Making Carbon Taxes Work

with Cyrille Viossat and Pierre Bloch*

A carbon tax is the favorite policy of many people concerned about climate change.

A carbon tax works by tilting investment and spending towards lower carbon emitting choices. A carbon tax makes high emitting goods and services more expensive so encourages people to shift spending toward low carbon substitutes. The planet benefits by the difference in emissions between the original item and its lower emitting substitute. For example, a carbon tax on gasoline nudges people to buy more fuel-efficient cars or to drive less or take public transport. A carbon tax on electricity encourages companies building new facilities to invest in energy efficiency lighting, HVAC, windows and design features better utilize sunlight.

However, by itself a carbon tax goes only a little way toward addressing climate change.

For a carbon tax to be effective there must be low-cost, low-emission substitutes available. Compared to the business-as-usual choice, any additional cost of the low-emitting alternative cannot exceed the carbon tax, adjusted for possible energy savings. Returning to the gasoline example, if a construction company replaces some of its trucks, that get about 15 miles per gallon, with newer models that get about 20 miles per gallon, emissions are reduced by about one-third. But if there were vehicles capable of doing the job that went 60 miles per gallon, emissions would be cut by 75%. The potential of a carbon tax can only be realized if there are cost-competitive low emission alternatives.

But having low-carbon substitutes is not enough either.

First level of complexity: a low-carbon eco-system

A key strategy to reduce carbon emissions is electrification, more specifically electrification powered by zero-emission renewables. Most car manufacturers are adding electric vehicles to their product lines. Consumer uptake has been slow because of concerns about electric vehicles’ range. The batteries required for a 300 mile or 400-mile range are heavy and expensive. But a network of fast charging stations (Level 3 chargers) only 60 or 80 miles apart reduces the need for heavy batteries. We not only have to develop the cars and trucks, but also the ecosystem that supports them. And, the ecosystem must run on clean energy.

For buildings many of the high-efficiency components already exist: high-efficiency HVAC systems, high R-value windows, smart energy management systems and so on. Electrification using low-carbon renewables can satisfy the remaining energy needs, if occupants are confident of having a steady supply. Some facilities cannot deal with even a few seconds of supply interruption. In this case the ecosystem required for a quicker uptake of clean energy design features in buildings and facilities requires at least grid-level reliability, possibly from batteries or fuel cells. Revising building codes and getting architects, and building contractors more comfortable using new components is also needed.

A second complication: timing.

A large portion of carbon emissions come from long-lived assets, such as cars and trucks, trains and planes, and buildings and factories. In the US the average age of passenger cars is almost 12 years. For trucks and heavy equipment, the average is almost 15 years. In Europe the average for both groups — cars and trucks and heavy equipment–is between six and eight years. For buildings in the US the average age is in the range or 25 to 35 years depending on location. In Europe almost 40% of building are at least 60 years old. Average asset age matters because once we buy a vehicle or build an office we have locked in energy use for years or decades. Once energy use is determined, emissions decrease only if grid emissions fall. The more quickly low-emission substitutes become available, the more climate friendly our long-lived assets will be. We need a range of low-carbon, cost-competitive alternatives, and their supporting eco-systems, developed quickly. Over time the market-place will develop many new products and technologies, but the longer that takes the more high-emitting assets, with their fixed energy appetites, that are put into place.

Making a carbon tax effective

Clearly, we need to support lots of research and development of low-carbon technologies. A straight-forward way would be to dedicate the revenue from a carbon tax to the R&D of low-carbon technologies. To speed up the process — and time is important- early supplemental R&D funding might be required.

Several carbon tax proposals specify that the tax be distributed to consumers or taxpayers. This makes a carbon tax less regressive and more politically palatable, but reduces its climate impact. Such tax-and-dividend plans need to be accompanied by R&D funding from other sources.

A carbon tax can only be effective if individuals and businesses have good low-emitting alternatives, and a support system that makes these low-carbon alternatives atrractive. As the discussion of carbon taxes progresses we need to understand that it requires more than just enacting a tax. We have to visualize the entire system that makes a carbon tax effective — the development of low-carbon alternatives and their supporting ecosystem — and find a way to fund this shift to a low-carbon world.

*Cyrille Viossat is an Associate Director at BCG, specialising in leveraging innovation and technology to address sustainability challenges.

Pierre Bloch is a Paris Based sustainability consultant with Quantis focussing on corporate carbon strategies

I teach MBA classes in the Finance and Managing for Sustainability programs at the Business School at the University of Colorado Denver. I live in Durango, CO.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store