Carbon Tax

Encouraging sustainable growth while avoiding greenflation

Sara Montesel
Current Events

Studies on the subject have shown that the current level of taxation on polluting products is low and does not adequately show the environmental damage caused by their production.

Let’s imagine we are standing in front of the pasta shelves at a supermarket, indecisive about which of the several dozen qualities on offer is the right choice for us. Which package do we choose? We might prefer a whole wheat or organic flour, a durum wheat mix or a protein enriched, if we have no preference we might simply opt for the cheapest brand. Suppose we buy the cheapest packet of pasta, what does our choice convey to the whole production chain? Given that the price of goods is normally linked to the cost of the resources needed for production and distribution, our choice indicates that we prefer the product requiring the least amount of resources or the cheapest. If, on the other hand, we were environmentalists, and as such were interested in buying a product with a low impact on the planet, which packet of pasta would suit our beliefs? In this case it would be particularly difficult to make a choice because the burden of greenhouse gas emissions is not represented in the final price of the product.

In his book How bad are bananas, Mike Berners-Lee explains the environmental impact of everyday products. Consulting a manual every time we are faced with a new purchase can be particularly intricate, in this case Carbon Tax can help.
Carbon Tax is an eco-tax on energy resources that emit carbon dioxide into the atmosphere. It works very simply: every tonne of carbon dioxide pollution released by fossil fuels would be subjected to a fixed tax by the government.
This makes climate impact a real cost that sends a message to all production chains to choose the least polluting alternative, greening every segment of its value chain.
The Carbon Tax was discussed on 3rd November at COP26, the 26th United Nations Framework Convention on Climate Change, scheduled to take place in Glasgow (Scotland) from 31st October to 12th November 2021, under the chairmanship of the United Kingdom. One of the topics on the agenda was how to finance the $100 billion a year fund, for five years to help the least developed countries decarbonise, an action already decided in the Paris Agreement for 2020 but not yet implemented and unlikely to be implemented before 2023.
Kristalina Georgieva, director of the International Monetary Fund, argued in favour of the eco-tax: “We believe that imposing a carbon price at the international level is very important” to achieve the climate goals of the Paris Agreement and that “$65 in 2030 is a fair and pragmatic price”, she said.
“The climate crisis is a threat to the stability of financial systems,” she added, “but green investments can generate 30 million green jobs and a 2% increase in global GDP.
There are two methods for quantifying the ideal value of a carbon tax: the first estimates what energy costs would be if they fully reflected the environmental and social externalities generated by their consumption, while the second calculates the price to be charged on a tonne of carbon dioxide, in line with the Paris Agreement. While both methods have been used in quantifying the ideal value, studies on the subject have shown that the current level of taxation on polluting products is low and does not adequately show the environmental damage caused by their production.
According to these analyses, the introduction of a carbon tax would generate a considerable amount of revenue that could be reinvested in projects that benefit the environment, health and work.
Therefore, regardless of whoever is standing in front of the pasta shelves, indecisive on which package to put into their trolley, whether an animal lover, a vegetarian, a classic car enthusiast, a turner, a child or a comic book collector, we should all be informed and educated from childhood onwards about conscious purchasing.
Today, carbon dioxide emissions from fuel combustion exceed 30 billion metric tons per year; as things stand, these numbers are expected to triple by 2100, due to increased energy consumption, especially in developing countries – which currently account for 60% of total emissions. In the absence of regulation, the expected temperature increase over pre-industrial levels is 4°C by the end of the century, which is why the Paris Agreement, signed in December 2015, aims to limit the temperature increase to a maximum of 2°C. On the basis of what has been said, the carbon tax is certainly a valid tool in the fight against climate change, directing every single player in the game towards the use of greener technologies.
However, this conversion could give rise to so-called greenflation: it is estimated that decarbonisation could cost the end consumer a price increase between 1% to 4%.
According to Financial Times journalist Gillian Tett, the signs of greenflation are already visible. In order to deal with the risks, governments should consider three factors. Firstly, they should be aware of the fact that renewable energy cannot yet fully replace fossil fuels, thus solutions will have to be sought to access raw materials that are essential for the environmental turnaround. Secondly, the necessity to anticipate the impact that the increase of carbon dioxide taxes will globally have on the final production costs. Finally, governments should ensure that they protect the most disadvantaged population groups from price increases.
As we make our personal assessments, reflecting on how much we are willing to pay for this conversion, let us not forget to ask ourselves: how much will non-action cost us in damages?

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