competition from countries without a carbon fee (“free riders”). Cap and Trade Defined “Cap and trade” is a system that places an administrative cap or limit on emissions (usually based on a baseline) by the government and the authorization to emit in the form of allowances issued by a governing body. Such governing bodies often have significant administrative discretion in the complex forecasting of emissions, determining the quantity of permits to be issued and intervening when the price of allowances is too high, low or variable. Each emission source © 2015 Robert A. Archer 3 must report accurately its emissions and submit allowances equal to its emissions. [4] Allowance trading is a central feature that allows emitting entities to sell and purchase allowances to meet their requirements. To date it has generally involved the financial sector as well and establishment of trading markets. Also, banking of allowances has been a feature of the European Union Emissions Trading System (EU ETS) that allows emitters to buy and hold allowances against their future pollution. Additionally, the purchase of “offsets” in developing countries through participation in clean energy projects (Kyoto Accord Clean Development Mechanism (CDM) and Joint Implementation) or forestry preservation or planting (UN Program on Reducing Emissions from Deforestation and Forest Destruction-‐-‐ REDD and REDD+) has occurred extensively with significant abuse. [5] Historically, the cap and trade concept has been more considered and advocated going back to the pre-‐negotiations period of the Kyoto Agreement when the U.S. pushed for it versus the carbon tax concept desired by the European Union. As a result, the EU ETS is the most extensive example of cap and trade to date. While cap and trade variations are proposed, the core characteristics predominantly remain—complexity, discretion, “flexibility” and lack of transparency. III. THE LOW-‐ AND MIDDLE-‐INCOME COUNTRY CONTEXT FOR CARBON PRICING U.S. Policy Analyses: Overlooking Low-‐ and Middle-‐Income Countries Weak Institutions and Corruption There has been considerable analysis of the carbon fee and cap and trade in academic institutions [6} and think tanks. [7] The analyses generally use criteria for comparative evaluation which are relevant for domestic policy debates. The analyses (and criteria) generally underestimate or fail to consider the importance of pursuing a policy that works not only in the U.S. and Europe but in low-‐ and middle-‐income countries with significant emissions. Context matters. These differences should significantly affect the choice between cap and trade versus a carbon fee and dividend. Institutional capacity is generally weak and uneven in low-‐ and middle-‐income countries. For purposes of this paper it is defined as the ability of government © 2015 Robert A. Archer 4 organizations to exercise authority, carry out functions, attract and maintain competent human resources and work effectively with other government entities. “What is true for international agreements is true for domestic policy: whether governments achieve the goals they set…mostly depends on that country’s institutional capacity.” [8] Corruption is a pervasive and complex element of the international development process. Systemic corruption embedded in existing on-‐going practices, such as the energy sector, combined with political and bureaucratic abuse, is a significant concern in low-‐ and middle-‐income countries. Corruption is compounded by weak institutional capacity. The energy sector corruption in countries such as Ukraine, Tanzania, China and Brazil [9,10,11,12] is significant, systemic and has political consequences. Elements within the energy sector, the government and selected private sector interests are able to manipulate the institutions, processes and financial and energy flows in a manner to establish systemic corruption and rent-‐seeking arrangements. In response to the view that corruption is a “country issue” and not the concern of the international community, the pro-‐active position of the World Bank President Jim Kim is representative and responsible: “The governance issues are real. Corruption is a very real issue. We continue to work in places where we know there is corruption, because there is no other group that would do it. So we’ve got to fight corruption, we’ve got to do everything we can to help specific countries improve on their governance.” [13] Institutional capacity and corruption factors will have much greater importance in determining the appropriateness of a carbon fee and dividend versus cap and trade in low-‐ and middle-‐income countries than in high-‐income countries (the EU and U.S.) as discussed below. The Low-‐ and Middle-‐Income Country Context Economic growth has been more