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29 September 2010

Carbon Tax: Trade or Trees

Written by Robyn Ferrar, Posted in editorials

Carbon Tax: Trade or Trees

Since the start of the Industrial Revolution, we humans have been taking advantage of the planet’s ecological services free of charge.  Today we are paying the price in many ways, and yet still we dig our heels in when it comes to shouldering that burden of debt.  Radical reform of our economy is required but until the powers that be get their heads around that one, we need to look at intermediate solutions.

Should “carbon neutral” = business as usual ?  Surely our changing climate relies on carbon neutrality representing vastly reduced emissions, because unless it does, the mechanism that facilitates this outcome has no purpose, other than greenwashing.  There are various mechanisms currently doing the rounds for the purpose of reducing greenhouse gas (GHG) emissions.  Some have legs, others have loopholes, and still others are just plain loopy - neither logical nor sustainable on a large scale.  This article will touch on three systems currently affecting South African businesses.

Offsetting with Trees

This appears to be the flavour of the month in South Africa right now, and it’s easy to see why.  It’s a nice shortcut to that “carbon neutral” finish line in a race with very few rules.  The idea here is that individuals or companies can buy the carbon storage capacity (i.e. trees) to compensate for the carbon they emit (e.g. flights).  The process of valuing this capacity has become big business recently, but it is unlikely that these calculators are entirely realistic.  As a simple example: trees die every day, releasing their cargo of carbon straight back into the atmosphere while they’re at it, but it’s not clear whether this, or variables like this, are accounted for in the calculations.

More disturbing though, is that offsetting seems to have become a marketing exercise in commerce these days, and it can be pretty cost effective marketing if you know your way around legislation.  Large emitters can do some fancy footwork to slice and dice their entities or externalise emissions as well as opting for the smallest acceptable scope of measurement, until they’re left with a puny footprint to offset, which bears no resemblance to reality.  The extent of deception here is tempered only by the morality of the business or marketing firm in question.  But on the whole it doesn’t seem to be bought or sold in the spirit of sustainability, not by any stretch of the imagination.

However, that’s not the biggest problem with this solution.  Ironically, it becomes more dangerous at scale, so perhaps it’s just as well it’s not used honestly. Here’s why…  In 2008 South Africa’s annual emissions were estimated at 800 million tons of carbon.  Pre-Copenhagen, the SA government laid out their forecast and targets for carbon emissions: the peak and plateau will be reached sometime around 2020 at a level of 1200 million tons per annum; the target then is to reduce back down to 600 million tons by 2050. That’s a reduction of 600 million tons per annum.  Spekboom - an unassuming indigenous tree that sequesters comparatively huge amounts of carbon (~4 tons per hectare) - should soon be enjoying the offsetting limelight, but even at those levels it will take over 1.4 million square kms of Spekboom to offset that much carbon… I think you see the problem here.  And all this is quite aside from the fact that, although Spekboom propagation has been shown to improve biodiversity in semi-arid regions, plantations of any kind of tree would generally amount to monoculture. This in itself has huge ecological drawbacks, like water and nutrient depletion and increased soil salinity and acidity, which, at scale and over time, severely compromises the all-important biodiversity.

Carbon Trading or “Cap & Trade”

South Africa currently has no formal “Cap & Trade” mechanism in place, although participation is possible on a voluntary basis.  The idea behind it is to reduce carbon emissions by setting a decreasing cap year-on-year based on agreed targets. The government will issue (or auction, as proposed in the US) companies with credits, and those that emit less than their quota can sell and potentially profit from their remaining credits.  Thus the incentive is provided.  Companies that emit more than their quota of carbon will have to buy credits to make up the deficit.  As credits gets scarcer, so the price of carbon goes up as regulated by free market forces.

