The Tax that Business Wants

“Price it right. Tax it smart. Do it now.” This is the mantra of the managing director of the International Monetary Fund, Christine Lagarde, who spoke last week at the Second Annual High Level Assembly meeting organized by the Carbon Pricing Leadership Coalition (CPLC). Lagarde’s words capture the sense of urgency in the international community for a carbon tax that sufficiently stabilizes global fossil fuel markets and gives the international community a tool to combat climate change.

Few policies hold the panacean promise of a carbon tax, which would unleash the creativity of the business sector, boost economic growth for the global economy, and catalyze the movement toward a more environmentally sustainable future. On April 20th, the international community, including government officials and business and civic organizations, convened at the World Bank to discuss a policy that holds this potential. A carbon tax aims to put a price on greenhouse gas emissions (GHGs) — the emissions that are driving climate change — by taxing energy companies for each ton of GHGs that they emit.

The word tax can send businesses of all kinds running; the prospect of increased expenses naturally detracts business, but a carbon tax is a rare outlier. “We’re here not because we like tree-hugging, but we think we can make money from this,” stated HSBC’s head of government affairs, Sherard Cowper-Coles. While the average tax is viewed merely as an added expense, a carbon tax corrects for a market failure: the underpricing of fossil fuels. Currently, the price of fossil fuel emissions is paid by the public as the public suffers the environmental damage of a heating planet, such as increased wildfires and drought. Internalizing the price paid by the public into operating costs through the implementation of a carbon tax on fossil fuel companies results in more accurate market signals. With market certainty in the price of dirty fuels comes growth.

“This is the growth story!” exclaimed Lord Nicholas Stern, Chair of the Grantham Research Institute, alluding to the fact that not taxing these emissions would create a hostile future that is anti-growth, for the socio-political ramifications of climate change threaten the stability of markets. Lord Stern continued, “This [underpricing of GHGs] is the greatest market failure the world has ever seen.” Because the economic and social consequences of climate change are so severe, letting carbon go untaxed would not only be a moral failure, but it would also be an economic catastrophe. That is, the artificially low price of fossil fuels incentivizes an over-consumption of dirty, carbon-emitting fuels, and this overconsumption is the driver of climate change.

“The International Energy Agency has told us, along with the IPCC, that no more than 1/3 of already proven oil and gas reserves can be burned [if we wish to remain under dangerous warming thresholds]. So we have $22 trillion of sub-prime carbon assets and -- just like sub-prime mortgages -- their value is based on an illusion that is going to dissipate,” said Vice President Al Gore, speaking about the economic consequences of failing to tax carbon. When the price of fossil fuels reflects its true cost to society, a carbon tax holds the promise of reorienting global markets away from an inflated economic bubble that, if popped, could result in a far-reaching economic crisis.

Echoing these same concerns, IMF Managing Director Christine Lagarde concluded the High Level Assembly with those three frank sentences: “Price it right. Tax it smart. Do it now.” A carbon tax provides the rare opportunity to act boldly in the face of climate change in a way that enhances global economic growth. The CPLC’s annual meeting, convening leaders from all sectors, provided the platform for progress as business and government collectively articulated a truth that is becoming more apparent by the day: Instituting a tax on carbon is a moral imperative in the face of climate change that aligns with one of the greatest economic opportunities in our history.