A TAX-NEUTRAL CARBON TAX

Elon Musk — if you want us to pay for your carbon tax, you’d better help us lobbying government to overhaul the dumb-ass retail tax system we already have.

Everybody is talking about Carbon Tax as a way to counter climate change. This month Elon Musk was calling for it on Joe Rogan’s, the world’s most popular podcast. Bill Gates is everywhere in the news asking for it and so is Larry Fink, head of the crazy big 165 billion dollars asset management company BlackRock.

The case for a carbon tax is quite straightforward (more later) yet Biden’s staff replied to Elon Musk’s people that a carbon tax would be “politically difficult”.

How so? Joe Biden has, after all, just been voted in on a “green new deal” platform. He surely must now implement effective environmental reforms in a nod to the many millions of believers who helped him secure his victory against Trump, right?

Quite right. However, if we look at carbon taxes’ recent history Biden’s strategists may be right to be concerned. In 2013 Tony Abbott won Australian elections on a manifesto to repeal prior carbon tax legislation. In 2018 French President Emmanuel Macron’s attempt to change motorists’ behavior by introducing a carbon tax on fuel backfired terribly, triggering the massive wave of “Giletes Janues” (yellow vests) protests which left Macron’s popularity in tatters.

Quite simply the working and middle classes do not want the burden of environmental tax reforms to fall disproportionately on them. They want the clean-up bill to be footed by the ones who have so far enjoyed the party — the likes of Elon Musk, Bill Gates and the rest of the 0.1% super-rich who to the ordinary man, have in one way or another greatly benefited from externalizing the cost of carbon emissions leading to the degradation of our planetary environment.

Good luck to us with getting the über rich, powerful and mobile 0.1% to be held to account for anything, let alone having taken advantage of a very imperfect system. Doomsday may well come first!

Even if we could squeeze every penny and dime out of Elon Musk, Bill Gates and all their friends it would still not work. We do not need a carbon tax to raise more money. We need a carbon tax to nudge the compounded consumer choices of the three billion of us, in developed and fast developing economies, thereby nudging the workings of our entire economic-industrial complex towards more environmentally friendly purchases.

How do we get policymakers to do this without mightily pissing off the three billion of us who keep them in power?

There may be a way. It would require changing the way we do things a bit, but it may just be viable in terms of getting policymakers to sign up to it, and the public to tolerate it. Many of us may even embrace it and feel better about ourselves and the way we live our finite lives on our finite planet.

The beautiful thing is that we don’t need an additional tax to achieve this. What we need is to overhaul the unintelligent retail tax system in our major economies, and replace it with a much smarter and more discerning consumption tax, based on carbon emissions.

In Europe average retail tax stands at 21%, 7% in the USA, 13% in China and 10% in Japan. Collectively this gives us approximately USD 4000 billion annually, on average about USD 2000 for each member of our families, which we could play with in order to increase or lower the price of goods and services that we purchase.

Neither people’s pockets nor governments’ coffers need to suffer. As consumers we are already paying this money in the form of retail taxes. Governments in different countries can calibrate this replacement tax to provide the same fiscal revenues today levied through an obsolete sales taxing system. As carbon taxing progressively nudges economies towards more eco-friendly forms of consumption, governments can respond by gradually increasing carbon taxation to maintain the same fiscal inflow, enabling a virtual cycle toward more and more environmentally sustainable forms of production and consumption.

Let’s now go through the role taxation and policy may have in directing consumer habits towards more sustainable forms of consumption.

While it may not be possible to have boundless economic growth without damaging the environment, a more eco-sensitive pricing of goods and services through a dynamic consumption-tax could offer significant help in minimizing the environmental impact per unit of economic growth, and in continuing to raise living standards.

Let’s see why and how.

Mankind is very good at reacting to immediate threats and emergencies. Our monkey-brains however are not so well equipped to manage threats which seem distant to us in time and space. The tiger is there on that hill, not in my garden. I am safe. It was quite interesting at the beginning of 2020 to see the fleeting feeling of safety “Covid is elsewhere” crumble as the virus kept rolling in from country to country, and started knocking on doors everywhere in our neighborhoods.

It is the role of policymakers to try and compensate for people’s tendency to think short-term, by translating long terms signals into immediate ones, such as the price of goods and services. One should not mistake such an approach for a form of soviet-style price fixing. Nothing is further from the truth. Goods and services would compete for consumer choice based on their own merits and full costs, without accessing subsidies. This has always been the darling principle of orthodox economic thinking. The problem with the current system is that it does not take into account the full long-term costs of producing certain products and services, thereby providing manufacturers with a hidden subsidy.

An environmental consumption tax would aim to remove such market distortion by better reflecting in the price-signal the true cost of the goods and services we purchase.

I love lamb and I love lentils but a serving of lamb has 80 times the carbon footprint of a serving of lentils. The two could and should be taxed differently to gently nudge me into eating more lentils and less lamb. I’d still be free to enjoy lamb when I want to, I just would have to pay more for it. It is however important to understand that while I would have to pay more for some goods I would get to pay less for many others. Overall, for this consumption tax we would have to pay the same amount of money we are already paying today in the form of retail taxes. Not more nor less, it would just be distributed differently.

