The Case for a Global Carbon Tax - OPTIONS: The only way to slow climate change is to make coal more expensive and alternatives cheaper.

The Case for a Global Carbon Tax - OPTIONS: The only way to slow climate change is to make coal more expensive and alternatives cheaper.
By Fareed Zakaria
© 2007 Newsweek, Inc.


April 16, 2007 issue - The Bush administration made two notable statements on energy policy early in its tenure. They were both highly controversial. The first was that the Kyoto accords, as negotiated, were "dead." The second was Dick Cheney's declaration in a 2001 speech that "conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy." As it happens, both are accurate and should be at the heart of any new, ambitious policy to tackle global warming and energy use. If you haven't fainted yet, let me explain what I mean.

The administration had several narrow-minded and callous reasons for rejecting Kyoto, but among its main arguments was that the accords did not include developing countries and thus were ineffective. To understand why that is correct, consider one simple statistic. During the Kyoto time frame (that is, by 2012), China and India will build almost 800 new coal-fired power plants. The combined CO2 emissions from those plants will be five times the total reductions in CO2 mandated by the accords.

Here's the math. These 800 new plants will burn about 900 million extra tons of coal every year. By 2012 they will have emitted about 2.5 billion tons of CO2 into the atmosphere. During that period, if the countries that have signed the Kyoto accords implement them fully—a big "if"—they will cut their CO2 emissions by 483 million tons.

Understanding the causes and cures of global warming is actually very simple. One word: coal. Coal is the cheapest and dirtiest source of energy around and is being used in the world's fastest-growing countries. If we cannot get a handle on the coal problem, nothing else matters.

Kyoto represents old thinking: if the West comes together and settles on a solution, the Third World will have to adhere to that template. It's the way things have been done in international affairs for decades, perhaps centuries. But today power is shifting to the emerging markets. China, India and Brazil will have a greater impact on the globe in coming years than Europe will—for better or worse. A new Kyoto would start the other way around. The United States should work out an agreement with these three countries. That would become the new template, defining what further actions are necessary and possible.

Getting China and India to stop burning coal will not be easy. It's the cheapest way to fuel their growth. While officials in China are more attentive to environmental issues these days—in part because China now has the dirtiest air and water in the world—they are highly unlikely to do anything that will significantly undercut economic progress.

Nandan Nilekani, CEO of the Indian technology giant Infosys and one of the few Asian executives genuinely concerned about environmental issues, says that ultimately the industrialized world will have to provide subsidies to developing countries to build "clean coal" plants. "Right now in India, and I assume in China, plants are built through competitive bidding. The lowest bid usually wins. You will have to create a subsidy for clean coal to make it the lowest bid. Otherwise, the dirtiest will win."

There's an obvious problem with this model—where will the money for subsidies come from?—but there's another glitch as well. The technology for clean coal doesn't really exist yet in a form that can be widely used. There are various pilot projects and experiments but nothing that is, as yet, economically viable. Both problems can be solved by the same simple idea—a tax on spewing carbon into the atmosphere. Once you tax carbon, you make it cheaper to produce clean energy. If burning coal and petrol in current ways becomes more expensive because of the damage they do to the environment, people will find ways to get energy out of alternative fuels or methods. Along the way, industrial societies will earn tax revenues that they can use, in part, to subsidize clean energy for the developing world. It is the only way to solve the problem at a global level, which is the only level at which the solution is meaningful.

Congress is currently considering a variety of proposals that address this issue. Most are a smorgasbord of caps, credits and regulations. Instead of imposing a simple carbon tax that would send a clear signal to the markets, Congress wants to create a set of hidden taxes through a "cap and trade" system. The Europeans have adopted a similar system, which is unwieldy and prone to gaming and cheating. (It is also unsustainable if Brazil, China and India don't come onboard soon.)

A carbon tax would also send the market a clear and powerful signal to develop alternative energies. Daniel Esty, a Yale environmental expert whose new book, "Green to Gold," is a blueprint for new thinking about the environment, argues that the only way forward is a "transformational approach that creates incentives for innovation and alternative energy. The way we think about these issues is old-fashioned. We're still trying to limit, regulate, control and inspect. We need to become much more market-friendly. Put in place a few simple rules, and let the market come up with hundreds of solutions. We're not even 10 percent of the way down such a path."

In the end, everyone realizes that innovation is the only real solution to the global-warming problem. And that's where Cheney is right. Conservation and energy efficiency are smart policies, but not enough. In America over the last three decades, almost all machines and appliances we use to power our lives have become significantly more efficient (with the exception of cars). And yet we consume three times as much energy as we did 30 years ago. Why? Because rising living standards mean rising energy use. We can slow down the growth, but some increase is inevitable. We have more efficient air conditioners. But now we air-condition our whole houses. Our bed lamps conserve power. But we also plug in two phones, a BlackBerry and three iPods.

And yet the Bush administration's record on energy and the environment is shameful. While they may have the right critique of Kyoto, they have used it as an excuse to do nothing, surrendered energy policy to special interests, subsidized polluters and killed or watered down every measure that would spur innovation or create a new energy framework for the future. They have been weak leaders, bad policymakers and poor stewards of the world we live in. That's not a sign of "personal virtue," it is personal and public vice.