Carbon pricing: is it a viable solution?
Carbon pricing has been presented as a way to drive the reduction of emissions and finance transitioning into greener energy. It follows the Polluter Pays Principle: households, companies and industries that are responsible for a high level of emissions should pay the price for their activities and carbon output. As COP27 continues, climate financing and corporate responsibility are priority areas for policy and pledges. But how does carbon pricing work, and is it actually useful?
Carbon pricing (also known as CO2 pricing) has three goals: ii) reducing greenhouse gas emissions, ii) facilitating the transition to green energy and iii) generating revenue. The main components of carbon pricing are carbon tax, Cap and Trade (CAT) and Emissions Trading Schemes. Notable examples of carbon pricing are the Chinese national carbon trading market and the European Union Emissions Trading System (EUETS). The latter was first established in 2005 and was divided into three ‘trading periods’ lasting until 2020. China’s carbon trading market began in 2021 under the Ministry of Ecology and Environment. It’s part of the country’s pledge to reduce its carbon intensity per unit of GDP by 60-65% by 2030. Globally, 9 countries have both national carbon tax and ETS systems, and 30 countries currently have a national carbon tax system (Austria has delayed plans to introduce a carbon tax).
Of the three methods, carbon tax is widely agreed to be the most stable and practical form of carbon pricing. As a 2022 IMF report explains it: “carbon taxes have significant practical, environmental, and economic advantages (especially for developing countries) due to ease of administration, price certainty which promotes investment, the potential to raise significant revenues, and coverage of broader emissions sources.” It’s simple: government (usually the ministry of finance or its equivalent) sets the price for carbon. Uruguay currently has the world’s highest carbon tax at €137.74 per tonne of CO2, whereas Poland’s tax is at €0.07 per tonne. This can be implemented at any stage of the production chain, from extraction and processing to distribution. This flexibility is why carbon tax is viewed more favourably than Emissions Trading Schemes and Cap and Trade.
Does carbon pricing work? In a 2020 piece for ‘Geopolitics, History and International Relations’, Luminița Ionescu believes that carbon tax and coal capacity lowering are key for conserving energy and carbon emission alleviation. There are other benefits: by encouraging a reduction in carbon emissions, carbon pricing can lead to a reduction in air pollution, which in turn leads to lower mortality rates and better health. Carbon taxes in particular can decrease carbon emissions in energy intensive sectors while generating revenue that can go towards financing green energy. However, for carbon pricing to be truly beneficial it needs to be part of a wider climate action scheme.
Ionescu, L. (2020). The Economics of the Carbon Tax: Environmental Performance, Sustainable Energy, and Green Financial Behavior. Geopolitics, History, and International Relations, 12 (1), 101–107. https://www.jstor.org/stable/26918291
Perry, I., Black, S., & Zhunussova, K. (2022). Carbon Taxes or Emissions Trading Systems? Instrument Choice and Design. Retrieved from https://www.imf.org/en/Publications/staff-climate-notes/Issues/2022/07/14/Carbon-Taxes-or-Emissions-Trading-Systems-Instrument-Choice-and-Design-519101
UNDP. What are carbon markets and why are they important? (2022, June 30). Retrieved November 10, 2022, from https://climatepromise.undp.org/news-and-stories/what-are-carbon-markets-and-why-are-they-important