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An Upstream Carbon Tax in the Guyana-Suriname Basin: Proposal Discussed at the 2021 Green Economy Workshop

A carbon tax is one way of “putting a price on carbon,” the other being to establish a carbon
emissions trading system (ETS). Carbon pricing causes economic agents who are transacting
in a market to recognise third party costs as part of their production costs. As such, an explicit
carbon tax that leads to a reduction in crude oil production is associated with a certain
amount of “avoided emissions.”

The Upstream Carbon Tax at the Wellhead (UCTW), discussed on Day 1 of the 2021 Green
Economy Workshop is a game-changing one that will in fact address all four objectives of
COP26: Climate Mitigation, Adaptation, Finance and Cooperation. A “Pigouvian tax” that will
be set equal to the best measure of the Social Cost of Carbon (SCC), the UCTW will achieve
the climate mitigation objective by ensuring that oil producers internalise the full cost –
including the “third party cost” or negative externality imposed on all of us when CO2
emissions are released on combustion – of their activities. As it is a tax the UCTW will also
generate revenues, which could be earmarked for climate adaptation, in the jurisdictions that
adopt it. In other words, the UCTW will achieve enhanced ambition in the Guyana-Suriname
Basin, but without the usual concerns about a reduction in revenues. Cooperation as
envisaged in Article 6 of the Paris Agreement will therefore be “incentive compatible” for
Guyana and Suriname, which could be seen as achieving enhanced ambition as a regional
climate club, an idea that has been promoted by Economics Nobel Laureate, William
Nordhaus. READ MORE

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