The Carbon Pricing Conundrum

Climate change is a burning issue for the 21st century. Recently, 16-year-old Swedish Climate activist Greta Thunberg’s speech at the United Nations Climate Action Summit amplified global consciousness about the climate change menace.1 Today, climate change has become an established fact in the international community as evident from the UNFCCC’s Paris Agreement (2015) and the Intergovernmental Panel on Climate Change (IPCC) reports. However, despite widespread convergence on the menace of climate change, nations are struggling to evolve an effective climate change policy. One of the most contentious topics concerning climate change policy is carbon pricing.

Carbon Pricing is recognised as a policy that puts an explicit cost on emissions of greenhouse gases (GHGs). The carbon price value is expressed in a monetary unit per tonne of CO2 equivalent (tCO2e).2 It captures the cost of negative externalities of air pollution and GHG emissions. The insight behind carbon pricing is that if the government regulates the GHG emissions by giving incentives to alter carbon activities, it would lead to lesser polluting activities by industries and will therefore reduce emissions. Carbon pricing tends to increase the relative prices of carbon-intensive activities and tends to lower the relative prices of carbon free goods. It aims to influence economic decisions towards a lower carbon economy. The carbon price also stimulates clean technology, environment-friendly activities and market innovation to drive economic growth towards a low carbon economy.

There are two main approaches for carbon pricing: Emissions Trading System (ETS) and Carbon Taxes. An ETS is a market-based approach that puts caps on the emissions by considering carbon as a commodity and allows industries to buy and sell permits and credits to emit carbon dioxide. This market-based approach brings competitiveness among industries and induces them to introduce cost-cutting technologies to cut carbon emissions.

On the other hand, a carbon tax is referred to as directly putting a price on carbon by defining a tax rate on greenhouse gas emissions. A carbon tax also produces revenue for the government that can be used in welfare policies for the introduction of renewable energy and clean technology.

There has been a conundrum in the international community about the two approaches. The conundrum is related to the question of which is a better policy to cut the emissions: a carbon tax or ETS.3  Sweden is an inspiring example of a state-led policy that has implemented carbon taxation effectively.4 Sweden, currently, has the highest carbon price in the world at US$139/tCO2. Swedish government introduced a carbon tax in 1991. Since then, its economy grew by 60% and carbon emissions decreased by 25%.5 Similar examples of carbon tax approaches are followed by Finland, Liechtenstein, Switzerland and the Canadian province of British Columbia.

Alternatively, the market-based approach is executed in the form of ETS, followed by the European Union, South Korea, Australia and New Zealand.6 Developing countries such as India and China have also introduced a pilot emissions carbon-trading system. India has introduced ‘Perform Achieve and Trade’ (PAT), which incentivises energy efficiency in carbon-intensive industries, and a Renewable Energy Credit (REC) trading system on a pilot basis.7

World Bank’s State and Trends of Carbon Pricing 2019 report states that there is an increase in the number of carbon pricing initiatives in the international community, and nations are strengthening and aligning their existing climate policies with their climate objectives.8 Despite growing consensus to cut emissions via carbon pricing, nations are still far from meeting the objectives of the Paris Agreement. It can be substantiated by the IPCC special report of 2018 which states that the current efforts are not enough to limit global warming below 2°C.9 Therefore, it is crucial to understand the issues in the current policy discourse of carbon pricing.

Issues in Carbon Pricing

There is a broad consensus among the international community about the potential advantages of carbon pricing.10 However, there is much debate regarding the better climate policy option between carbon taxes or ETS. Summarised below are some of the issues related to carbon pricing policies.

• Critics of carbon taxes advocate it as a state-interventionist policy. Market-led economies are apprehensive regarding carbon tax. The fear is that carbon tax may not be effective as it can cause the possibility of tax evasion.11 For example, a stringent state-led carbon tax may compel industries to fudge the true level of pollution. Alternatively, developed countries such as the US, Japan and other western countries could outsource carbon-intensive production to poor and developing countries which have weaker climate governance.12 It has also been argued that carbon tax discourages investment, reduces profitability and puts an extra burden on industries.13

• Critics of carbon trading advocate that emissions trading schemes may fail to achieve the goal since the rules of the emission trading system is set in a lenient manner due to the influence and pressure of industrial lobbyist groups on governments.14 Sunita Narain, an environmental activist, in her book “Conflicts of Interest: My Journey Through India’s Green Movement” criticized the climate policies of the developed economies stating that environmental negotiations have been reduced to economic negotiations.15

