Start a carbon tax? That’s so 1991. Clean innovation and partnerships is where it’s at

We price carbon. This is nothing new. The first time this explicitly happened, Vanilla Ice hit number one in Australia, and Bryan Adams was topping the global charts with “(Everything I do) I do it for you”.

Carbon Taxes have existed in Europe since the early 1990s. This is because broad-scale ecological innovations in industry require political support. Market forces alone cannot innovate us to a low-carbon future because, up until now, we have taken global public goods like clean air for granted. The carbon tax places Australia amongst other global leaders - such as the UK, California, Scandinavia - by taking positive action on climate change. But the price, whilst important, is not the main game here. It is the prerequisite for change and there will be a price on carbon everywhere, sooner or later. It is, however, connectivity and new partnerships that will be central to governing a low carbon transformation.

Carbon Pricing, Roxette style

In 1991 Sweden implemented a carbon tax of US$44.37 per metric ton of CO2. This was not evenly distributed across society, with consumers paying more than industry, so, ultimately, industry ended up paying US$23.04/tCO2e from 2003-2006. This rings some bells given the price coming in Australia. According to the Swedish government, the tax reduced CO2 emissions by about 15% between 1990 and 1995, and overall emissions dropped almost 9% between 1990 and 2006, and by more than 40% since the 1970s. The Swedish revenues also flowed into general government coffers, not specific funds for low-carbon technology and innovation development.

Denmark, on the other hand, implemented a carbon tax in 1992, this time with revenues being focused on environmental subsidies (taxing “bads” such as fossil fuel use to support “goods” such as renewable energy), leading to 15% reductions on a per person basis from 1990 to 2005, and industrial emissions dropping by 23% during the 1990s after market-induced industrial restructuring. Denmark’s carbon tax actually slightly decreased from US$16.91 in 1992 to US$16.41 in 2008.

More recently, British Columbia (BC) in Canada implemented a carbon tax in 2008. It reaches C$30 (A$28.80) per ton of carbon dioxide equivalent this weekend, its 4th anniversary. Did the sky fall in in BC? Nope. Emissions dropped, especially in petroleum fuel use – 15.1% since 2008, as reported by Canadian think tank, Sustainable Prosperity – and gross domestic product (GDP – an imperfect but standard measure of wealth) grew compared to the rest of Canada, even with the oil sands in Alberta factored in. Importantly, studies have shown that in seven countries with carbon taxes, GDP has slightly grown or remained neutral. Over the last 20 years, the sky in these countries has not fallen in and the economies have not gone to hell in the proverbial hand-basket.

Complementarity

So, the carbon price in Australia is not way out ahead of everyone else, but places the country amongst others leading the way globally. There are two things that are important to note here: firstly, that it takes time for the environmental effect of the tax to kick in. Those who often criticise carbon taxes for not having immediate effect overlook that it takes time to restructure economies, but that this can happen without reducing GDP. Important here is that industry has certainty in policy decisions, and a clear carbon price extending into the future so that clean investments can be made. Assistance to overcome initial financial and technological hurdles, including competitiveness issues, are also important in this transition time.

Secondly, tax alone is not enough: broader policies need to be in place to spur new innovation that generates wealth out of new green economies. Although taxing can create innovation, complementary policies are also needed to help drive lower emissions. For example, Sweden is part of the EU Emissions Trading Scheme, has policies to target waste disposal, and invests money in research and development and local programmes. Funding measures may also help, for example, tenants buy low carbon energy when they don’t have incentives to invest in physical infrastructure through things like Property-Assessed Clean Energy (PACE) schemes.

These examples don’t account for every nuance in these countries, but it shows that pricing carbon, really, isn’t a big deal. The carbon price is prerequisite for internalising externalities – it helps nudge decision making on the margins – but it is not the be-all-and-end-all of climate policy. In fact, it’s even smaller than that: pricing it is a necessary but insufficient step in reducing emissions and creating healthy ecological economies. It is the other mechanisms that create new partnerships, invest in new technological and business model innovations that will facilitate a profitable transformation to a low carbon economy.

Partnerships

Creating a culture of innovation through partnership and multi-stakeholder processes is really what is essential in creating the right atmosphere for benefiting from a low carbon future. The carbon tax is one tool in a broader systemic approach to foster new clean industries. New innovation also isn’t just about technology; it is about business models and connectivity between business, government and communities to show support for a positive vision of the future. For example Solar City in California innovated around its business model of providing a service for solar power, rather than just selling a product. Investment mechanisms, such as government funds or venture capitalists, also need to help bridge gaps, providing support that links innovators from policy requirements to profitable markets.

Many of these opportunities will come from better inter-connectivity between the new economy actors. Just as the fossil-fuel industry has worked with governments for decades to instill subsidies as a norm, new green industry should be fostered through co-evolution of new policy and capital through partnerships and organisation. An example is creating consortia of cleantech, venture capitalists and green collar employment organisations to push government and show support for low carbon policies. Information and knowledge for people to make decisions as consumer voters/citizens (e.g. carbon labels on products), and partnerships that allow low carbon activities to be scaled up (e.g. city level carbon management and innovation) are important for bridging policies to people’s everyday living. These initiatives give government and consumers the confidence and support they need to make low carbon decisions, both in parliament and the supermarket. By connecting, we can provide what I call “example and enable environments”, giving practical examples of tools that can then be scaled up over space and time. For example, online carbon calculators for people or companies to use voluntarily can be used to raise awareness and skills, which can then help understanding of incoming government regulation.

Our recent work in the international Carbon Governance Project illustrated the importance of connectivity and leadership in leading climate change jurisdictions including the UK, California, and British Columbia. Cleantech capital and industry is partnering with leading research institutes, community “living laboratories” and facilitating the co-evolution of low carbon economies. When we think of the carbon tax in Australia, all we are doing is placing a price to get rid of something we don’t want and enabling the economy to start making money from new industries. So we price the environment and place value in its societal outcomes.

Often people get hung up on the price: “too low to make a difference”; “too high making us uncompetitive”; “too clouded to figure out what it actually does”. The most important point is that carbon has a dollar value in the first place; the carbon tax gets us on that necessary path. Now we should focus on positive visions of the future with tangible examples that illustrate this. We need to use the market as a tool to drive low carbon transformation: using the price as a stick, and profitable partnerships as the carrot. Then we can conceptualise and realise the multiple discoveries that will both benefit society and the environment in a new low carbon future, bringing Australia firmly out of 90s hair dos and into the leading pack.

Comments welcome below.

Adam Bumpus receives funding from University of Melbourne. He is affiliated with the University of Melbourne and the Sauder School of Business, University of British Columbia.