Carbon pricing sounds like the simplest solution to the world's emissions problem: if you want to emit, you have to pay for it. Europe has pioneered carbon pricing efforts with its emissions trading system, but now these efforts are turning out to be insufficient. At the same time, there is a push in the U.S. to utilize carbon pricing as a means of dealing with climate change. But will it work?
There are two ways in which carbon pricing policies can be implemented: one is the direct charging of emitters for the carbon dioxide they release, and the other is the so-called cap-and-trade way, which Europe has adopted in its Emissions Trading System (ETS). Basically, the cap-and-trade approach allows emitters a small amount of free emissions, and if they pollute more, they need to either pay for additional allowances or offset the emissions by investing in clean energy.
In the United States, California is the poster child of climate change efforts and carbon pricing is part of its arsenal. The state also adopted a cap-and-trade mechanism in 2013 and has seen its emissions decline, as has Europe. However, in the context of the latest commitments on emission reductions, neither decline seems to have been enough.
According to an analysis in Boston Review, carbon pricing as we use it now is simply not the best political solution to the emissions problem. Citing California's experience, the authors point out how thanks to the excess supply of pollution permits, the price of emissions has been lower than it should be in order to not just bring revenues into the state coffers but change the behaviors of companies, so they pollute less.
The authors attribute the inefficiency of California’s—and other places’—carbon pricing mechanism to fossil fuel companies' interference, blaming them for turning the public against such measures while officially supporting them as a solution to the emissions problem.
Fossil fuel companies are indeed backing carbon pricing as a solution. Whether their motivations are as sinister as the authors of the Boston Review article suggest, or whether they welcome the straightforwardness of carbon pricing as a principle is not particularly relevant. What is relevant, according to that analysis, is changing the mentality of people so that they accept higher prices for a range of goods and services.
This is the ultimate drawback of carbon pricing: the companies that fall within its scope have to pay for allowances. They often pass on these additional costs to their customers. It was a proposed price hike for carbon that prompted the yellow vest protests in France, and these protests are one of the best illustrations of why the public is not a fan of such measures.
Yet if done right—with high enough carbon prices—this policy could offset other costs related to climate change, argue the authors of the Boston Review article. All we need is to make the people who will pay for these high carbon prices that their children will live in a cleaner world. Others—a team of researchers from Princeton University—argue now is the best time to make carbon pricing work.
"When we think about long-term problems like the pandemic or climate change, it's easy to assume that the solutions could conflict since they all require massive resources," says the lead author of the study, Kian Mintz-Woo. "But what we describe in this article is how the context of the coronavirus crisis actually provides a unique opportunity for mutually reinforcing forward-thinking solutions to improve sustainability and wellbeing as countries recover."
The argument: economies are already disrupted by the pandemic. One more disruption in the form of carbon pricing could pass more painlessly than it would in pre-pandemic times. What's more, the current challenging environment could motivate the right kind of reactions to carbon pricing from the business world: focusing on sustainability rather than paying for carbon allowances.
Europe is already ramping up its carbon-pricing efforts, despite the pandemic that led to the biggest postwar slump on the continent. Bloomberg recently reported that the EU is planning a major overhaul of its Emissions Trading System that will result in not just higher prices for pollution but also extend its scope to include the shipping industry.
On the face of it, this would lead to higher prices for a lot of things at a time when millions of people are either furloughed or out of a job permanently because of the pandemic. This does not really make sound sense. But, say the authors of the Princeton study, it's not high prices that have led to the slump in consumer spending during the pandemic. It was the shrinking economic activity in general that led to this.
The researchers may have a point, but the memory of the yellow vest movement may prove to be a bit too fresh in people's memories. Still, the EU's climate-related policies offer insight into what works and what doesn't really, so other countries can pick and choose the measures that work best for them.
Carbon pricing is a case in point. Higher prices, necessary as they may be in order to force companies to change their behavior, could still meet with some public opposition, even in green Europe. This, in turn, would provide valuable insight for U.S. regulators and carbon pricing proponents on what (not) to do.
By Irina Slav for Oilprice.com
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