Taiwan’s government intends to start collecting carbon fees from businesses that generate greenhouse gas emissions, beginning in the second half of 2024 — after the presidential election. That announcement, though, from Taiwan’s Environmental Protection Administration (EPA) head Chang Tzi-chin (張子敬) came with few details attached, and debate continues over the starting rate and which sectors will initially be covered by the price.
With that in mind, we spoke to Josh Burke, senior policy fellow at the Grantham Research Institute on Climate Change and the Environment, who co-authored a report on the subject for the EPA in 2020. Burke spoke about who will be paying, potential issues and why it’s happening now. The interview was conducted over video call and edited for clarity and length. Several minor clarifications were added afterwards, based on an email exchange.
Your 2020 report recommended that Taiwan should implement a carbon levy. Can you explain in basic terms what that means?
Essentially there’s two ways of pricing carbon, and you can think about them as two sides of the same coin. On one side you have a price on emissions that holds the price constant, and that’s a carbon levy. What you get with that is certainty over the price but you don’t get certainty over the amount of emissions that will be removed. The other option is to have an emissions trading scheme which gives you certainty over the quantity [of emissions that will be removed] but doesn’t give you certainty over the price, because that is set by the dynamics of supply and demand. So either option is essentially a choice between different risk preferences. You could either have a risk of not knowing the quantity or not knowing the price and it’s up to governments to choose. There’s good examples of both working very well independently and both working together at the same time. So in the U.K., for example, we have both a carbon levy and an emissions trading scheme. They can work separately and work together.
The decision to choose which one to go for is very context dependent. It depends on the dynamics of the economy, [the size and depth of the market that might be covered by a price signal] and what the nature of the economy is in terms of which sectors contribute in terms of GDP. So, for example, the U.K. is a service-based [economy] — we’re not heavy on manufacturing — so we have less worry about the impact of that price on some of our sectors in the U.K. It’s different in Taiwan because it’s an export-oriented [economy] which is reliant on manufacturing goods. So you have to be very cautious about which approach you take, accounting for political economy constraints in specific contexts..
Accordingly, there’s also the political considerations of tax versus trade. And for example a carbon levy can be more prone to political interference because [the government] can dictate what the price is, whereas with an emissions trading scheme they don’t choose the price — that’s set by the number of permits in circulation. But, conversely, you can change the number of permits in circulation [and therefore effectively] change the price. So, the idea that a carbon levy is more prone to price interference is broadly true, but you can have the same effect with changing the number of permits in circulation.
And who pays?
It depends on the jurisdiction. In most countries it’s called an upstream tax, so it’s levied at the point of production — or consumption if you’re a coal-fired power station. The opposite to that is a downstream tax, where it’s essentially paid for by consumers. In most taxes or emissions trading schemes, it’s what we call upstream. But then that does filter through to consumers, via higher product prices. So if I’m an electricity producer, I’m paying the carbon tax. That’s increasing my costs, and I’m going to pass [on] that cost to consumers via higher electricity prices, for example. So, ultimately, all consumers pay, that’s just the nature of it. But it’s a technical decision where you place [the initial cost.]
The price of electricity is controlled for consumers in Taiwan. The report mentions this could be a problem for the implementation of the carbon levy. Will it work?
It can work, it’s just not quite as effective. What you want to be doing is reforming some of the structures in the market to allow for the carbon price to work as effectively as possible by allowing the price to be passed through. So we point to this in the report: What we ideally would see is that there would be some liberalization of the energy market to allow this to happen. But then this comes back to those political constraints around pricing carbon and the undesirable distributional impacts it may impose on consumers if they are not protected.
If that “liberalization” hasn’t happened, how does the carbon price work?
It depends which sectors we’re talking about here. In the power sector it’s more of an issue because the prices are controlled so that the consumers don’t face high prices. But in the industrial sector it’s different. There’ll be manufacturing sectors which will face the price, which is outside of the control of the government, so it will work in its more traditional sense there. It’s more in the power sector where some of these changes need to occur.
Can you give some examples?
