The Climate-Policy Trap

Once a year or so, journalists from major news outlets travel to the Marshall Islands, a remote chain of volcanic islands and coral atolls in the Pacific Ocean, to report in panicked tones that the island nation is vanishing because of climate change. Their dispatches are often filled with raw emotion and suggest that residents are fleeing atolls swiftly sinking into the sea.

A carbon tax is much discussed as a solution to climate change. It is simple and straightforward: a climate price tag makes industry and consumers take into account the implicit negative effects of their actions, whether it is the aircraft fuel for a vacation, or fossil fuels for food fertilizers or to heat and cool a home.

I have argued for a well-designed carbon tax for more than a decade. But five important caveats, almost universally breached by politicians, affect the likelihood of such a policy working.

Inadequate and poor-quality power supply means frequent interruptions, poor voltage levels, and dissatisfied consumers across much of the country. Adding up all the losses in the system—including the losses due to energy dissipated in conductors, transformers and other equipment, along with pilferage by those who bypass meters, and losses from failure to recover the amount billed to consumers—India’s total energy losses came to 24% in 2015-16, significantly more than international norms.