The 21st Century climate challenge

3Avoiding dangerous climate change: strategies for mitigationThe climate change benefitsof carbon taxation orcap-and-trade systems willbe limited if governmentsdo not complementreforms in these areaswith a curtailment offossil-fuel subsidies• An annualized increase in taxation ofUS$5–10/t CO 2adjusted on a rolling basisto take into account the national emissionstrajectory. 37It should be emphasized that the aim ofintroducing carbon taxation is climate changemitigation—not revenue raising. Taxes on CO 2can be increased without raising the overall taxburden. Indeed, fiscally neutral carbon taxreform offers a potential to finance wider reformsof the taxation system. As seen before, loweringtaxes on employment or investment can createincentives for the development of low-carbontechnologies. Because carbon taxation has thepotential to feed through into higher pricesfor energy, overcoming the regressive effects byusing revenues to support low income groups isalso important.Where should carbon taxes orcap-and-trade programmes be applied? Theoptimal approach would be to create a singleglobal price for carbon, with the distributionalconsequences addressed through internationaltransfers (just as national transfers are usedto compensate for the effects of taxation). Intheory, it is possible to design a transitionalroute to this goal, with taxes or cap-and-tradequotas graduated to reflect the circumstances ofrich and poor countries. In practice, the worldlacks the political, administrative and financialgovernance structures to oversee taxation orcap-and-trade systems covering both developedand developing countries.That does not mean that the world cannotmove towards a global carbon price regime.The issue is one of sequencing. For developedcountries, the priority is to build upon currentcap-and-trade schemes or to introduce carbontaxation consistent with the emission reductiontargets set out in our sustainable emissionspathway. Integrating emerging carbon marketsin Australia, Europe, Japan and the UnitedStates provides a skeletal structure for globalcarbon trading. Developing countries couldgradually integrate into international systemsby establishing their own cap-and-tradeschemes, or by introducing carbon taxationas they seek to reduce their emissions over alonger-term time horizon.Eliminating perverse subsidiesWhatever their respective merits, the climatechange benefits of carbon taxation orcap-and-trade systems will be limited ifgovernments do not complement reforms in theseareas with a curtailment of fossil-fuel subsidies.While OECD countries as a group have beenreducing these subsidies over time, they continueto distort markets and create incentives forcarbon-intensive investments. Overall, OECDsubsidies for fossil-fuel energy are estimated atUS$20–22 billion annually. From a climatechange mitigation perspective, these subsidiesare sending precisely the wrong market signalsby encouraging investments in carbon-intensiveinfrastructure. Among the examples:• In the United States, the congressionalJoint Committee on Taxation estimatestax concessions for exploration anddevelopment of fossil fuels at US$2 billionannually for 2006–2010. 38 Old coal powerplants in the United States are also subjectto weaker pollution controls under theClean Air Act than newer plants—in effectproviding them with an indirect subsidyfor pollution. 39• In 2004, the European EnvironmentAgency estimated on-budget state subsidiesfor coal production to total €6.5 billion(US$8.1 billion), dominated by Germany(€3.5 billion, some US$4.4 billion) andSpain (€1 billion, some US$1.2 billion),with off-budget support generating asimilar amount. 40 In 2005, the EuropeanCommission approved a €12 billion(US$15 billion) grant for 10 coal mines inGermany. 41• Aviation fuel used in domestic and internationalflights is exempt from fuel duty inmany countries. This is an obvious contrastto the position for petrol used in cars, wherefuel duties figure prominently in final pricespaid by consumers. The tax advantageenjoyed by aviation fuel represents animplicit subsidy on air transport, though thelevel of subsidy varies across countries. 42Subsidy elimination and taxation on flightsand fuel, or the application of cap-and-trade tothe aviation industry are priorities.128 HUMAN DEVELOPMENT REPORT 2007/2008