So if I’m in the power sector and I’m producing power using coal, I’m paying [the carbon levy] based on the tons of CO2 emitted producing that unit of electricity. [Elsewhere,] if I’m in the industrial sector, let’s say I’m making cement, for every ton of cement I make I’m paying “X” price for the emissions [released] to produce that ton of cement. And then the way they recoup their costs is whoever’s buying that cement then pays a higher price for that cement because their prices have gone up.
*By email, Burke adds that “Whilst true, this is somewhat simplistic, and the extent to which manufacturers can pass through these costs will vary from product to product depending on other factors such as demand elasticities. This is why it is important to design some protections for industry which are a common feature of carbon pricing schemes.”
Your report recommends that “Taiwan should start with a simple carbon levy, set at an initially low level, but with a clear trajectory to reach higher prices.” 300 New Taiwan dollars ($10) per ton has been mentioned as a likely starting point. The Environmental Rights Foundation in Taiwan has been asking for 500 New Taiwan dollars ($17), rising to 3,000 New Taiwan dollars ($100) by 2030. What do you think about those numbers? Is 300 New Taiwan dollars the kind of starting point you had in mind? And do you believe the “clear trajectory of price increases over time … needed to ensure sufficient decarbonisation incentives” will be in place?
I think it’s easy to get fixated on what the starting price is. That’s almost secondary, really. What is more important is where the price is going. So as long as there is a starting point with a fairly quick trajectory, then that’s the most important thing, I think. Business does need confidence that the price will rise in line with expectations, so that in 2025 they think it’s going to “X” and in 2030 they think it’s going to be “X” on an increasing trajectory. In that way they can make investment decisions knowing that the price is going to be going higher in future. As long as there’s confidence in that price rise, it will have a large effect on polluters who are exposed to the price, [and] that’s the most important thing, really.
So what are the experiences of other countries like in terms of maintaining that clear trajectory? Have there been issues when, for example, governments have changed?
It happens quite a lot. That’s the main drawback of the carbon levy. It is potentially subject to more interference. If there’s a recession or they’re worried about the impact on consumers in a cost of living crisis, it’s quite easy to say, “We’re going to cut this tax, here.” So it’s definitely happened in other jurisdictions. It’s happened in the U.K. But equally it can happen with emissions trading schemes where you can inject more permits into the market. So, it is a concern, but it’s definitely something that can be guarded against with the right governance mechanisms. I don’t know exactly what they’re going to look like in this context, yet.
So there are ways to “lock in” the price trajectory a bit more?
Exactly. Governments need flexibility, but at the same time in the U.K., for example, it’s been too easy for a government minister to just say, “This tax, we’re just cutting it now because it’s too expensive.” Whereas if there was a slightly more arduous process to go through — more governance steps — it makes slightly more difficult. Whether that requires a vote in parliament or whatever, if you’re going to deviate from what you think is the appropriate trajectory that might make it slightly more difficult.
It’s three years since you released your report, and Taiwan is planning to start taxing carbon in the second half of 2024. In a general sense, why do you think everything about this has been so slow in Taiwan?
Carbon pricing is a challenging policy to implement because it’s transparent about the economic winners and losers. It’s not a challenge unique to Taiwan. Lots of other jurisdictions have taken their time when designing a carbon levy. The most important thing is to get the policy right from the outset, and this is what Taiwan is trying to do, and rightly so.
I think what’s driving a lot of the changes now is the EU’s CBAM [the EU’s Carbon Border Adjustment Mechanism, an import tariff on carbon-intensive goods from abroad, designed to match the price already imposed on carbon emissions for goods made within the EU. Importers must purchase certificates covering the emissions “embedded” in the products they import and submit annual declarations. A transitional period will begin in October this year.] That’s really changed the thinking around the world, in terms of “What could the impact be on our economy?” Even the threat of the CBAM has increased ambition in lots of countries, so in that respect you could consider CBAM to be already working in raising the bar in terms of ambition.
