The 21st Century climate challenge

As these positive examples suggest, voluntaryinitiatives for climate change mitigation havean important role to play. They can informconsumer choice, create incentives for companiesand establish best practice models. But voluntaryaction is not enough. It has not been enough topush emission trends in a downward direction inAustralia or in the United States. In other areas ofpublic policy—national security, nuclear safetyor the regulation of environmental pollution,for example—governments would not considerreliance on voluntary action alone. Yet when itcomes to climate change, there is a damagingtendency to overstate the role of ‘choice’ andunderstate the importance of governmentaction. Ultimately, failure to recognize the limitsto voluntarism will compromise climate changemitigation.The monetary and widersocial costs of carbonemissions are large butuncertain—and they arespread across countriesand generations33.2 Putting a price on carbon—the role of marketsand governmentsThe debate on climate change has shifted inrecent years. The argument is no longer aboutwhether or not the world is warming, orwhether or not human-induced climate changeis responsible. Today, the debate is about how totackle the problem.In an ideal world, the marginal cost ofcarbon would be aligned with the damage—orexternalities—caused by additional emissions,leaving the actors responsible for those emissionsto pay the full social cost of their actions. In thereal world, putting the full-cost price on carbonis a tricky business. The monetary and widersocial costs of carbon emissions are large butuncertain—and they are spread across countriesand generations. One important outcome isthat emitters do not face the consequences oftheir own pollution.None of this represents an insurmountableobstacle to the development of carbon pricing.We may not be able to calculate the precise socialcosts of emissions. However, we know the orderof magnitude for emission reductions required toavoid dangerous climate change. Our sustainableemissions pathway provides a first approximation.The immediate challenge is to push the price ofcarbon to a level consistent with this pathway,either through taxation or quota, or both.Taxation versus ‘cap-and-trade’The case for putting a price on carbon aspart of a climate change mitigation strategyis increasingly widely accepted. But whereshould the price be set? And how should it begenerated? These questions are at the heart ofa somewhat polarized debate over the relativemerits of carbon taxation and ‘cap-and-trade’programmes. The polarization is unhelpful—and unnecessary.Both carbon taxation and cap-and-tradesystems would create economic incentives todrive emission reductions. Under a carbon tax,emitters are required to pay a price for everytonne of emissions they generate. Using a taxto achieve a specified reduction in emissionsrequires decisions on the level of tax, who shouldpay and what to do with the revenue. Under acap-and-trade programme, the government setsan overall emissions cap. It then issues tradableallowances—in effect, ‘permits to pollute’—thatallow business the right to emit a set amount.Those who can reduce their emissions morecheaply are able to sell their allowances to otherswho would otherwise be unable to comply.Using a cap-and-trade programme means takingdecisions on where to set the pollution ceiling,who should be issued with allowances and howmany of the allowances should be sold ratherthan given away free.The case for carbon taxationProponents of carbon taxation claim a broadrange of advantages over cap-and-tradesystems. 30 These can be clustered into fourcategories:Avoiding dangerous climate change: strategies for mitigationHUMAN DEVELOPMENT REPORT 2007/2008 125