A key challenge will be to accurately qualify and quantify the environmental cost of the goods and services we purchase. As climate change appears to be our most immediate environmental threat it would probably make sense to initially use units of CO2 emissions as the main proxy for overall environmental impact. This choice would also have the added advantage of being the easiest to implement. The carbon credits system, developed under the Kyoto protocol, as well as a number of local carbon taxing initiatives, have in fact developed an efficient framework for carbon footprint calculations.

As trailing and auditing processes improve it should be possible, over time, to introduce other environmental value elements into the price signal. We have plenty of problems to choose from, such as other greenhouse gases emitted, amounts of fresh water used, natural resources exploited, biodiversity threatened… but CO2 emissions look like a good place to start.

The environmental tax burden would be transmitted from manufacturers and distributors to consumers. This is nothing new. The same happens today with VAT, for example bakers offloading the VAT they pay on flour to consumers, through the price.

Maintaining this transmission mechanism from raw material suppliers to final consumers would hopefully spark a competitive process to minimize carbon footprints at every level of the value chain creation, allowing all players to profit from the efficiencies they generate in terms of carbon emission reductions. Retailers able to source goods with a smaller carbon footprint would be able to offer their products to their customers at a lower price and therefore gain a competitive advantage.

At this point one may question why we have to go through all this, and continue to feed the beast. Could we not just chill out and go back to a slower pace of life, as many environmental activists seem to suggest? Not really, unless you see yourself able to push more than a billion Chinese people back to the poverty and hardship of the rice paddies. While doing nothing may not be an option, neither can we go forward by going back into the past. We need realistic, pragmatic and actionable solutions, without further impoverishing the already struggling middle and working class.

Ok then, what would it take for such an overhaul of the retail taxation system to happen? What could be the path ahead?

For this to work it would take at least one of the main economic blocks in world — the USA, the European Union or China — to set environmental accounting standards which producers across the world would be legally required to meet in order to gain access to their market.

In the US at present this could be quite difficult. Sales taxes are levied at the state level, not the federal one. Current politics would make a coordinated approach problematic and single states would be unlikely to have the economic and legislative muscle to impose new carbon accounting rules for goods coming in from others states in the US or other parts of the world. Maybe some of our American friends will come up with some good idea how this could be made the work in the US.

China has been quite active in the climate change domain as of late. Initially party leaders in Peking thought that climate change was a western-fad. However, after being told by their own top universities that climate change is real and real damage is ahead, Chinese authorities have shifted gear and they are now swiftly creating new solar farms and setting up other initiatives aimed at reducing carbon emissions.

As the biggest manufacturer and exporter in the world, China could be interested in leveraging its extraordinary organizational capabilities to introduce and document carbon emission efficiencies so as to maintain a competitive edge for their exports, especially now that less developed countries are eating into China’s competitiveness with their lower labor costs. Now that I think of it, I’ll try to call up the Chinese embassy to see what they can do to help.

But it is the European Union which is especially well positioned to play the role of the scrupulous importer. The European Union has so far been, at least on paper, a loud advocate for fighting climate change and protecting the environment. Also, although with different rates, it has a common sale tax (VAT) infrastructure which could form the basis of the new carbon emissions-based consumption tax.

The European Union would also have a vested interest in implementing such a program. The EU currently has an annual energy import bill of over 350 billion euro, almost 1000 euro annually for every man, woman and child. Since there is a clear correlation between fossil energy use and CO2 emissions, a tax capable of nudging the EU population toward forms of consumption with a lower CO2 footprint would most likely also reduce the EU’s overall energy import bill.

As this tax would ultimately be paid by consumers (same as VAT today), in principle it should not constitute a trade barrier under WTO rules. There would in fact be a level playing field for all producers, within Europe and across the globe. All players would have the opportunity to maximize their competitiveness by documenting and reducing their carbon footprint.

It will never work, some may say. It is not reasonable to expect all providers of goods and services to simultaneously organize themselves with the necessary carbon accounting standards. True, but during a phase-in period, authorities could provide default footprint values for type of goods and tax them accordingly. Producers able to demonstrate, through the required carbon accounting standards, a lower carbon footprint would able to lower the tax level paid by their customers and consequently become more competitive and profitable.

It will not be easy to convince our governments to overhaul existing retail tax systems. The fossil fuel industry will lobby against it ferociously. But this approach may also win us very powerful allies. With a model proposing to redistribute an existing tax burden there will be winners as well as losers. By definition some industries stand to gain as much as the fossil industry stands to lose. Many players in our economies currently deliver added value products and service with smaller than average carbon footprints. They could benefit enormously from such a change to our consumption tax system. There is the renewable energy industry of course, but also the health sector, the education one, communications, everything that has to do with content generation, ideas and the arts, as well as — believe it or not, the mighty financial services industry. Potentially there are many powerful allies, some more sexy than others but all worthy nonetheless. In order to have a chance to succeed we need these industries to come out, open their wallets and start lobbying governments for this as ferociously as the fossil industry has done until now. Why? Because it is in their best interest to do so, if the future of our planet as a common home to us all is not reason enough.

With our current economic model, we are facing an unprecedented threat to our environment, and thus to our livelihoods and that of future generations. This piece is a call to action to all like-minded individuals around the world to help us lobby decision makers and let them know that there are in fact realistic and politically viable ways to introduce change. There is no more time to sit on the fence. Let’s act!

For further discussion on how to bring change about join me on the Greener Next Year group on LinkedIn