Robin Mills: Carbon tax would kill several birds with one stone
On Thursday, Mutriba in Kuwait reached a temperature of 54°C, possibly the highest reliably measured anywhere in the world.
At the same time, low oil prices are turning up the heat on Arabian Gulf finance ministries. With scorching weather becoming routine as global warming worsens, Gulf states are missing a policy that would improve their environmental record and economies at the same time.
A carbon tax is becoming increasingly popular in policy circles. A fee, paid for every tonne of carbon dioxide (or the equivalent of other climate-warming gases such as methane), raises revenue for the government at the same time as encouraging polluters to cut back. The tax would be levied on sales of petrol and diesel to motorists, and on gas or coal burnt in power stations, the cost being passed on to electricity users.
A tax is a better way to reduce emissions than policies such as subsidies or mandates for renewable energy. Non-distorting and transparent, it encourages all low-carbon forms of energy, including carbon capture, nuclear power and greater efficiency.
In June last year, major oil companies including Shell and Total came out to back a carbon tax. Canada is debating introducing the charge – its province of British Columbia already has it for industry at a rate of 30 Canadian dollars (Dh83) per tonne. And a French committee has recommended a European carbon price of €20 (Dh80) to €30 per tonne by 2020.
Gulf countries are struggling with heavy budget deficits, fast-rising energy demand which eats into exports, and growing greenhouse gas emissions. A carbon tax would address all these problems simultaneously.
To plug holes in its finances, the GCC is considering a value-added tax (VAT) by 2018, at a rate of 5 per cent. It is also weighing corporate taxation and increases to government fees. But although necessary, such measures are problematic as they make the Gulf a less attractive destination for business – at exactly the time that growth in the non-oil economy is vital for diversification.
Until recently, a carbon tax made no sense for the Gulf, since electricity and fuel prices were highly subsidised. But recent reforms have largely eliminated subsidies in the UAE, and significantly reduced them elsewhere.
A tax of $5 per tonne of carbon dioxide would add less than 1 fils per kilowatt to electricity bills, and about 4 fils per litre to petrol prices (which stand at Dh1.77 per litre for Special 95). It would raise about $6 billion per year across the GCC, a third as much as the planned VAT.
Such a tax would be much simpler to assess and collect than VAT. At these modest levels, it would not seriously affect the cost of living or doing business. It would, though, be best to coordinate its introduction across the Gulf countries to avoid pushing companies to a no-tax area.
The GCC’s heavy carbon footprint, the highest on Earth per capita, is dangerous in a world increasingly taking action against climate change. Regions that have a carbon price in place, such as the EU, may impose tariffs on GCC exports.
A dramatic move to a carbon tax by the world’s premier oil exporters would raise its popularity as the primary climate change policy. And that is in the Gulf’s interest. It would favour replacing coal with gas, and using carbon capture and storage. That is preferable to the unintentional and paradoxical “coal plus renewables” strategy playing out in parts of Europe and Asia, and blunts the threatening move to delegitimize fossil fuels.
Policy is usually about trade-offs – it is rare to find such an opportunity to strike at several problems simultaneously. GCC countries might prefer not to raise taxes, but since they have to, it would be better to tax bad things than good. The physical, political and economic climate increasingly demands putting a price on carbon now.
Robin Mills is the chief executive of Qamar Energy and the author of The Myth of the Oil Crisis.
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Published: July 24, 2016 04:00 AM