All good so far?  The problem here is similar to that of buying trees – it’s so easy to cheat!  In fact, there is so much incentive to cheat!  Issuing credits free to polluters (and in some cases making certain sectors, such as aviation, exempt from the scheme!) is essentially giving them a license to continue polluting unchecked.  On the other hand, selling them to companies means that costs will be passed straight to the consumer.  That sounds like lose/lose!  In the commerce/consumer dance, companies won’t accept that, but they will settle for win/lose.  Cue the fraudsters.  The ways to cheat are too numerous to count, from over-estimating emissions to gain more credits than required in order to sell them at a profit (money for nothing), to over-stating the savings to be had from “green technologies”.  Cheating becomes even more tempting in the fuzzier offsetting component of the scheme, where companies earn credits by sponsoring or investing in projects that result in reduced emissions in the developing world.  Sounds great - especially for us - but it is almost impossible to verify claims; balance the inevitable trade-offs and avoid drowning in greenwashing.  Remember, the purpose is to reduce emissions, not increase profit or GDP.

There is another, more fundamental issue with this approach.  Albert Einstein once said “We cannot solve the problems of the world today by thinking the same thoughts that created the problems in the first place.” And this is exactly what Cap & Trade is trying to do.  The brainchild of Enron (energy trading) and Goldman Sachs (US sub-prime mortgage crisis) – neither of them pillars of morals and ethics - Cap & Trade was designed using principles of a system that is fundamentally flawed and no longer fit for purpose – the capitalist economy.  Instead of throwing more money into the black hole that this system is creating, we should be getting stuck into a radical re-design, such as an Ecological Economy.  Cap & Trade serves as yet another distraction from solving the real problem, and is nothing more than plastering over the cracks.

Carbon Tax

This concept is a simple case of levying a tax per unit of fossil fuel, based primarily on the amount of greenhouse gas, or carbon equivalent, it produces in its use.  Of the three mechanisms outlined here, this is the simplest, fairest and arguably the most effective option on the table, especially if it is revenue neutral.  This means the revenue generated is rebated fairly by way of reduced taxes elsewhere, but subsidies in renewable energy technologies would also be beneficial.

With existing collection and auditing mechanisms in place, imperfect as they may be, this is the cheapest and most efficient option, and unlike with Cap & Trade, all countries have these facilities in place already, in one form or another.  It is somewhat arrogant of the 1st world to prescribe an international system that suits them without consideration for the requirements of the 3rd world in terms of implementing and enforcing such a system without the means of a revenue stream or even a global authority.  A carbon tax is also a much safer option than the very risky and self-perpetuating Cap & Trade system, in that if it’s found to be ineffective in the future it can be withdrawn or replaced without crippling those with huge and worthless investments in an artificial carbon currency.  With both systems the cost of energy will go up, as will the cost of downstream goods and services – that would mean it is working – providing the necessary incentive to move to renewables.  The difference is that a carbon tax can rebate those that are affected by the tax, instead of rewarding those that know how to work the system and profit from it.

The good news is that, although a Cap & Trade system is being considered by our government, it is as a secondary solution to the carbon tax.  However, the first phase of this tax is questionable, in that new cars will be taxed at point of sale based on their fuel economy specification (based on manufacturers specs) at R75 per g/km for each g/km above 120 g/km.  This will apply to light vehicles which directly targets consumers and is being levied despite the lack of cleaner burning fuel.  Unless the government legislates for this higher quality fuel, motor companies cannot introduce cleaner engines for more fuel-efficient vehicles.  Another glitch in this system is that two people can buy the same vehicle and pay the same tax but one drives twice as far and contributes double the carbon.  It would make more sense to simply tax the fuel with a rebate scheme of some form.  Finally, it is not clear what government plans to do with the R450m this tax will generate, and it is unlikely to be revenue neutral.


South African business is treading on thin ice with the offsetting trend and consumers are getting wind of it.  They may not know why they don’t believe some claims of carbon neutrality but common sense and self-education has something to do with that.  The government on the other hand is on the right track with its focus on carbon tax above the dreaded Cap & Trade, but there is still a long way to go before people/planet/profit can achieve win/win/win.

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