rapid in low-‐income and middle-‐income countries compared to high-‐income countries. [14] Rapid growth combined with a higher energy intensity results in CO2 rates of emissions that generally exceed those of higher-‐income countries. © 2015 Robert A. Archer 5 Limited institutional capacity has been a serious constraint in achieving reforms and sustainable development. It manifests itself in government organizations that lack adequate skilled human resources, ineffective organizational structures, inability to administer and apparent but not real authority. Organizations within countries vary significantly in capacity depending upon their importance, engagement with international organizations and other factors. Generally two of the strongest organizations are the fiscal/tax authorities and the organizations responsible for border tariffs and trade. Often among the weaker are ministries and agencies such as environment, health, statistics and energy ministries, with the energy companies exerting undue influence and corrupt practices. Significant attention has been on the rapid economic growth and rising CO2 emissions of China and India. While this is understandable, it overlooks a major block of predominantly low-‐ and middle-‐income countries and how their characteristics will affect the implementation of a carbon fee and dividend versus cap and trade. Failure to give adequate weight to weak institutional capacity and corruption in the emerging U.S. and international debate on carbon pricing will lessen the probability of sound policy choices and effective CO2 reduction. Corruption, Governance and Emissions: The Group of 19, China and India “Serious” corruption and weak governance and institutions prevail in a group of nineteen countries with significant and growing emissions. Corruption and institutional weakness are measured in the table below by the indices of Transparency International (TI) [15] and the World Bank (WB) Corruption and Governance Index. [16] The countries are in rank order of their 2013 CO2 emissions. [17] Table 1 shows the magnitude of the emissions from the “Group of 19” in political economies that are institutionally weak and with serious corruption. © 2015 Robert A. Archer 6 TABLE 1 NINETEEN COUNTRIES WITH HIGH EMISSIONS, “SERIOUS” CORRUPTION AND INSTITUTIONAL WEAKNESS COUNTRY EMISSIONS (kt) CORRUPTION GOVERNANCE AND INDEX CORRUPTION INDEX (WB) (TI) (WB) Russia 1,740,776 127 45/17 Iran 571,612 144 28/28 Saudi Arabia 464,481 63 57/61 South Africa 460,124 72 66/54 Mexico 443,674 106 60/40 Indonesia 433,989 114 45/30 Brazil 419,754 72 51/55 Ukraine 304,805 144 30/10 Turkey 298,002 53 65/60 Thailand 295,282 102 61/49 Kazakhstan 248,729 140 35/20 Malaysia 216,804 53 82/68 Egypt 204,776 114 20/32 Venezuela 201,747 160 13/7 Argentina 180,512 106 45/41 Pakistan 161,396 127 23/28 Algeria 123,475 94 32/39 Iraq 114,667 171 15/7 Nigeria 78,910 144 16/9 TOTAL 6,963,515 China 8,286,692 80 54/47 India 2,008,823 94 50/35 Sources: Transparency International (TI) and World Bank (WB) Indices All countries ranked below #53 on down to #171 as defined by the TI Corruption Perception Index have “serious” corruption. [Note: Turkey and Malaysia are on the borderline at #53; their inclusion does not change the conclusions.] © 2015 Robert A. Archer 7 This corruption index ranking is generally consistent with the World Bank Governance and Corruption Index scores in the last column where the lower the score the weaker the governance and worse the corruption. TABLE 2 CHINA, GROUP OF 19 AND INDIA CONSTITUTE THE MAJORITY OF GLOBAL EMISSIONS COUNTRIES EMISSIONS (2013) % OF GLOBAL (kt) EMISSIONS China 8,286,692 24.7 Group of 19 6,963,515 20.7 India 2,008,823 6.0 Subtotal 17,259,030 51.4 U.S. 5,433,057 16.2 Rest of World 10,923,302 32.4 Total 33,615,389 100.0 Table 2 shows the significance of the “Group of Nineteen” CO2 emissions. This group constitutes the second largest source of CO2 emissions in the world— ahead of the United States and India and behind only China. It is important to note that both China and India have significant institutional weakness and systemic corruption issues as well as the Group of 19. (See the bottom of Table 1 for their scores). Table 2 shows that over 50% of global emissions come from China, the Group of 19 and India and all are growing faster than high-‐income countries. This highlights the importance of encouraging a carbon pricing policy that is “administration-‐lite” and provides the least opportunity for corruption and abuse—whether legal or illegal. The discussion of the carbon pricing options below applies not only to the Group of 19 but to India and China as well given their similar characteristics. © 2015 Robert A. Archer 8 IV. CARBON FEE AND DIVIDEND VERSUS CAP AND TRADE “Reform” Versus Reality Getting