Carbon Tax. A laic pigouvian approach.

This is the abstract of the overall speech that i’ve partially given in an interview at the event “HEY EU, TAX CO2” organized and promoted by STOPGLOBALWARMING.com.

Let’s start from the beginning: participating the Green New Deal is a “great deal”. For personal finance today and global environmental wellness tomorrow.

And we are proving it with Ener2Crowd, the first Italian lending crowdfunding platform dedicated to the energy transition, thanks to which we are basically fighting climate change with the same sword that caused it: money. Yeah, right. It’s possible.

Our mission is to explain to people that a climate remediation is not just good and possible (with the actual available technology, such as our platform), but definitely convenient.

In this perspective we can be considered the missing link: the option of a short term action — investing in the green economy — as a response for the consistent worries about our future and the real threats we will have to keep on facing, environmentally, socially and economically talking.

We compete with the old market, in the market, with GREEN opportunities that beat the market.

For being myself a co-founder of a “green money machine” i think we need a “laic pigouvian approach” to the Carbon Tax.

Arthur Pigou (1877–1959) was the first neoclassic economist to focus on welfare economy. His economic theory was mainly focused on using economics for the good of society. It was quite clear to him that we need somehow to make private firms or individuals pay the social costs for the decisions they took not in the same direction of the collective interests, balancing what are clearly externalities.

Today we know that carbon emissions are an externality and that we have to start to price them, socially and environmentally. And Carbon Tax is the tool to introduce that price in the market. At least in the EU Market.

Of course it is not an easy argument to be debated. But we know it works, and we know it for 3 reasons:

1. In countries with a high usage of fossil fuels as Australia, it was removed after 2 years because it was really making unprofitable to emit CO2 emissions: in just 2 years of activity it produced a drop of +28% of renewables and a plunge of coal use from 14% to 5% in electricity production.
2. In Sweden it has worked — with an astonishing price of 150€/tonCO2 — transforming the entire sector of heating (supporting a transition from coal to biomasses).
3. It has been discarded by the international diplomacy.

But there are also three dilemmas to be solved.

The first dilemma is that we truly need a switch in terms of accountability from the industrial and productive world: they have to recognize themselves to be the cause of the problem and give an economic contribution to the society that indeed has allowed them to prospere and grow.

The second dilemma is how to use those money for: in California the “cap & trade” scheme has contributed for 5 billion dollars, used for low income or disadvantaged people programs or to support further emissions plans. But this kind of “impact” solution would probably increase the overall fiscal pressure.

The third dilemma is how much to make them pay for every ton of CO2 emissions.

And today that everything has slowed down we need to rush, at least in taking a decision, because it is very possibile that a big rebound in CO2 emissions will come following the restart of an economy supported by the condition of fossil fuels low prices (still the main source for EU energy final consumption, about 82%).

Which answer can we give?

1. My answer to the first dilemma (accountability) is: improve data collection, sharing and transparency about polluters so to stimulate their accountability response. Once you have a clear vision of who is polluting and through which services and products, the market, “we” will be able decide or at least we will be conscious that be need an alternative for our “consumeristic-status-quo”.
2. My answer to the second dilemma (how) is: we need those money to reduce the taxation on people — we can decide to make it proportional to the personal richness level — and on the other companies that are improving or have already improved their sustainability target or that are not polluting as much. We could also reduce taxation on every enterprise, and rely on the additional direct and specific taxations of polluters.
3. My answer to the third dilemma (how much) is: we need to make them pay enough to make fossil fuel not convenient anymore. 20$/ton is a good benchmark if we look to the past, at the Californian and Australian experience, but it is not anymore if we look at science. The “scientific” real price for every ton of CO2 is considered to be fair starting from 100$ and someone is talking about 400$ per ton. I personally think that we should simply link the price we make polluters pay for every ton of CO2 with commodities price (oil, coal and gas), in particular when they go below a certain level on the market. The equation should be done in order to make them prefer other energy sources or other technologies.

However, every price put on carbon, even just 20$, will represent a disruptive momentum that could provoke a growth in the carbon leakage phenomena: business going out of EU to produce under a softer environmental regulation, selling us back their goods or services at lower price: social + labour + environmental dumping. The perfect mess.

Today we are preventing it by giving for free 47% of the amount of CO2 certificates to be traded in a year to those polluters (companies) that reflect the higher risk to relocate. And this is the reason why we are here talking about a direct “carbon tax”, and why the European Court of Justice has judged this mechanism as unfair for citizens and not respecting the ethic principle “make polluters pay”.

In order to apply a carbon tax, price the carbon emissions in the market, and make it work, we need to imagine new EU trading policies oriented to protect the European Commercial borders.

Luckily, just very recently, Ursula Von Der Leyen has used the magical acronym BCA, already imagined few years ago by some nobel prices as Joseph Stiglitz, : “Border Carbon Adjustment”. It is kind of a tax scheme that will close the gap between the European domestic carbon tax and those countries that have lower fees or none.

The great lesson is that we don’t just have to introduce tools or regulations, but we have to imagine how to protect them from a globalized world, in which the global dimension is able to hide even polluters hard to surrender to the fact that they have to change.