I think the speed at which the Taiwan EPA is now looking at this is partly a reflection of what’s going on in Europe and ensuring that Taiwan’s economy is not unduly impacted by the CBAM. Because the higher the price of the levy in Taiwan, the lower the economic impact of the EU’s CBAM, so there’s a good reason to be more ambitious now.
How will CBAM work in relation to Taiwan’s local carbon levy?
I think the preference is if [businesses] are going to have to pay some kind of price per ton of CO2 polluted, they’d rather keep the money in Taiwan, which makes total sense. It’s a little bit unclear yet exactly how the CBAM will work with other countries. So the main challenge of the CBAM is how you determine “equivalence.” CBAM is based on the premise that countries that are “equivalent” in ambition don’t face it. Quantifying what is equivalent or not is really difficult. The most obvious way is if a [jurisdiction] has an explicit carbon price that is close enough to the EU price, that will be considered equivalent. The EU price is pretty high — let’s say it’s 80 euros (around $90) at the moment. The Taiwan price will be much lower than that. It might be hard to argue that this is “equivalent.” So if I’m an exporter of ships to the EU, for example, I would have to buy permits to cover the difference, essentially.
That seems like a large incentive to raise Taiwan’s carbon levy as soon as possible: Why let the money leave?
Indeed. That’s one of the arguments for having more ambitious pricing in Taiwan. But you want the price to rise quickly, but not too quickly, because you need to observe how effective the policy is and ensure companies have time to adjust to these things.
Is there going to be a period of time where they are losing money to CBAM?
It’s a bit early to say exactly how the mechanics of the CBAM will work. Particularly with jurisdictions thinking about implementing a levy, but it’s not quite at the EU’s level, yet. I don’t know how the EU will deem that. It’s quite a subjective call on saying, “This regime is as ambitious as ours.” It’s quite difficult to say definitively.
What’s the subjective part of it?
America for example can’t implement a carbon price — it’s too politically contentious. But America doesn’t want to be subject to the EU’s CBAM. So America will argue that it’s got equivalent ambition because it’s got very stringent regulations in place. So they’re trying to equate regulations and convert that into what that means in terms of a price.
Countries that can’t implement a carbon price for political reasons but have a net zero target and have stringent regulations are going to argue that they’re equally ambitious as the EU, they’ve just gone a different route. Under the Paris agreement you have common rules but you’re allowed different ways of getting there. So if a [jurisdiction] chooses not to go down the price route but goes down a different route, they’re entitled to make that argument. Whether it’s valid or not is a different question.
I recently read a book called “The Value of a Whale” which sets out to criticize market-based price mechanisms as a method of reducing carbon emissions. Do you have thoughts on these kinds of criticisms?
I don’t think anyone thinks of carbon pricing — an ETS [emissions-trading scheme] or a levy — as the only policy. It’s one policy amongst many. It deals with one market failure but [complimentary] policies deal with others. So I think if people look at carbon pricing as a silver bullet, then it’s not going to work as anticipated. If you look at it as a component of a holistic policy framework, then it’s an integral part of that.
That book goes as far as arguing that market-based efforts are a distraction. What do you think of that?
I think the empirical evidence suggests otherwise. If you look at countries that have had a carbon price it’s demonstrably reduced emissions. Where it’s not been as good is where the prices have been low, but that makes perfect sense. Low prices don’t necessarily reduce emissions that dramatically. The prices [are] now higher than they’ve ever been in lots of countries, and we’re really seeing that transformation.
The U.K. power sector is a perfect case study, where we’ve gone from 40% of coal to less than 2% in six years. And the carbon levy was a huge driver of that. So I disagree that the carbon price is ineffective. It’s ineffective if the price is low but it’s not ineffective if the price is right. Obviously, getting the right price is the challenge, but once you get there it’s worthwhile.
How much of that shift in the U.K. power sector is generally attributed to the carbon levy and how much is attributed to other factors?
This speaks to the point of complementary policies. In the U.K. there’s a paper by Imperial College [London] and they estimated that that change in coal-fired power generation was [approximately] 30% attributable to the carbon tax, 30% attributable to subsidies and 30% attributable to regulations, broadly. Which speaks to the point that you need everything. You need a tax to make one thing more expensive, you need the subsidies to make the thing that you switch to available and cheap, and then you need the regulations to limit the amount of hours that they can run and further weaken the economic case [for fossil fuels.]