acceptance and “formal” adoption of a carbon pricing policy is one thing; real implementation is another, as shown by international development experience. Without effective implementation, carbon emission reductions will be illusory. There is widespread experience in the development community with the gap between adopting policy reforms and actual implementation in low-‐ and middle-‐income countries. An example is in the energy sector where reform commitments with international organizations (World Bank, IMF) and donors (EU and U.S.) have a history of mixed implementation. For successful implementation and results, it is necessary to consider the institutional capacity of the country and the corruption opportunity risks in both the policy and implementation. It is this gap between formal adoption and real implementation that is significant in the comparison of the carbon fee and dividend policy and cap and trade. Implementation of a carbon fee is achievable; cap and trade unlikely. Carbon Fee & Dividend: The Best Fit for Low-‐ and Middle-‐Income Countries The carbon fee, dividend and duty policy has significant advantages over cap and trade in low-‐ and middle-‐income countries (and high income countries which are not included here). The economic arguments are compelling, particularly those relating to revenues, volatility, transparency, and predictability. The carbon fee and dividend approach is an obvious fit in what is generally considered the strongest government organization-‐-‐the ministries of finance/tax authorities. The carbon fee and dividend requirements are fully consistent with the institutional role and strengths of the Ministry of Finance and revenue authorities which include tax collection and disbursement functions. Most importantly, countries’ fiscal organizations generally have direct working arrangements with the International Monetary Fund (IMF). The IMF provides policy guidance and assistance, institutional development support for taxation, budget and expenditures for its client countries. This provides a degree of assurance that a carbon fee and the dividend can be carried out effectively and with a degree of international oversight. © 2015 Robert A. Archer 9 Similarly, the carbon duty imposed at the border and administered by countries’ border/trade organizations would operate under the framework of the World Trade Organization (WTO) which has on-‐going working arrangements with all member countries. The WTO emphasizes transparency and trade monitoring through surveillance of national trade policies. This is a fundamental activity running throughout the work of the WTO. All WTO members are reviewed. [18] In this manner, the carbon fee and dividend differ significantly from cap and trade which has no comprehensive empowered international counterpart for oversight. [Note: such oversight is beyond the capacity and authority of the World Bank.] The revenue-‐neutral dividend is a central part of the carbon fee concept. A steady household rebate to all households is significant for two reasons. First, it allows governments to address one of the most significant problems in energy reform that plagues low-‐ and middle-‐income countries: price reform. The dividend, based on analyses to date, will hold harmless between 60%-‐80% of households from the resulting price increases. Within this transition, governments will be able to reform price structures and levels that impede clean energy investments, energy efficiency and expanded multilateral donor support. Secondly, the steady predictable household dividend builds broad-‐based political support for continuation of the carbon fee, serves as a political guard against diversion of revenues and facilitates the overall transition for all income levels. It is important to note that this predictability is not a characteristic of cap and trade given the experience to date of widely fluctuating allocations and allowance prices. To date, the experience with cap and trade shows that revenues fluctuate significantly. This makes the concept of rebates to households in cap and trade program more aspirational than achievable. The carbon fee and dividend has comparative advantage over cap and trade in low-‐ and middle-‐income countries: Less Administrative Burden: The policy calls for a fee on a limited number of coal, oil and gas firms (and imports) and distribution of those revenues to households. This is a perfect fit with the functions, expertise and experience of the ministries of finance/tax authorities (that are usually closely engaged with the IMF). Less Administrative Discretion: The fee is fixed, escalates annually and its simplicity allows for monitoring and verification. Household distribution is self-‐ © 2015 Robert A. Archer 10
Description:The list of books you might like
