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Investment needed to find better way to fight climate change

By Jeffrey D. Sachs

Few economic regions have made much progress in this transformation. For example, the US is now investing heavily in natural gas without recognizing or caring that its shale-gas boom, based on new hydraulic-fracturing technology, is likely to make matters worse.

Even if the US economy shifts from coal to natural gas, the US’ coal will probably be exported for use elsewhere in the world. In any event, natural gas, though somewhat less carbon-intensive than coal, is a fossil fuel; burning it will cause unacceptable climate damage.

Only Europe has tried to make a serious shift away from carbon emissions, creating a system that requires each industrial emitter to obtain a permit for each ton of carbon dioxide emissions. As these permits trade at a market price, companies have an incentive to reduce their emissions, thereby requiring them to buy fewer permits or enabling them to sell excess permits for a profit.

The problem is that the permits’ market price has plummeted in the midst of Europe’s economic slowdown. Permits that used to sell for more than US$30 per ton before the crisis now trade for under US$10. At this low price, companies have little incentive to cut back on their carbon dioxide emissions — and little faith that a market-based incentive will return. Much of European industry continues on a business-as-usual energy path, even as Europe tries to lead the world in this transformation.

However, there is a much better strategy than tradable permits. Each region of the world should introduce a tax on carbon dioxide emissions that starts low today and increases gradually and predictably in the future.

Part of the tax revenue should be channeled into subsidies for new low-carbon energy sources like wind and solar, and to cover the costs of developing CCS. These subsidies could start fairly high and decline gradually over time, as the tax on carbon emissions rises and the costs of new energy technologies fall with more experience and innovation.

With a long-term and predictable carbon tax and subsidy system, the world would move systematically toward low-carbon energy, greater energy efficiency and CCS.

Time is short. The need for all major world regions to adopt practical and far-sighted energy policies is more urgent than ever.

Jeffrey D. Sachs is professor of Sustainable Development, professor of Health Policy and Management and director of the Earth Institute at Columbia University. He is also special adviser to the UN Secretary-General on the Millennium Development Goals.

Copyright: Project Syndicate

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