Why Larry Sumners is right and wrong about a Carbon Tax

Larry Sumners has joined those calling for the fall in energy prices to be seized as an opportunity to introduce a carbon tax.

“The case for carbon taxes has long been compelling. With the recent steep fall in oil prices and associated declines in other energy prices it is overwhelming. There is room for debate about the size of the tax and about how the proceeds should be deployed. But there should be no doubt that starting from the current zero tax rate on carbon, increased taxation would be desirable.”

As I have said this is the right time to do this. But I have to disagree with two comments which he goes on to make.

Firstly, he argues for a border carbon tax to protect the competitive position of countries which introduce a carbon tax. This is bad tax policy. Border carbon taxes are like customs duties in general, the devil is in the detail and in terms of carbon there is lots of detail. While it may be relatively simple to calculate the carbon in a ton of coal when its imported, how do you do the same for a car? What assumptions do you make about the power used to make the product in probably a number of countries? Border carbon taxes are a false friend – they look simple but as anyone who has dealt with customs duties knows they aren’t.

If you want to protect the competitive position of industry sectors the best mechanism is that used in the emission system, ie to exempt sectors for a period of time.

Second, Mr Sumners wants to spend the money raised on infrastructure but not green infrastructure. Again this is misguided. The transition to a low carbon economy needs significant investment in the power distribution system to deal with the specific burdens which renewables place on a power grid. This is the type of infrastructure that needs investment.

Its excellent that Mr Sumners raises these issues, but it also demonstrates that we need a proper debate to identify the best policy track for the transition to low carbon.

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