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The Trouble With Carbon Taxes: Lessons For Asian Policymakers

Tilak Doshi, Forbes

Asian energy planners and policy makers are not likely to be encouraged by the experience of carbon tax legislation in a number of countries in the West which have been at the fore-front of “decarbonizing”.

As some of the world’s largest carbon emitters, the major emerging Asian economies such as China, India and Indonesia as well as the developed countries Japan and South Korea have been under pressure in international climate change forums to adopt carbon pricing. Asian energy planners, however, are not likely to be encouraged by the experience of carbon tax legislation in a number of countries in the West which have been at the fore-front of “decarbonizing”. Many voters in the developed countries have become increasingly resentful of expensive climate change policies predicated on model-based projections of impending environmental catastrophe. There is no reason to believe that the average Asian citizen, generally poorer than his Western counterpart, will be any less opposed to policies which increase energy prices in his household budget.

Pricing carbon

It is well established among economists that a price on the carbon content of fossil fuels is a far more efficient policy instrument than bureaucratic regulations or government-directed subsidies for power plants, appliances, machinery, buildings and cars. A carbon price can be imposed as a tax or via emission trading schemes (“ETS”) which let markets set the price of carbon allowances. A group of eminent US economists published a bipartisan open letter in the Wall Street Journal earlier this year stating that a “carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary”.

An increasing number of governments as well as regional and local authorities around the world have been legislating carbon or greenhouse gas (GHG) pricing schemes. In its latest (2018) global survey, the World Bank claims that carbon taxes and ETS continue “to gain traction.” To date, 88 countries of those (over 190) that submitted their “nationally determined contributions” to the Paris Agreement in 2015 have stated that they are planning to use carbon pricing as a tool to meet their voluntary commitments.

China, Japan and South Korea are experimenting with voluntary ETS in some cities and provinces while Thailand, Vietnam, and Taiwan are “considering” future ETS or carbon taxes. The tiny city-state of Singapore is the first on record implementing a nation-wide carbon tax of just under $4.00/tCO2e (ton of carbon dioxide equivalent, a measure of GHGs emitted) on large industrial emitters from 2019 onward.

The political revolt against carbon taxes

But these early moves on carbon pricing in Asia are likely to remain limited, as the unfolding political revolt against burdensome energy policies has become increasingly apparent in the West. On May 3rd, the German magazine Spiegel reported that the leader of the Christian Democratic party rejected the call for nationwide carbon taxes, as the interests of the German economy trumped climate change concerns of its partners in the governing coalition. This occurred only days after it was claimed that Germany was moving towards a carbon tax as senior officials from the coalition government had reached a seeming consensus.

The German U-turn is only the latest in a series of set-backs that carbon tax policies have faced in Europe. In March and April, two fledgling political parties on the right (the Finns Party and Forum for Democracy) surged electorally in Finland and Holland on campaign platforms that featured calls for lower fuel prices and an end to funding for international climate change agreements. The national protests in France by the yellow vests garnered a global media audience that witnessed the fury of voters’ reaction against fuel taxes among other issues. In December 2018, French President Emmanuel Macron was forced to suspend increases in petrol and diesel taxes.

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