Why Carbon Taxes?

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By Daniel Kiuna Njogu

Revenue Collection and Climate Change

We have all experienced the effects of climate change, which is high temperatures (global warming) and weather pattern changes. The world focus is now on the effects of climate change caused by uncontrolled carbon emissions. 

Climate change effects are not limited by geo-political borders. According to the United Nations Environment Program (UNEP), despite Sub-Saharan Africa contributing less than 4% to the global carbon emission, they are hit hard by the impact of climate change compared to developed countries. 

United Nations Climate Change Conferences and Blue Economy Conferences are examples of platforms where countries have agreed on strategies to combat climate change. These countries are also signatories to various climate change commitments like The Paris Agreement (2015) and Sustainable Development Goals (SDGs). They aim to manage climate change and poverty, and to improve education, health, and economic growth. It was agreed at the 2022 United Nations Climate Change Conference (COP27) that Sub-Saharan Africa should be compensated for the negative impact of climate change. 

Policies have proven to be less effective than carbon taxes in combating climate change. For example, subsidizing power generation to enhance the use of gas instead of fuels does not guarantee CO2 reduction beyond the power generation sector. Carbon taxes are easy to administer and collect as they are usually linked to existing fuel taxes.

A carbon tax is a type of Pigouvian tax. It can be defined as the social cost charged to carbon dioxide (CO2) emitters or a penalty paid for excessive greenhouse gas emissions. The tax is designed to increase the production costs of CO2 producers.  It is a form of carbon pricing on greenhouse gas emissions in order to push producers to seek or adopt clean energy technology. A carbon tax can be used to increase carbon-based fuel prices like electricity and gasoline for consumers to start using alternative clean sources of energy. 

The Scandinavian and Nordic countries were the first to implement carbon taxes in the 1990s. Other countries have followed this path by designing carbon taxes in order to accelerate the achievement of climate change targets. Attaining carbon neutrality by 2050 (Paris Agreement 2015) is not easy, especially when designing carbon taxes and mobilization of political support. The rationale for the reforms and the utilization of the revenues must be clearly communicated. For example, increasing fuel prices through revenue-neutral tax subsidies to promote the generation of clean energy, efficient use of energy and promoting green energy innovations. 

Striking a balance between household access to sustainable energy and the use of fuels with low-carbon footprints is an issue developing countries are striving to achieve. Despite Kenya’s commitment to attaining 100% carbon-free energy by the year 2030, she has been trying to explore her oil fields in Lokichar, Turkana County. In this context, the benefits of exploiting crude oil outweigh the climate change impacts as Kenya imports all its refined oils and heavy oils. 

Uganda has been put under pressure by civil organizations to stop construction plans for the Uganda – Tanzania crude oil pipeline. One facet of this conversation is on morality. At this point, it is subjective and based on where one stands. The global commitment towards promoting the attainment of carbon-free economies have affected the initiatives of developing countries in raising finance for such projects.

Carbon or energy taxes help in reducing greenhouse gas emissions, raising revenue, stimulating a low carbon economy and addressing local health and environmental issues.

Key considerations in designing carbon taxes: 

Scope – Carbon tax should be based on substances covered. For example, levying a carbon tax subject to fuel fossil content ($73 per ton of carbon). 

Point of taxation – Carbon tax can be levied at any point of the energy supply chain. The most effective approach is “upstream” where only few entities would be subjected to the carbon tax. For example, the main energy sector players.

Tax and escalation rates- Economic theory proposes that a carbon tax should be equal to the present value of carbon emission social costs. 

Distribution impacts – households with lower disposable income spend a larger proportion of their income on energy. A percentage of collected revenues should be directed towards improving the well fare of low-income households. 

Competitiveness – The competitiveness of local companies in the international market should be considered. 

Revenues – A carbon tax can raise significant revenue. Economic research argues that using these revenues to reduce existing taxes on capital and labor (tax swap) minimizes economic factors of production costs. 

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