CO2 tax better way to fight global climate change

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THE basic story of human-caused climate change is becoming clearer to the global public. Several gases, including carbon dioxide, methane, and nitrous oxide, warm the planet as their concentrations in the atmosphere increase.

As the world economy grows, so do emissions of these gases. The main greenhouse gas is carbon dioxide. Most CO2 emissions result from the burning of fossil fuels - coal, oil, and natural gas - for energy, global consumption of which is rising as the world economy grows. As a result, we are on a path to dangerous levels of CO2 in the atmosphere.

Twenty years ago, the world agreed to reduce sharply emissions of CO2 and other greenhouse gases, but little progress has been made. If the world continues on its current trajectory, global temperatures will eventually rise by several degrees centigrade, causing higher sea levels, mega-storms, severe heat waves, massive crop failures, extreme droughts, heavy flooding, and a sharp loss of biodiversity.

Yet changing the world's energy system is a daunting challenge, because fossil fuels are so deeply embedded in the workings of the global economy. How, then, can we sustain worldwide economic progress while cutting back sharply on carbon emissions?

There are essentially two solutions.

The first is to shift massively from fossil fuels to renewable energy sources, especially wind power and solar power. Some countries will also continue to use nuclear power. (Hydroelectric power generation emits no CO2, but there are only a few remaining places in the world where it can be expanded without major environmental or social costs.)

The second solution is to capture CO2 emissions for storage underground. But this technology, called carbon capture and sequestration (CCS), is not yet proven on a large scale. One approach is to capture the CO2 at the power plant as the coal or gas is burned. Another is to capture it directly from the air using specially designed chemical processes. Either way, CCS will require significant investment in further research and development.

The big problem is time. If we had a century to change the world's energy system, we could feel reasonably secure. Yet we must complete most of the transformation to low-carbon energy by mid-century.

This is extraordinarily difficult given the long transition period needed to overhaul the world's energy infrastructure, including not only power plants, transmission lines, and transport systems, but also homes and commercial buildings. Few economic regions have made much progress in this transformation. In fact, the United States is now investing heavily in natural gas without recognizing or caring that its shale-gas boom, based on new hydraulic-fracturing technology, is likely to make matters worse.

Only Europe has tried to make a serious shift away from carbon emissions, creating a system that requires each industrial emitter to obtain a permit for each ton of CO2 emissions. Because these permits trade at a market price, companies have an incentive to reduce their emissions, thereby requiring them to buy fewer permits or enabling them to sell excess permits for a profit.

The problem is that the permits' market price has plummeted in the midst of Europe's economic slowdown. Permits that used to sell for more than US$30 per ton before the crisis now trade for under US$10. At this low price, companies have little incentive to cut back on their CO2 emissions - and little faith that a market-based incentive will return.

There is a much better strategy than tradable permits. Each region of the world should introduce a tax on CO2 emissions that starts low today and increases gradually and predictably in the future.

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