While no country alone can make a difference, change is possible through cooperative global action. With the Biden administration fully prepared to recommit the US to do its bit, there’s hope for significant movement in the climate talks in London later this year. As a leader among emerging markets, India should go with a serious proposal likely to move the needle and also fair to the industrialising world.
Economists generally agree that an important way to reduce carbon emissions is to tax them. But the changes those taxes bring about will, by design, be disruptive in the short run. That means any discussion of imposing a carbon tax in a country soon runs into either free-rider or fairness problems. Industrialised countries such as the US are concerned that developing countries will free-ride and keep pumping out emissions. Indians, however, believe there’s profound inequity in asking India, which has a per capita emission of 1.8 tons of CO2 in 2017, to bear the same burden as the US (16 tons per person), or Saudi Arabia (19 tons).
Yet, the least costly way of reducing global emissions would be to give everyone similar incentives – India should not build many more dirty coal plants as it grows, and Europe should close down the plants it already has. So how do we balance these concerns while saving the one world we live in?
The economic solution is quite simple: A per-ton carbon levy called the global carbon reduction incentive (GCRI). Every country that emits more than the per capita world average (5 tons) would pay into a global incentive fund. This annual payment would be calculated by multiplying excess emissions per capita by their population and the GCRI. If we started the GCRI at $10 per ton, the US would pay around $36 billion while Saudi Arabia would pay $4.6 billion. Countries below the global per capita average would receive a commensurate payout – Uganda would receive around $2.1 billion, while populous but low-emitting India would get $41.6 billion.
Every country faces a loss of $10 for every ton by which they increase per capita emissions, whether they are at a high, low, or average level today. So India has the same incentives to economise on emissions as the US.
Moreover, this addresses the equity problem. Low emitters, often the poorest countries and most endangered by climatic changes they didn’t cause, get a payment. Indeed, if the GCRI is raised over time, the collective sums paid out will approach the $100 billion per year that poor countries were promised by rich ones in 2009 for climate adjustment. GCRI also assigns responsibility for payments in a rational way: Fortunately, the big emitters typically have the ability to pay.
Ideally, each country, including recipients, would decentralise GCRI through a domestic carbon tax, which may be set at a higher level. For example, the Baker-Shultz plan in the US proposes to tax carbon at a rate of $43 per ton, and rebate the sums collected to every American family via a carbon dividend. That would help the tax attract broad political support by keeping average personal income unchanged while curbing emissions. Excluding the richest taxpayers from receiving the dividend would allow the US to use some of the money raised to pay its contribution to the global fund. India, too, would have an incentive to impose a carbon tax at least as high as the GCRI.
The tax would set developing countries on the right emission path, rewarding their investment in renewables, while discouraging coal. Furthermore, the very poorest countries could use their payments from the global fund to help their people adapt to climate change and reduce incentives for outward migration. They could also buy insurance against climatic disruptions.
Alternative carbon tax proposals are less fair. For instance, some countries that plan to impose a domestic carbon tax also want to impose a border adjustment tax, effectively applying the same tax rate to goods coming in from countries without a carbon tax. This might push more countries to impose their own carbon taxes but does nothing to improve equity between countries. Instead border taxes would let large importing countries impose their tax preferences on others, and might allow protectionism to creep in under the guise of adjustment.
Some adjustments to the GCRI may be necessary. For instance, what’s consumed is as important as how it’s produced, so we should ensure some portion of the emissions embedded in imported goods are added to the importing country’s emissions tally, and subtracted from the exporting country’s tally.
The GCRI proposal also ignores past responsibility for building up carbon in the atmosphere. Dealing with that liability will be controversial and shouldn’t impede efforts to address the immediate challenge of climate change. The GCRI proposal offers a fresh, rational and equitable approach to account for, and change, present emission behaviour – all the more necessary after COP25’s failure in Madrid.
Despite their past promises, is it optimistic to expect rich emitters to pay? Perhaps! Hopefully, however, the more idealistic youth in these countries, who want climate action now, should break the gridlock by pushing their leaders to accept more equitable burden sharing. In these divisive times, a collective global project to reduce emissions may be the tonic the world needs.