How well are we doing?

Pricing carbon

Finance

Finance

How well are we doing?

Basic economics (as well as common sense) tells us that the cheaper something is, the more it will be consumed, and vice versa. So a simple way to make our economies greener would be to make polluting and damaging the climate more expensive – by Pricing carbon.

Across the 20 countries surveyed so far, carbon pricing policies are split starkly between developed economies, which tend to have fairly robust approaches, and emerging economies, where carbon monitoring or pricing is close to non-existent. Carbon pricing is a straightforward policy on paper - use a carbon tax or carbon price to make emitters pay - but few countries with high carbon industries or consumption are willing to step out from the crowd and take unilateral action.

Canada, France, Portugal, and the United Kingdom all have carbon trading or taxation policies in place for key sectors – and sometimes both, such as in Sweden. For the European countries this approach is largely arranged through the EU Emissions Trading Scheme (ETS), one of the most comprehensive attempts to set up international pricing of carbon; although held back by a failure to create the stable and high carbon price needed to drive investment decisions. The United Kingdom’s supplementary tax – the Carbon Price Floor – has attempted to address this, and been very effective in driving coal from the energy mix. Though some way behind on implementation, China is taking the lead amongst emerging economies, with what will be the world’s largest carbon market currently under development.

A consistently rising carbon price will encourage technological innovation and large-scale infrastructure development. It will also accelerate the diffusion of carbon-efficient goods and services.

Economists' Statement on Carbon Dividends
Wall Street Journal, Jan 2019

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About this policy

There are many ways to a put a price on carbon. One is a carbon tax: a fee levied on the use of fossil fuels, based on how much CO2 they emit, which makes dirty fuels more expensive and incentivises efficiency and clean energy. Another is a carbon price in a carbon market (or carbon trading scheme), which requires companies to acquire licences to emit carbon, with the price set amongst themselves based the number of permits and ability of companies to reduce emissions and sell their 'spare' credits.

There is also the question of who should be paying – large industries, businesses, SMEs, or even households and individual people – and how the revenues from the tax should be used. Some policies are “revenue neutral”, in that additional costs to the consumer are offset by tax cuts elsewhere; others earmark the proceeds of a tax towards green investment.

For any carbon price to be effective, it must be high enough to provide a real incentive, and stable enough to allow companies to plan around it. The aim is that polluting firms will pay up in the short term, be forced to clean up in the medium term, and be pushed out of business by their greener competitors in the long term.

Determining the strength of carbon pricing policy largely depends on its scope, the price levels, and how it integrates across borders. The best policies will have clearly structured trading schemes or taxes, sending strong price signals across a large share of national emissions, and with the potential to be integrated at a regional level - so that polluters must change their behavior and technology, rather than just relocate their emissions.

Policy methodology

Case Study: Sweden

Sweden was the first country in the world to introduce a carbon tax, in 1991. The current tax is set at 1180 SEK per tonne (US$120/€110), which is the highest of any country in the world. The tax has been increased gradually over time, allowing sectors some freedom to adapt and plan, while revenues are used to fund social welfare spending – especially on inequality measures – and climate-related projects.

Sweden Country Profile

Case Study: China

In 2017, China announced an ambitious plan for a national emissions trading scheme, focused on the power sector. This policy built on seven smaller regional pilot markets launched between 2013-14, which between them already cover emissions from 2000 entities and 200 million tons of CO2e. Though frequently delayed and still not officially launched, the gradual rollout seems to be continuing through 2018 and 2019. When finalised, the scheme will cover 40% of China’s emissions – making it by some distance the largest carbon market in the world.

China Country Profile