Climate Change and Carbon Pricing
Context: Pennsylvania has become the first major fossil fuel-producing state in the US to adopt a carbon pricing policy to address climate change.
- It joins 11 states where coal, oil and natural gas power plants must buy credits for every ton of carbon dioxide they emit.
- President Joe Biden is attempting a less direct approach — known as the social cost of carbon — that calculates future climate damages to justify tougher restrictions on polluting industries.
- Canada imposes fuel charges on individuals and also makes big polluters pay for emissions. It’s one of 27 nations with some kind of carbon tax, according to The World Bank.
So what’s the price tag?
- It varies depending on governments.
- The US administration’s social cost estimate is about $51, meaning every ton of carbon dioxide emitted from a power plant or tail pipe today is projected to contribute to $51 in economic damages in coming years.
- The state of New York has its own social cost of carbon, updated in 2020 to $125 a ton to account for economic trends.
- By contrast, emissions were most recently valued at $13.50 per ton at auction under the Regional Greenhouse Gas Initiative in the Northeast, which Pennsylvania is joining
- Canada’s carbon taxes include a minimum fuel charge for individuals equivalent to about $40 per ton.
Why the big differences?
- The social cost of carbon attempts to capture the value of all climate damage, centuries into the future.
- Carbon pricing reflects how much companies are willing to pay today for a limited amount of emission credits offered at auction.
- In other words, the social cost of carbon guides policy, while carbon pricing represents policy in practice.
- A more stringent policy would have a higher carbon price. A more lax policy would give you a lower carbon price.
- Trump administration had cut the social cost of carbon from about $50 per ton to $7 or less. The lower number included only domestic climate impacts and not global damages.
A smart approach is pricing carbon which can be done in following ways:
- One way to price carbon is through emission trading, i.e., setting a maximum amount of allowable effluents from industries, and permitting those with low emissions to sell their extra space.
- It is a market-based approach to controlling pollution by providing economic incentives for reducing the emissions of pollutants.
- This is in contrast to command-and-control environmental regulations imposed by governments
- Another way is to put a carbon tax on economic activities — for example, on the use of fossil fuels like coal, as done in Canada and Sweden.
- A carbon tax is a fee on the carbon content of fossil fuels
- It is a powerful monetary disincentive that motivates transition to clean energy across the economy, simply by making it more economically rewarding to move to non-carbon fuels and energy efficiency.
- Example: Canada imposed a carbon tax at $20 per tonne of CO2 emissions in 2019 and gradually increasing it. This is estimated to reduce greenhouse gas pollution by between 80 and 90 million tonnes by 2022.
- The fiscal gains from pricing carbon can be sizeable. A carbon tax at $35 per tonne of CO2 emissions in India is estimated to be capable of generating some 2% of GDP through 2030.
Carbon Tariff on Imports
- Carbon emissions continue unabated by developed world as they outsource it in developing countries and import the goods produced through such process. Therefore, imports are having substantial carbon footprint in any economy.
- Big economies like India & EU should also use their global monopsony, or the power of a large buyer in international trade, to impose a carbon tariff & move towards green trade prospects.
Is any of this working?
- Emissions from northeastern states of USA would have been about 24% higher if the carbon pricing mechanism hadn’t been in place.
- The carbon auctions also have brought in almost $5 billion that can be used to reduce household energy cost increases and promote renewable energy.
- The expansion of carbon pricing into Pennsylvania remains tenuous. A legal challenge is pending and the state’s term-limited Democratic governor could soon be replaced by a successor who opposes the state’s participation
- While pricing carbon would be the gold standard, it seems politically difficult to actually get there.
- Without a nationwide cap and trade program, environmentalists and economists want the government to be more aggressive in using the social cost of carbon to overhaul government energy policy.
Connecting the dots