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07 Nov 2021

COP26 Insights from John Kent: The logical argument for carbon tax

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As the main fanfare of the early days of COP26 settles down it is worth reflecting on some of the highlights so far. The pledge by 100 countries to reduce methane emissions by 30% by 2030 is a notable step forward despite the pledge being non-binding and the fact that China, Russia, and India remain on the sidelines. Methane reduction is important because, over 20 years, it is 84 times as powerful per unit mass as carbon dioxide and it is the second-largest component of global warming after carbon dioxide. I also find Mark Carney's Glasgow Financial Alliance for Net Zero (GFANZ) potentially as ground breaking. Having the right 'financial plumbing' to support energy transition will have real impact. Other areas of progress include commitments on deforestation and movement away from coal, albeit non binding.

One area which has received less airplay than I would have liked is Carbon Taxation. This, in my mind, has the potential to be the largest weapon in the armoury required to achieve Net Zero by 2050. Other than comments by Mark Carney on his vision of a global carbon tax by 2030, headlines and discussions on this topic have been muted. Potential reasons for the relative silence in this area may lie in the fact that to coordinate a carbon tax across the globe is a very tough task. Who pays what? How can you ensure equity between rich and poor countries? How do you deal with cross border transactions? Also, some politicians may fear constituency rejection if a broad carbon tax scheme is seen to be unfair.

About 45 nations have some element of a carbon tax and according to the World Bank c.US$70bn was raised globally from carbon pricing schemes in 2020. In the same period global carbon emissions from fossil fuels were 36.4 billion tonnes. A global carbon tax with an average of US$10 per tonne, mixing a low-level entry cost for all parties and a much higher cost for developed nations would certainly result in many positive behavioural and funding changes. Firstly, the additional cost burden on the user of carbon will result in reducing their demand. Increasing carbon cost over a known period will see demand drop systemically. Secondly, such a scheme has the potential to produce the scale of funds required for the energy infrastructure of tomorrow. Thirdly, it will support funding for developing nations to enable their energy transition plans.

Yes, implementing a global carbon tax scheme is a tough ask, however, it has game-changing potential.

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