Cheng Yu Advocates for a Carbon Tax on Jet and Ship Fuel

According to AFP, the World Bank and the IMF are proposing a carbon tax on jet and ship fuel (AFP, 2011). If the proposal is passed, airlines and shipping companies will pay $25 for each ton of carbon dioxide released. This is a big step forward on the World Bank and IMF because they have finally acknowledged reality and are willing to break away from their ideological love affair with the “carbon market”. A carbon tax is also more cost-saving and effective than the alternative.

Not too long ago the World Bank and IMF were obsessed with the solution of the “carbon market”, as if that was the only way to save the world. Have you have heard about “cap-and-trade,” “CDM,” or “offsetting”? They all mean more-or-less the same concept: using market solutions to reduce the amount of greenhouse gases, specifically carbon dioxide. I am not going to argue whether carbon dioxide released by human activities causes global warming since all major political parties and scientific institutions around the world have acknowledged the fact, including the Communist Party of China. (For your information, the Republican Party of the United States is the only major party that still casts doubt on global warming.)

Why is the obsession problematic? The idea of carbon market is that if we set up a goal to make reduction on carbon emission, it doesn’t matter whether the reduction is made in a factory in New York or in a field outside Nairobi. Participants of the carbon market can trade between each other, and the market can determine how much one should pay for emitting a ton of carbon dioxide. According to Nobel Prize-winning economist Ronald Coase, the carbon market is more efficient than the carbon tax (Duval, 2006). However, many people forget the fact that in Coase’s paper, there is a condition: if the transaction cost is low.

However, according to the offsetting projects going on in Africa, transaction costs, defined as money that goes to a third party other than the carbon credit purchaser and carbon credit producer, is as high as 80% (Yu, 2011). According to introductory economics, the market can not function efficiently when the transaction cost is too high (Frank, 2008). For other problems that the carbon market causes, you can get a clear idea by reading Janet Redman’s research, “World Bank: Climate Profiteer”. Despite the problems, the World Bank pledged billions of dollars to set up at least 12 carbon funds, with the ambition to push forward a global carbon market by 2020. That decision is not based on economic efficiency, but based on their obsession in “market-oriented climate solutions”.

This is why a carbon tax is a much more cost-saving and effective way to climate change. Current technology is able to measure the amount of carbon emitted. There is no need to hire “professional carbon consultants” or “professional carbon accountants”; and there is no need to set up a trading and clearing center, as required in the carbon market, which creates a lot of cost savings because carbon accounting requires special training. Also, many carbon offsetting projects require using land where indigenous people live. Even though the World Bank has systematic Safeguard Policies, the monitoring cost of enforcing them is very high (Yu, 2011). Using basic microeconomic theory, a carbon tax is called a per-unit tax because it is charged based on per ton of carbon dioxide emitted. Therefore, it can effectively reduce the marginal benefit of using jet or ship fuel, thus reducing the quantity used.

However, some might be concerned that the extra carbon tax will be shifted to consumers, an example of which would be the consumers paying more for an airline ticket. However, economic theory tells us that the airlines don’t have the incentive to shift the full price to consumers because that will reduce their profit. Airlines are a relatively competitive market. Suppose Airline A shifts the carbon tax to their consumers, then consumers will choose Airline B, which decides raise the price only a little bit. Demand for an airline is somewhat elastic, using an economic term, because while airlines compete with each other in the market there are alternatives to planes such as high-speed rail, which is not taxed in the proposal. Since the airlines’ goal is to maximize their profit, they do not have the incentive to shift the tax completely to their consumers because doing so would cause them to lose customers. However, there is a possibility that airlines will shift more tax burden to consumers on their international routes, considering there is no alternative to flying from Beijing to Washington in 14 hours. In the case of cross-ocean international flights, the demand is relatively inelastic.

By the way, you market lovers should know that a carbon tax is also a market-based solution. Since the World Bank and IMF play leading roles in global affairs, the carbon tax has significant power to encourage countries around the world to impose carbon tax. However, whether the new tax can be successfully implemented remains a mystery. But if you care about the future of humanity, you should tell your family, neighbors and friends about this. The more people support a carbon tax, the more likely it is that the politicians will implement it, which definitely brings hope for a more sustainable world.

References:

1. Duval, D. T. (2006). Coasian economics and the management of international aviation emissions. International Journal of Innovation and Sustainable Development, 1(3), 201-213. Retrieved from www.scopus.com 
2. Frank, R. H. (2008). Principles of microeconomics New York, NY: McGraw-Hill/Irwin.
3. Yu, C. (2011). A review on the World Bank safeguard policies. (Unpublished paper). Institute for Policy Studies, Washington, DC.
4. Redman, J. (2008). World Bank: Climate profiteer. Institute for Policy Studies. Retrieved from www.ips-dc.org
5. AFP (September 24, 2011). IMF, World Bank eye carbon tax on fuels. Herald Sun. Retrieved from www.heraldsun.com.au

Cheng Yu is an economics student at the University of Illinois- Urbana-Champaign. His website is www.chengyuofficial.com.