From Mr Kevin Watkins.
Sir, Fiona Harvey's review of this year’s Human Development Report and your editorial, “Groundhog Day” (November 28), raised important questions about relative merits of carbon taxes and cap-and-trade programmes. In our view, both have a key role to play in putting a price on carbon.
In economic theory, taxes and quotas on emissions are equivalent. They both raise the price of emitting greenhouse gases, thereby creating incentives for low-carbon investments. In practice, governments need to consider each option, taking into account the realities of democratic debate, differences between economic sectors, and institutional capacity.
As one of your commentators suggests, it would be foolish to dismiss cap-and-trade options in favour of carbon taxation on the grounds of theoretical purity. That said, it would be equally short-sighted to overlook the shortcomings of current cap-and-trade models. The European Union’s Emissions Trading Scheme has suffered from quota ceilings that have been set too high, and from a failure to increase the share of quotas subject to market auction.
It is important that quantitative limits on CO 2 emissions and carbon taxes are geared towards credible targets for cutting overall emissions. Associated revenues must be used in a fiscally neutral fashion to create incentives for the development of low-carbon technologies, to protect those who might be affected by higher energy costs and to finance low-carbon technology transfer for developing countries.
Our energy systems and associated markets are misaligned with the Earth’s ecological systems. Correcting that will require cuts of at least 80 per cent in rich-country emissions by 2050. We have the financial resources and the technological capabilities to mitigate without compromising long-term prosperity. Failure to act will consign a large part of humanity to unprecedented reversals in human development.
Human Development Report Office,