Justin Dargin - Emissions trading platforms - Carbon tax

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A carbon tax would be especially difficult to implement in the Gulf, since most countries embrace a national policy of minimal or “zero” taxation. Therefore, strategies that incorporate an ecological (e.g., carbon) tax scheme (such as in 1999, when Germany used a feed-in tariff system) are generally incompatible with Gulf policies. Moreover, carbon taxes have been broadly criticized on the grounds that the environmental outcome—i.e., overall mitigation of carbon emissions—is not assured.

However, one positive point for the private sector is that, in contrast to a CaT system, a well-crafted taxation scheme removes much of the uncertainty and vagaries that business generally despises. The emitter will not need to hedge against potential volatility since the amount of the tax vulnerability can usually be estimated beforehand. A singular benefit of a uniform carbon tax rate is that, when placed upon an essentially volatile market, the government will bear the burden of the volatility through lost revenue. And if the tax is implemented fairly, governments would not be in a position to pick industrial “winners and losers.”

Nonetheless, the Gulf is a unique region, in part because it contains massive hydrocarbon reserves and few other natural resources. Therefore, the above benefits and negatives take on a special salience when analyzed in the Gulf context. GCC states are usually designated as “rentier states” states which derive all, or a substantial portion, of their national revenues from the exportation of domestic resources to external clients, i.e., international oil companies. For instance, Hertog notes that the Gulf states “derive all or a substantial portion of their national revenues from the rent of indigenous resources to external clients.”

Nevertheless, minimal taxation, an abundance of low-cost energy and electricity supplies, extremely low-cost foreign labor and a lack of stringent environmental regulations make GCC countries an attractive destination for Western firms migrating from developed jurisdictions. As a consequence, each year the GCC welcomes the arrival of new energy-intensive industries, especially those involved in aluminum, steel and cement, and the value-added petrochemical sector.

If the GCC states attempted to impose carbon taxes, they would incur extremely high political and economic costs. The energy-intensive industries are an extremely powerful and influential lobby within the Gulf, and they form an essential part of the national strategies that the governments rely upon to institute economic diversification away from mere primary product export, i.e., unrefined oil and gas. The imposition of any national carbon mitigation scheme raises the costs of energy—often to the end user—by forcing companies to internalize the cost of carbon. If the GCC were to institute a carbon tax, the national governments would most likely nullify its impact by promptly exempting most energy-intensive industries.

In this political and economic milieu, a carbon tax would not be the Gulf’s most effective carbon mitigation tool.

Justin Dargin is a Research Fellow with The Dubai Initiative and a Fulbright Scholar of the Middle East. Justin Dargin is a specialist in International Law and Energy Law, and a prolific author on energy affairs.

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