The outgoing U.S. energy editor of the Financial Times also expressed pessimism about markets being able to drive this shift to renewables, writing that, “The sheer scale of the physical infrastructure that must be revamped, demolished or demolished is almost beyond comprehension.” What do you think about that view?
The governments set the broad framework, and then the market can drive the costs lower in some areas. Take the U.K. renewable energy auctions: The government funded it, the government set the parameters and the framework, but they allowed the market to compete to drive costs lower and we saw offshore wind go from [about] 140 pounds (around $180) per megawatt hour to [less than] 40 pounds (around $50) per megawatt hour in the space of [seven] years, so when you get that balance right it can work very effectively. I just think in the past that balance has not always been right.
Along the same lines, when you collect the carbon levy, is it ringfenced to be spent on renewable energy projects?
It varies. The U.K. is [an outlier]: It just sucks up all the money and puts it in a general pot. In other countries they’re much more transparent about how they use the proceeds of the revenue because that’s a really important part of increasing acceptability. If consumers see that the money is used to either compensate households who have been disproportionately affected or it goes to [funding] low-carbon energy, then the policy is popular in the long run. So certainly we would encourage jurisdictions thinking about a carbon price to be transparent about how they are going to use that revenue.
Final couple of questions. The government of Taiwan has engaged with major polluting companies directly in putting together its carbon price. That doesn’t necessarily feel great: The police don’t ask a murderer how long they want to go to prison for. What do you feel about it?
I think it’s right that the government engages with all the stakeholders that are going to be implementing the policy, because they have the potential to slow it down if they’re in opposition to it. So I think it’s absolutely right that the government engages with them, but then, ultimately, the decision should be that of the government and not of industry. [There are useful lessons to learn from free allocation in the EU emissions-trading scheme in terms of] the balance between being overly generous with industry protections versus ensuring that the polluters pay the full price. The danger is that once you implement a policy and carve out certain exemptions, you create a lobby to protect those interests. And that’s happened in lots of examples of carbon pricing.
This goes back to what we spoke about at the very start. It’s the politics that dictate how effective a carbon price will be, which is often what its detractors say is too big to overcome. It’s not a challenge unique to Taiwan.
Carbon pricing sounds like a dry, bureaucratic exercise, but as the whole point is market efficiency — and transparency is a part of that — would it be good if more people knew about it? Or is it fine as a bureaucratic exercise?
I think the public engagement part is absolutely critical. People are often turned off by things because they don’t understand them. Essentially the problem with the carbon [levy] is that consumers view it as a [government] revenue raising exercise, rather than a policy to correct a market failure. They see it as fiscally motivated rather than environmentally motivated to reduce emissions. The more that consumers understand the policy — that it’s not there just to raise money, it’s there to give them cleaner air and a cleaner environment — that increases the trust in the policy. Making consumers understand it more is a really important foundation of a longer-term successful policy.
Finally, what happens if people or companies aren’t on board? Are there legal cases?
There’s two examples here of what happens if it’s challenged. There’s one on the consumer side. The “gilet jaunes” [Yellow Vests Protests] is cited as an example. It’s not a perfect example because it was a protest about tax cuts for the rich at the same time as price increases on fuel for the poor, so it was as much about that sense of injustice as it was about the pure price. But you had huge protests. And then in Canada you had huge protests by truckers. They were all driving their trucks and blocking highways in response to fuel pricing. So it’s more in that sense that you get opposition rather than in the courts.
And that’s why you think it has to be a steady process where people from all sides are kept on board?
Yes. Because the moment any politician thinks they’re going to suffer at the ballot box, they’re going to be quick to change the policy. So it’s completely understandable why politicians engage heavily with the stakeholders, because essentially they have the power to change their electoral fortunes.
Image: Photo by Johnson Hung on Unsplash
Leave a Reply