Time for carbon tax

12 Dec 2019


The writer teaches economics and public policy at Habib University, Karachi.
The writer teaches economics and public policy at Habib University, Karachi.

POISONOUS smog has become a fifth season in Pakistani cities. Recently, the air quality turned so bad in Lahore that schools were closed; Lahore reigned as the world’s second-most polluted city. In emerging economies like Pakistan, several factors including rapid urbanisation and burning of agricultural waste damage air quality. A chief reason behind the hazardous air quality is that economic growth necessitates more fossil fuel combustion.

One mechanism through which economic growth leads to poor air quality is that rising incomes increase affordability for new two- and four-wheeled vehicles. But, unlike other nations, tottering vehicles do not end up in the junkyard. In the absence of auto emissions standards, old dilapidated cars, rickety diesel buses and smoke-spewing two-stroke motorcycles thrive. In the absence of a regulatory framework, this ends up destroying the air quality. World Bank data shows that in the 20 years between 1991-2012, the number of vehicles, including two-wheelers, went from two million to 10.6m in Pakistan — an annual increase of 8.5 per cent.

Also, in emerging economies, economic growth speeds up infrastructure construction such as ports, bridges and roads, which largely use cement and steel. Cement and steel manufacturing increase the combustion of fossil fuels in industrial facilities as these are energy-intensive industrial processes.

Unregulated fossil fuel combustion, either in vehicles or industrial facilities, emits lethal particles like PM 2.5 that penetrate our lungs and bloodstream. PM 2.5 has been shown to exacerbate asthma and other pulmonary diseases, besides increasing the incidence of heart attacks and strokes. Thus, unregulated combustion for powering the economy extracts an enormous social cost in the shape of society’s poor health.

Carbon taxes have been efficient in bringing down CO2 emissions.

Besides lack of regulation, the social cost of burning fossil fuels not being borne by the polluters compounds public health hazards. If polluters were required to pay for environmental and public health damage, or the social cost, the resulting higher price of fossil fuel would force a substantive decrease in use.

The enormous social cost of burning fossil fuels is an example of a ‘negative externality’, first identified by economist Arthur C. Pigou in 1920. Pigou argued that externalities could be corrected by requiring polluters to pay a tax equal to the social cost and not just the private market price. The additional tax on polluters would limit the quantum of fossil fuel combustion to a social optimum.

‘Pigouvian’ taxes are the basis for introducing taxes on CO2 emissions, or ‘carbon taxes’, in order to tackle climate change in general, and poor air quality in particular. Around 40 nations today have adopted either a carbon tax or cap-and-trade, or both. Canada has introduced an ambitious nation-wide carbon tax on coal, oil and gas. China is also experimenting with what will eventually become the world’s biggest carbon-pricing system.

Carbon taxes have been efficient in bringing down CO2 emissions. A recent study from Sweden shows that emissions in the transportation sector dropped 6.3pc every year from 1990-2005. In Britain, CO2 emissions have fallen to their lowest level since 1890 after a carbon tax was introduced in 2013. For Pakistan, a carbon tax can bring additional benefits in the shape of more revenue that could help the government put its fiscal house in order.

Introducing a carbon tax is, however, not that straightforward. Detractors ask that if the government decided to roll out a carbon tax on industrial facilities, how would Pakistan’s exports compete internationally, given the increase in the cost of operations. Moreover, it is argued that the impact of any carbon tax would be regressive, or unfair, since low-income households spend a greater portion of their money on energy than do higher-income households.

These concerns can be addressed. In the case of Pakistan, at least in the short term, export industries will need to be insulated from a carbon tax. Canadian industries, for instance, that face stiff foreign competition in, for example, chemicals and steels, are exempt from carbon tax. Rather than using the carbon tax to generate revenue, a better approach is to make carbon tax revenue-neutral ie refunding the entire carbon tax revenue from mainly vehicles and industrial facilities equally to all Pakistani citizens, thereby making it fairer.

Tackling hazardous air quality in Pakistani cities requires dramatic policies. In terms of regulation, the government should develop stringent emissions standards such that tottering cars, diesel buses and two-stroke motorcycles can be phased out as quickly as possible. At the same time, policymakers need to immediately come together in order to conceive, design and introduce a carbon tax that will work towards making the air breathable again.

The writer teaches economics and public policy at Habib University, Karachi.


Published in Dawn, December 12th, 2019