Tax and other financial mechanisms towards a Low-carbon economy

Aug 8, 2018 by

The lecturer Emanuele Campiglio presented the topic of sustainable finance with the objective of providing policies for a smooth and low carbon transition through sustainable financing. For that, he emphasized the necessity to develop a strategy to move financial resources to low-carbon and sustainable activities, avoiding economic and financial disruptions in the process.

He indicated that a transition is unlikely to happen on its own since, although there is currently a positive trend towards technological improvements and towards investments related to the stabilization and reduction of the concentration of greenhouse gases in the atmosphere not much money is being derived yet for this sector. This is due to the return on investment that can be ambiguous and risky depending on the type of asset, private interests, changes in policies, or the high initial costs but long-term performance.

This is how the speaker proposed five main topics to achieve it: introduce sustainable incentives for private finance through ‘green’ subsidies financial intervention, removing subsidies for fossil fuels, while introducing a price on the carbon (tax base and/or limit and exchange system); public financial intervention for larges and/or unprofitable investments (through government or national/multilateral development banks); facilitate sustainable financial investments; improve the climate risk assessment and disclosure; and use macro and micro climate-aligned financial regulations.

Regarding to the first main topic (introduce sustainable incentives), we consider that not all taxes are “bad” neither all subsidies are “good”. For instance, a tax imposed to carbon could bring positive impacts and a reduction of emissions, while a tax in solar panels could be very negative. For the other hand, subsidies for clean energies are a positive financial mechanism that could be included in the city and/or country policies in order to promote the change that we need. In the following paragraphs we will mention several examples of this mechanisms being applied.

Sweden has used a carbon tax to reduce GHG emissions since 1991, which allowed the country to achieve the Kyoto Protocol goals of 20% GHG emissions reduction. Sweden’s carbon tax has been credited with spurring the innovation and use of green heating technologies that have significantly phased out burning oil for heating. The tax is of $140/tonne of carbon pollution, which despite the expectations that it would damage the economy, actually helped the country to a more than 100% growth. Furthermore, in Canada, B.C. and Alberta they use carbon taxes as part of their strategies to reduce emissions and encourage investments in energy-efficiency and renewable energy (RE).

In India, a new “green tax” has been implemented to combat the negative environmental effects in several states (Maharashtra, Andhra Pradesh, Himachal Pradesh, and Karnataka). They use this strategy in order to fight pollution from old vehicles (commercial vehicles over 8 years old and private vehicles over 15 years old).

Countries like China, South Korea, Japan and Germany are good examples of pro-green policies. China has become the fourth largest wind power supplier in the world since it has a subsidy of $88/kW to wind turbine manufacturing companies for the first 50 wind-turbine power units above 1.5MW and provides a refund on important duties. Additionally, for certain types of clean projects, the value added tax was reduced form 17% to 8.5%. Germany has promoted renewable technologies through feed-in-tariffs schemes, where utilities are legally required to enter into agreements with RE producers to purchase electricity at a fixed, guaranteed price per unit for a certain period of time.

California’s Air Resources Board launched the state’s cap-and-trade program to help curb GHG emissions. California has joined with Manitoba, Quebec, Ontario, and British Columbia in the Western Climate Initiative (WCI), which goal is to align the cap-and-trade programs from each jurisdiction to establish a wide area covered by a standard program. These jurisdictions have formed a nonprofit to coordinate the trading programs in each area.

However, in the other side of the coin we can think of countries like Spain or the United States of America, where a new tax has been implemented for solar energy. In the USA, a carbon tariff of 30% has been approved by the president this year 2018, which clearly disincentivizes the transition towards a cleaner energy system, additionally, it means 260 thousand people who will not work in this sector. A “tax sun” was  approved in Spain in 2015, which demands for a tax for those self-consumption installations with power greater than 10 kW. Nevertheless, this new policy is against the EU’s climate targets, which expects that 27 per cent of the total energy is generated by RE.

Regarding the mentioned examples, and having in mind that we should “tax the bads not the goods” we consider that carbon taxes and cap-and trade are both good mechanisms, but they also have some pros and cons. Carbon tax might be vulnerable to lobbies, but also gives the idea that money could solve the emissions problem, which actually only “hides” the problem’s depth, and where the rich countries or companies could just pay for their emissions. Regarding cap-and-trade mechanism, its main weakness is that it allows to pollute, so basically there is an intrinsic permit to continue the contamination of our planet.

Written by: Brenda Vaccari and Karla Sulca

Based on the lecture by: Emanuele Campiglio (“Sustainable Finance: Policies for a Smooth Low-Carbon Transition”)