Dendi Ramdani (Mandiri Bank) (The Jakarta Post)
Tue 10 Aug 2021
The claim that carbon dioxide (CO2) needs to be reduced is widely accepted globally. A set of empirical studies have confirmed that carbon dioxide is the main cause of the effect of greenhouse gases (GHGs). GHGs are believed to be responsible for global climate change, leading to massive flooding, crop failures and melting polar ice caps, which threaten the future of humans and other living things on Earth.
The assertion implies that we should internalize all negative externalities produced in products, firms and sectors. Conceptually, the idea is not new as it simply follows the Pigouvian tax on negative externalities. The Pigouvian tax has been well known since 1921, after British economist Arthur C. Pigou wrote a book called The welfare economy.
A global trend today sees many countries starting to impose a Pigouvian tax, known as the carbon tax. For example, the European Commission has just considered applying a mechanism called the Carbon Frontier Adjustment Mechanism (CBAM). It aims to tax imported products entering the European Union on the basis of the carbon produced in their production process. Likewise, the United States also plans to impose a border carbon adjustment tax on imported carbon-intensive products. In addition, the Indonesian government is also planning to apply a carbon tax to products that generate carbon emissions.
In our opinion, the trend is good news for our future life on Earth. However, we see that certain issues arising from this global trend must be highlighted in relation to international trade, in particular that between developed and developing countries. Accordingly, we believe that global coordination for the internalisation of negative externalities is the key to the success of an emissions reduction program.
In more detail, we see some issues that should be solved together, which means that countries need to coordinate in the implementation of the zero carbon program. The reasons are as follows:
First, we see that carbon emissions are linked to global economic externalities affecting the lives of people who might be geographically separated. In other words, the carbon produced in one country can affect lives in other countries that might be thousands of miles away.
Second, we can see that the carbon tax can be double billed. A country may impose an imported carbon tax on products from other countries. Meanwhile, the exporting countries also charge a carbon tax for the products. So the question is: who has the right to collect the carbon tax, the importing country or the exporting country?
Third, we can see that a carbon tax could be misused as an instrument to engage in unfair trading. A country can impose an imported carbon tariff to protect its domestic market from the products of foreign competitors.
Fourth, carbon tax revenues should in principle be used to repair environmental damage, guarantee reforestation, compensate indigenous people and carry out other activities that support the reduction of carbon emissions. Obviously, we believe that carbon tax revenues should be spent where the carbon is produced, to repair environmental damage. An alternative is for the revenues to be spent in other places capable of cleaning up CO2, such as maintaining rainforests.
In addition, we believe that the principle of equity must be applied, mainly in relations between developed and developing countries. In our opinion, developing countries are still blamed as the main cause of GHG effects; while developed countries are said to be clean. In fact, data shows that the world’s biggest polluters are largely advanced countries. Specifically, data from the World Resource Institute shows that the largest emitter of GHGs is China, which contributes 26.1% of global emissions, followed by the United States (12.67%) and the EU-27. (7.52%).
As a result, the biggest consumers of thermal coal are also not much different from the world’s biggest polluters. The largest is China with thermal coal consumption of 3.81 billion tonnes in 2019, followed by India with 1.03 billion tonnes and the United States with 628 million tonnes.
Therefore, we propose some actions to accomplish the carbon reduction program.
First, all countries should coordinate globally to implement carbon reduction policies, carbon tax and tariffs, and the allocation of carbon tax revenue funds. A global agency, primarily the United Nations, should take the lead in coordinating the implementation of an emissions reduction program.
Second, we need to design the allocation of carbon tax revenues collected on imported products. In our opinion, the funds should be spent in the countries that manufacture these products to repair the environmental damage in those regions.
Third, we can consider developing a global trust fund to manage carbon tax revenues and act as a clearinghouse to determine who should pay the carbon tax and receive the compensation.
Fourth, developing countries such as Indonesia should implement initiatives to uphold the principle of equity. The data described above clearly shows that the biggest polluters are the advanced countries. Thus, developing countries should ask them to pay compensation in order to internalize the negative externalities they cause. Compensation should be allocated primarily to countries that maintain tropical forests, corals and mangroves.
To sum up, we believe that the emissions reduction agenda is in dire need of close coordination and cooperation from all countries and stakeholders from global institutions, businesses, investors, non-governmental organizations and ordinary citizens. . In addition, we should also impose the principle of equity to ensure that the countries concerned provide compensation for negative externalities.
Economist at Bank Mandiri