Impose a CO2 Tax?
One way governments can decrease air pollution is to impose a tax on industrial carbon dioxide emissions. But why should governments consider a carbon tax when they could control emissions by establishing energy efficiency and conservation standards, by legislating against coal use, or by increasing investment in nuclear power? The great virtue of such a tax is that it would provide incentives for industry to achieve emission reductions. Because oil emits more carbon dioxide per unit of energy generated than does natural gas, and coal more than oil, a carbon tax would vary with the type of fuel. Such a tax would induce industry to substitute less-polluting fuels for those carrying a higher tax, and also to reduce the total use of energy.
However, it is not clear how high such a tax should be or what its economic and environmental implications would be. At first glance, it is not difficult to estimate roughly the size of the tax needed to effect a given level of emission reduction. One writer estimates, for example, that a tax of 41 percent on the price of coal, 33 percent on oil, and 25 percent on gas would reduce the United Kingdom’s emissions by 20 percent (using 1988 as the base year) by the year 2005, the target recommended by the 1988 Toronto Conference. It should be noted, however, that these numbers ignore the effect of the tax on economic growth, and hence on emissions, and assume that past responses to a price rise will be replicated in the future. These numbers are also based on the assumption that all countries will behave cooperatively in imposing a carbon tax.
There are very strong reasons to believe that cooperation would be difficult to win. If most countries cooperated, then any country that chose not to cooperate would be advantaged: it would have no abatement costs, and the effect on the environment of its defection would be relatively small. Because of this “free rider” effect, cooperation on a scale needed to reduce carbon dioxide emissions might prove elusive.
Should countries act unilaterally to curb emissions? If a country were to act unilaterally, the benefits would be spread across the globe, whereas the costs would fall solely on the country taking the action. The action would reduce emissions globally, and the effect of this would be to reduce the benefit other countries would receive if they reduced emissions. As a consequence, other countries would have less incentive to reduce emissions and would probably emit more carbon dioxide than they would have if the unilateral action had not been taken. The entire effect of the emission reduction may not be lost, but it would surely be diminished by this free-riding behaviour.