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Carbon emission trading schemes - a gas factory in the making

Flashback: first published 29 May 2008

The French have a term usine à gaz or ‘gas factory‘, a metaphor for overly-complex bureaucratic mechanisms that are disproportionate to the problems they are supposed to solve. Ironically, the term seems highly descriptive of the ‘cap and trade’ carbon emissions regimes being proposed by governments in many countries.

Every academic, economist, environmentalist, business leader and indeed politician with whom I’ve discussed this has said something along the lines that a carbon tax is the simplest and most effective way to penalise carbon emission, but that ‘cap and trade’ is the only way to get everyone on side. Even oil and coal executives seem to privately support a simple tax system. I assume they must exist, but I have yet to meet someone who actually thinks ‘cap and trade’ is a good way to reduce carbon emissions. It’s as if no-one in a national or international leadership role is prepared to be the first to say this is a stupid system.

What about the countries that don’t impose a carbon tax? Won’t that just see jobs and carbon pollution exported to them? I’d argue that countries that won’t impose a carbon tax are even less likely to impose a complicated bureaucratic system like ‘cap and trade’.

The most neutral system for countries that want to discourage carbon emission is to tax it - either at the point of domestic production or at the place of import;.  Exports would be carbon-tax-free (i.e. the tax is reclaimed on exports, but taxed by the country importing those goods if it so chooses).  My idea is akin to VAT/GST which are consumption taxes neutralised at the border, and hopefully (I’m no expert) it does not break WTO rules on border taxes. Likewise the taxation point for international travel and shipping would be the arrival port. This would be neutral with non-complying countries, whose exports would therefore still be captured by the tax regimes of importing countries. Countries could be as aggressive or light-handed in their level of tax as they choose. Of course there would be complexities, like how to estimate the carbon content of imports, but still much less complex than the alternative.

However, the absolutists won’t buy the idea of carbon-tax-free exports, and so we have this nonsensical system of ‘cap and trade’. Someone needs to show some leadership on this. It would be nice if it came from both the green and carbon-producing sides of the debate.

Update 20 February 2012. Surprise, surprise!  Reports from Europe indicate that the penny has started to drop: the bureaucratic and rorted cap & trade system isn't working. 
Update 8 June 2014. Finally the NZ Greens announce a policy to scrap NZ's CETS in favour of a carbon tax. Don't like strange sectoral variations nor the cross-border impact.  I prefer my trade-neutral idea.  The absolutist Greens are unlikely to go for it directly, but might if it helped them form a coalition government with NZ Labour, who historically have been pro-trade.