Carbon price
Carbon pricing seeks to address the economic problem that emissions of CO2 and other greenhouse gases are a negative externality – a detrimental product that is not charged for by any market.
[5] According to the Intergovernmental Panel on Climate Change, a price level of $135–$5500 in 2030 and $245–$13,000 per metric ton CO2 in 2050 would be needed to drive carbon emissions to stay below the 1.5°C limit.
[6] Latest models of the social cost of carbon calculate a damage of more than $300 per ton of CO2 as a result of economy feedbacks and falling global GDP growth rates, while policy recommendations range from about $50 to $200.
Assuming all else is equal, the market for permits will automatically adjust the carbon price to a level that ensures that the cap is met.
Recent policy changes have led to a steep increase of the carbon price since 2018, exceeding 100€ ($118) per ton of CO2 in February 2023.
[15] The exact monetary damage of the social cost caused by a tonne of CO2 depends on climate and economic feedback effects and remains to some degree uncertain.
Latest calculations show an increasing trend: Cap-and-trade systems can include price stability provisions with floor and ceiling limits.
The simplicity and immediacy of a carbon tax has been proven effective in British Columbia, Canada – enacted and implemented in five months.
[20] The Regional Greenhouse Gas Initiative, for example, sets an upper limit on allowance prices through its cost containment provision.
On the other hand, a redistribution on a per-capita-basis would even release poorer households which tend to consume less energy compared to wealthier parts of the population.
Looking at individual situations though, the compensation would not apply to commuters in rural areas or people living in houses with poor insulation.
On the other hand, a carbon price still helps to provide an incentive to use more effective fossil fuel technologies such as CCGT gas turbines in contrast to high-emission coal.
[30] In many EU member states like France or Germany, there is a coexistence of two systems: The EU-ETS covers power generation and large industry emissions while national ETS or taxes put a different price on petrol, natural gas and oil for private consumption.
The final consumer price for fuels and electric energy depends on individual tax regulations and conditions in each country.
[43] For energy-intensive industries, the beneficial effects of Annex I actions through technological development were considered possibly substantial.
On the empirical evidence they assessed, Barker et al. (2007) concluded that the competitive losses of then-current mitigation actions, e.g., the EU-ETS, were not significant.
Under the EU ETS rules Carbon Leakage Exposure Factor is used to determine the volumes of free allocation of emission permits to industrial installations.
In 2010, World Bank commented that introducing border tariffs could lead to a proliferation of trade measures where the competitive playing field is viewed as being uneven.
[clarification needed] In late 2013, William Nordhaus, president of the American Economic Association, published The Climate Casino,[49] which culminates in a description of an international "carbon price regime".
[52] The price-commitment view appears to have gained major support from independent positions taken by the World Bank and the International Monetary Fund (IMF).
This statement summarizes the economic case for carbon pricing as follows:The most efficient approach to slowing climate change is through market-based policies.
In order for the world to achieve its climatic objectives at minimum cost, a cooperative approach among nations is required – such as an international emissions trading agreement.
[61] Unfortunately the concept of additionality is difficult to define and monitor, with the result that some companies purposefully increased emissions in order to get paid to eliminate them.
[citation needed] This allows an entity to over-comply in early periods in anticipation of higher carbon prices in subsequent years.
