By Maximilian Auffhammer and Richard Carson
Thursday, August 2, 2007
China is about to emerge as the world's leading emitter of greenhouse gases, a position the United States has held since 1890. Now is the time for China to take the lead in finding a way to reduce global emissions, which the United States has thus far failed to do. It should start by imposing a sizable tax on the carbon content of its fossil fuel consumption and by heading an effort among other major trading countries to do the same.
China would gain in several ways from implementing a substantial carbon tax. By reducing its fossil fuel consumption, China would prevent the deaths of hundreds of thousands of citizens because of the short- and long-term consequences of air pollution from burning coal. Investments in energy-efficient durable goods, encouraged by a carbon tax, would generate energy savings over the lengthy life of these investments. The demands of China's rapid economic growth are outstripping the country's ability to provide the infrastructure necessary for continued growth; a carbon tax would slow short-term growth and allow infrastructure investments to catch up. Ultimately, this would lead to greater long-term growth. If China fears a drag on its economy from the carbon tax, it could make such a tax partially or fully revenue neutral by reducing other taxes.
For China, as for many rapidly industrializing countries, a carbon tax represents the possibility of additional payoffs. From an overall economic perspective, it would be more efficient than many other forms of taxation. It would be harder to evade and easier to collect (since a resource tax on fossil fuel use is already in place), and it would be more progressive than many existing taxes.
The alternative to a global carbon tax is to continue building on the Kyoto Protocol, which the world's industrialized countries, minus the United States and Australia, have ratified. The United States could potentially come to terms with the industrialized signatories by agreeing to effectively constrain its emissions to original Kyoto levels but with a later deadline. This would suit China's expressed desire that industrialized nations bear the burden of cutting emissions while its own economy continues to expand. However, these actions are unlikely to result in a sizable enough reduction to offset projected annual increases by China -- which are roughly equal to France's total emissions -- and other rapidly industrializing countries.
China's argument for making no substantial reductions is one of fairness: The developed countries that are members of the Organization for Economic Cooperation and Development have contributed most of the excess greenhouse gases to the atmosphere and should bear most of the burden of reducing emissions.
This position resonates strongly among developing countries but would doom the world to the potentially devastating consequences of large-scale climate change.
The only way out of this dilemma is for the world's major trading nations to come to a consensus on implementing a reasonably high carbon tax. The country with the most to gain is China. Indeed, the gains are likely to be sufficiently large that it is in China's interest to adopt such a tax even if other countries do not.
Widespread agreement among the major trading nations on a common carbon tax would disproportionately benefit China because it would be less costly for China to cut back on carbon emissions due to the relative inefficiency of China's fossil fuel consumption. These gains would be further amplified by a broader understanding that all countries would impose an import tariff equal to the agreed minimum carbon tax unless the exporting country imposed the tax (or an equivalent emissions trading scheme). This tariff would provide a clear incentive to all countries to impose the carbon tax, since the taxing country would collect the revenue.
The question is whether China is willing to lead the effort to implement a world carbon tax, which many economists believe is the best way to avoid large-scale global climate change. China's leaders would need to put future growth ahead of short-term growth and accept the burden of explaining the increase in fossil fuel prices to its people. Most important, they would have to put the Chinese people ahead of special interests that gain from continuing along the path of dirty energy.
Maximilian Auffhammer is an assistant professor in the Department of Agricultural and Resource Economics at the University of California at Berkeley. Richard Carson, a professor in the Department of Economics at the University of California at San Diego, is immediate past president of the Association of Environmental and Resource Economists.