So far, the only alternative to Cap & Trade schemes seems to be plain taxation of emitted GHG’s.
Still, there are several problems associated with taxes:
- An expected tax might simply be included in the production price, hence potentially triggering inflation and generating immediate windfall profits for the emitters.
- Choosing and measuring emissions subject to taxation could also prove a difficult issue when it comes to myriad of small businesses (scope, baseline, sector comparison, benchmarks)
- Another consequence is that such taxes may double existing taxes, for instance excise on fuels, or more generally VAT on any consumable. Hence, curbing consumption by this means might eventually compound into less public revenues.
- Although apparently straightforward (the polluter is the payer), taxes may also trigger escape behaviours, hence generating carbon leaks.
- Carbon taxes also pose the problem of a fair re-using of the levied amounts.
All in, carbon taxes may very well end-up in making the poorest cleaner (and poorer) while the wealthiest would either simply do with the additional burden or shift their activity under less demanding skies.
A third way might however exist, which would incidentally cope with those critics: encouraging greener behaviour and investments through <strong>tax immunity</strong>.
Indeed, such a system – the Tax Shelter – already exists in Belgium for the sake of supporting the (not too profitable) movie industry. The basic idea is for any company to invest a proportion of its annual profits in said industry, with the benefit of immunizing 150% of the invested amounts for the final computation of its taxes.
Such a system applied to carbon reduction investments would indeed constitute a clever alternative to plain taxation or even to Kyoto’s flexible mechanism. The latter is indeed often confronted to the growing difficulty of identifying the real additionality of the projects benefiting of the system, making the generated carbon credits sometimes disputable.
A well designed Tax Shelter scheme would encourage businesses to dispose of part of their profits for the sake of selected environmental projects and create solidarity at national and European level between mature businesses and developing/not yet profitable green ventures.
This by the way would also solve the problem of national subventions, usually badly perceived by the EC for obvious competition distortion reasons.
Needless to say, should such a system be promoted, it will be the subject of political initiative and dedicated legislation.
This post was originally published on Blogactiv.eu
Bruno Simon is Managing partner at Cap CO2 Advisors