As Austerity Falters, European Economists Say "Price Carbon!"
Turmoil over budget cuts roils Greek streets. France elects an anti-austerity president. Even Germany's Austerity Queen Angela Merkel faces electoral backlash. It appears Europeans are getting sick of tightening their belts. But when you can't cut any more, there's little else to do but hustle up more cash.
For governments allergic to raising income taxes, a European Climate Foundation analysis released yesterday shows there's a less painful way to slash deficits—one that could save the planet as it saves the economy: a carbon tax.
The report argues that reforming how Europe taxes energy could, by 2020, cut some countries' 2011 deficits in half. Spain, whose deficit reached $116 billion last year (the third-worst in Europe), could add $13 billion in yearly revenue under the recommended plan. As a bonus, the report found that carbon taxes improve energy security and can reduce climate-changing emissions by up to 2.5 percent.
Clearly a Europe in crisis needs a new idea, says economist Max Krahe of Vivid Economics, which co-authored the report. "There are smart ways of doing it and less smart ways of doing it."
Krahe suggests starting with a tax on household emissions, which in the three case-study countries in the report (Spain, Poland, and Hungary), aren't taxed at all, despite accounting for a quarter of Europe's total emissions. Household carbon taxes are a bit of a hard sell, Krahe admitted, because politicians are loathe to add new taxes where none currently exist.
The fear, he said, is that without a safety net higher energy bills would devastate the families already hit hardest by austerity: "In Eastern Europe, you're going to push some old grandmothers into poverty." But the tradeoff is that revenue could be looped back to Granny in the form of increased social services; under a similar scheme about to commence in Australia, over half the money raised from taxing carbon will be sent back to households via tax cuts and other assistance.