Carbon Tax: Planet over Profit

In my previous blog, I tried to analyze the climate Change dilemma by applying the Game Theory, with the conclusion that businesses and consumers won’t cooperate to reduce carbon footprint, even it appears in their best interests to do so. In the absence of Intrinsic motivation and sense of urgency global warming remains an unsolved threat to our planet and future generations. However, the Game Theory is just a simplified framework supplementing the problem-solving process, which provides a structured format to come up with possible solutions. It is important not to over-simplify the situation, as climate change brings multiple sources of error into play simultaneously, in particular, to be named cognitive and judgmental biases are a key reason that people respond irrationally. So, the majority of people believe that climate change is an environmental threat and are self-reported environmentalists, but when policies with definite costs have placed the support for mitigation fades away. Anyway, the analysis of the problem and potential solutions begun in the late 70s, books have been written, it’s time to recognize that analyzing is not solving and that the complexity of the problem isn’t an excuse for not acting, especially as the cost of delay needs to be paid by future generations. Speed matters in the fight against global warming, as the consequences, the bias for action paired with calculated risk-taking is the only way forward. Until today’s efforts of setting sustainability goals, awareness campaigns and tax rewards did not convert into tangible results, global carbon footprint emissions are on an all-time high. As novel and important those activities are, they have diminishing returns and mainly serve to ease our conscience. It not because humans are mean or selfish, human brains are hard-wired for chasing growth, and today’s economic growth is not compatible with reversing climate change. The right way to go, the way out of this dilemma are extrinsic motivations, introduced by a third party.

One way to achieve this is the Carbon Footprint Tax (CFT), which represents the cost of environmental “damage”. Modeled after a credit-method value-added tax enforced by the government, under this method, businesses are taxed only on their carbon footprint emission at each stage of the supply chain. The basis for the tax would be a product’s or Service’s carbon footprint, which includes all of the emissions released during production. A consumption-based mechanism will level the playing field between domestic and foreign enterprises and kill the unproductive debate on the linkage between environmental regulations and growth. With a CFT in place, the free market mechanisms will kick-in, the price for carbon-intensive products increase, making green-products more competitive. More importantly, investors will move the capital to companies who embrace the chance, which will ultimately foster innovation leading to long term sustainable “green growth”. Remember these are tens of billions, in fact, trillions of USD of investments that take place across the world, technologies that today look non-scalable, like solar energy, may turn out to have much more potential than we currently imagine if we start innovating more aggressively. Ultimately, today’s resistance transforms into a green revolution, clearing a socially sustainable path to growth.

Whether a carbon consumption tax is feasible to implement comes down to the challenge of calculating carbon footprint of every individual product along the Supply Chain, which is the prerequisite to tax it fairly the political leadership ability of the maneuvering a nation through short-term pain, and finally the willingness of consumers to accept a lower standard of living, especially for citizen in Europe and US.

What’s next?

?Most importantly, we need to stop overthinking and stop hiding behind the excuse that a global consensus is required to get it started. Joint global efforts are desirable, but the progress of the past was frustratingly slow, and impactful actions seem to be decades away. A better approach is one country takes the lead, so that new knowledge can be applied quickly and pivot towards better designs faster, with the ultimate goal to invite other countries to join making it a global effort, and scale.

This article was originally posted on Medium