Friday, March 7, 2014, 10:17
Counting the costs
By KARL WILSON in Sydney / Asia Weekly

It has been widely reported the government is considering implementing a tax of 10 yuan per ton of CO2 with the price rising to 50 yuan by 2020.

HSBC has calculated that this could raise 90 billion to 460 billion yuan annually for the government with “energy activities” bearing the brunt of the tax.

On an industry basis, using the lower value of 10 yuan per ton, the following sectors would be most affected: Fuel production, processing and conversion; manufacturing and construction; transportation; cement.

David Hemous, assistant professor of economics and political science at INSEAD graduate business school in France, says carbon pricing plays a “fundamental role in reducing CO2 emissions and mitigating climate change”.

“A uniform carbon price is the most cost-effective way to achieve an immediate reduction in CO2 emissions,” Hemous says.

“The reason is that firms (or sectors), for which reducing carbon emissions is more difficult, are allowed to emit more than firms (or sectors) where reducing carbon emissions comes at a very small cost.”

He adds that the EU Emission Trading System (ETS) is often criticized because the price of carbon has become very low. This is a misunderstanding of what a permit system is supposed to achieve — a stated reduction in emissions at the least possible cost, he says.

Hemous believes carbon pricing shows a true commitment to reducing emissions and tackling climate change.

“This is helpful in giving firms a signal that the government is serious about climate change and in giving international partners a sign of goodwill.”

The first goal of carbon pricing is to achieve an immediate reduction of carbon emissions, he says.

“An argument against unilateral carbon pricing is that firms which produce tradable goods may choose to locate their activities in countries with a lower carbon price.”

Hemous believes if the program becomes sufficiently ambitious (with a high carbon price), this could be a concern.

“However, I imagine that for China the initial cap on emissions will still be quite generous, so the carbon price would be low and should not have a large impact on firms’ location decisions.

“In addition, I think that if China manages to set up a meaningful carbon pricing system, it will be a major push for climate negotiations so several countries will follow.”

A carbon price extended to household consumption on such things as heating, electricity and gas has large distributional consequences, as it hurts more citizens that rely a lot on transport.

“This explains why it is not very popular,” Hemous says. “Therefore a carbon price extended to these items as well should be put in place together with other measures which compensate those that lose the most.”