What Is Carbon Pricing?
Carbon pricing. Source: The World Bank
The climate crisis is described as the “greatest market failure the world has ever seen,” due to the disproportionate risks placed on future generations. Carbon pricing is thought to be the most effective way to reduce greenhouse gas (GHG) emissions internationally. But what exactly is carbon pricing, and why is it predicted to be so successful?
Carbon Pricing - Explained
Carbon pricing can be defined as “placing a fee on emitting and/or offering an incentive for emitting less.” The costs of the climate crisis are paid by the public through air pollution, healthcare costs, and worsening inequity. In 1992, the Rio Declaration emphasised the importance of the “polluter pays principle” to increase anthropogenic responsibility. Carbon pricing further embeds this principle into climate policy and shifts accountability towards producers. As Kaia Rose and Eric Mann summarize in their short film, “Climate Countdown: Carbon Pricing,” there are two main types of carbon pricing: focusing on quantity or on price.
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Summary
The maximum quantity of carbon emissions is capped in a region or country.
A set number of permits are then given for companies to produce carbon emissions, which can be traded with other companies (creating a controlled market to produce carbon emissions, while incentivizing cleaner technology).
Focus
Limiting the quantity of carbon emissions
Uncertainty
Price
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Summary
Tax fossil fuel sources/the distribution, selling, or use of carbon-creating products.
Focus
Increasing prices for carbon
Uncertainty
Quantity of carbon emissions
The Future - Uniform and Universal Carbon Pricing?
Many countries have already put some form of carbon pricing in their national legislation, including China, Mexico, South Africa, the EU, the UK, and several U.S. states. Australia even has a different form of carbon policy (known as an Emission Reduction Fund) in place.
However, many countries are acting individually with their respective carbon policies and are cautious of creating more aggressive carbon policies. This is due to concern to remain competitive in the international market. An international carbon price floor could help to overcome this obstacle. The International Monetary Fund has previously proposed for major economies (who are often also major GHG emitters) to agree on a minimum price of how much they must all pay for their carbon emissions. Additionally, by concentrating on a price floor, this can still empower countries to exceed this minimum carbon pricing.
A key concern with a universal carbon price floor is that it can worsen already existing inequities that the climate crisis exacerbates if not carefully planned. Furthermore, a critique of universal carbon pricing policy is that different sectors also have different technologies currently available. For example, in the energy sector, there are many greener alternatives to fossil fuels, including hydropower and solar energy. In contrast, several sectors –including agriculture and food– lack the same extent of greener alternatives, yet face the same carbon pricing scheme. Therefore, if refined to focus on the major economies and GHG sectors, then carbon pricing may help to reduce disproportionate inequities, aid in climate justice, and provide another strategy in tackling the climate crisis.
As with most climate strategies, universally just carbon pricing requires international cooperation to substantially enhance climate mitigation. This requires significant global climate legislation, akin to the Montreal Protocol and Paris Agreement. However, given the extent of the climate crisis’ consequences, we must remain hopeful as we continue to undertake concerted efforts.
