In the context of climate change, establishing a tax (price) on greenhouse gas (GHG) emissions should be aimed at taxing those economic activities that generate this type of negative externality. Externality that will ultimately have to be recognized and addressed by the public sector through spending on public health, care for the environment, and so on.
In my opinion, the tax would not only reduce pollution rates, but also promote energy efficiency and technological innovation; and it would increase tax collection.
Faced with the environmental crisis we are experiencing, we could ask ourselves the following questions: Should we put a tax on pollution? Is it possible to put a price on carbon emissions? And, should the price or tax be global or local?
Without answering these questions for the moment, let us remember that another path proposed at the global level (as an alternative to a tax policy) is the creation of a carbon credit market. In fact, COP26 discussed how to regulate its operation. However, despite the agreements reached, new questions arose: should this market be voluntary or regulated? And should the market be global or local?
Regarding the first question, I must say that today there are already the technical bases for both types of market to operate. Regarding the second, everything indicates that in the future it will be consolidated in a global market.
The discussion on the creation of a carbon market reached a consensus and was first established in the Kyoto Protocol, and later confirmed in Paris and now in Glasgow. The fundamental idea is to create a market that allows companies to buy and sell carbon credits or bonds. In the event that companies own such securities, they may emit a certain amount of GHG. This amount will be determined, in principle, by the value assigned to the credit-bond by a regulator.
To the extent that the company emits less GHG, it will have a credit in favor that it can exchange in the market and if it does not reduce its emissions, it will have to acquire more bonds or it could be fined. The intention is to reduce the number of bond-credits over time, encouraging companies and countries to be more efficient or to develop technologies to reduce their emissions.
The challenge here, from my point of view, is that for some companies or countries reducing their emissions is not economically viable in the short term. Above all, if we talk about the global environmental goals to be achieved in 2030 and 2050.
Given this situation, and knowing that the G20 countries generate around 80% of GHG emissions worldwide, I agree with those who say that these countries should transfer resources to those nations that are most vulnerable to the effects of climate change ( which are generally developing countries) to meet their climate goals.
However, unfortunately, many of the international agreements that we have mentioned lack effective tools that oblige countries to reduce their emissions.
In fact, the agreements are not binding; Therefore, the goodwill of the parties is appealed to for compliance. This is where incentive theory, raised at the beginning of this note, turns out to be relevant.