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Carbon Free, but Someone Always Pays

Carbon Free, but Someone Always Pays

Environmental debates are not new. Ever since the Industrial Revolution, humans have been modifying the natural environment in a plethora of ways. Everything from strip mining to trapping and fishing, burning fossil fuels or constructing nuclear power plants, we’re an innovative species that does not remain stagnant for long. As with most things, doing something to A will cause something in B. Sure, we can generate cleaner energy with nuclear plants, but what about the waste or potential dangers, some would ask. As Milton Friedman was fond of saying, “there is no such thing as a free lunch.” Someone pays, someone always pays. 

There is a near-universal consensus that carbon emissions are bad for the environment. The debate lies in how we reduce them and by how much. A tax on something generally affects demand. Carbon taxes are popular policy tools for limiting emissions. Yet, if enacted poorly or sloppily, the effects are adversely felt. For example, a straight carbon tax on fossil fuels is often regressive. The burden of the tax falls harder on those who have less. It is possible to tax fossil fuels more progressively, but because fuel is essential in the production of a host of other items (food, services, etc), prices naturally rise across the board and those with less are still impacted disproportionately. 

Now, this doesn’t mean that carbon taxes can’t work. There are many successful examples of carbon taxes coupled with targeted government transfers to mitigate the disproportionate household effects. But this requires extreme coordination and collaborative political will. The shipping industry is currently weighing a similar proposal as there is broad agreement that it must reduce its carbon footprint. Shipping represents approximately three percent of global greenhouse gas emissions and incentives and regulations are greatly needed. 

The International Maritime Organization (IMO) is a United Nations agency responsible for the safety and security of shipping as well as the prevention of atmospheric pollution by ships. They have been meeting and exchanging carbon mitigation proposals over the past two months with China and Japan namely. If structured conscientiously, a carbon tax can move the industry to emit less via incentives to improve efficiency and ultimately the implementation of zero-carbon technology. But some are concerned that the new regulatory system (based on Carbon Intensity Indicator metrics) is not the smartest path.

These metrics do not take into account operational and trading efficiencies and ultimately introduce misguided incentives for shippers. Ships that carry less cargo will receive favorable scores which are akin to the International Air Transport Association (IATA) introducing metrics that reward airlines for flying half-empty. While a half-empty vessel indeed features a lower carbon footprint, the one left paying for a pricier lunch is the eventual consumer.  

An alternative measure would be following the EU’s Emission Trading Scheme (ETS). This is a levy based on the vessel’s real-time carbon emissions. Supporters claim it is more practical and would eventually spur collaboration to improve efficiency and stimulate investment in an eventual zero-emission fuel solution. 

There is much discussion still to come. Regardless of the adopted measures, carbon taxes must not be implemented without considering the two parties in any transaction – the supplier and the consumer. In a world where lunches aren’t free, the details are where it counts.