Furthermore, the nations which are following the ETS have been criticized for their lax approach for excluding important sectors such as aviation, agriculture and transport.16

• According to the World Bank’s State and Trends of Carbon Pricing 2019 report the current efforts-either carbon tax or carbon trade- are insufficient. It also states that only 20 percent of global GHG emissions are covered by a carbon price. The climate objectives of the Paris Agreement aims carbon pricing at US$40/tCO2e to US$80/tCO2e by 2020 and US$50/tCO2e to US$100/tCO2e by 2030.17 It has been observed that less than 5 percent of global emissions covered under carbon pricing initiatives are consistent with Paris Climate objectives and about 50 percent of the emissions covered by carbon pricing initiatives are still priced below US$10/tCO2e. Thus, the current price levels of carbon pricing are still insufficient to address climate change substantially.18

• Among the 185 Parties that have committed their contribution to the Paris Agreement, only 96 members have started to plan or consider the use of carbon pricing as an instrument to achieve their targets. However, the current coverage of carbon pricing initiatives is still insufficient.19

•Carbon pricing policies find it difficult to gain and sustain public support. As the global economy is recovering from the economic crisis, it is often difficult to execute more ambitious carbon policies. Economic issues such as a slowdown in economic growth, unemployment, wealth inequality have resulted in social unrest and protest against the state policies. For instance, voters in Washington state rejected the carbon tax in 2018 and the anti-carbon tax rally was organised in Australia in 2011.20, 21 Similarly developing countries like India whose economy is primarily dependent on fossil fuels, an introduction of an ambitious carbon tax on emissions may lead to inflation in common goods. This can cause misery to the common man and thus result in the loss of public support.

New insights to improve carbon pricing

Michael Barber in his book, “How to Run A Government” advocates that rather than debating market-led approach versus government-led approaches, it is more important to emphasize the science of delivery.22 He emphasizes the value of good governance. It can be substantiated by the cross-national studies that have attempted to link the ambitious carbon policies with the existing extent of political trust and corruption.23, 24 It shows that countries that have a high degree of political trust and low degree of corruption perception have a better implementation of carbon policies. The reason behind the success story of Sweden may partly be due to the emphasis on good governance. The extensive public reasoning and social deliberation in Sweden have perhaps led to political trust and transparency prior to the fiscal reform that introduced carbon taxation.25 Additionally, it is also important to revisit the current pricing policies which are criticised due to their approach of “one size fits all” approach. A hybrid approach can be explored by combining the role of the state and the role of the market in delivering the outcomes. This can be done by identifying the potential areas where market-led or state-led approaches are effectively implementable.

Moreover, it is also imperative to focus on a decentralised approach in order to make carbon policies more effective. Carbon policies across the globe are complex due to the difference in the approach of the countries. A decentralised approach can potentially simplify the complexity of carbon policies. This approach focuses on the principle of subsidiarity which advocates that the decision-making process should be exercised close to the sub-national and citizenry level. It not only facilitates people’s participation but also facilitates public support and awareness. The sub-national government should be given the flexibility to articulate its own approach according to their local circumstances and local resources.

The Gujarat government’s recent pilot project “Emissions Trading Scheme” to combat air pollution from Surat’s industrial belt, is an example of decentralisation.26 Similarly, sub-national governments in America and Canada have introduced carbon pricing initiatives- emission carbon trading in Massachusetts (America) covering power plants and emission carbon trading in Nova Scotia (Canada).27 Furthermore, the successful implementation may be more likely to happen if the benefits of carbon pricing are concentrated at the constituency level. It will not only allow carbon policies to be closest to the citizens, thereby ensuring impact, but also results in increasing the legitimacy of the policies. Additionally, carbon pricing schemes if introduced at the subnational level are less likely to be affected should there be a change in national government. Apart from the governance approach, behavioural approaches also substantiate a new insight about the acceptability of carbon emission policies to mitigate climate change menace. It is imperative to note that climate change mitigation is not just about the introduction of ambitious goals but also about the understanding of socially desirable human behaviour. Carbon pricing reform policies are more likely to get acceptance if its benefits are concentrated and visible to the public. Studies have shown that merely changing the labelling of carbon pricing can result in a greater acceptance of the policies.28 For instance, Switzerland and the Alberta state of Canada have changed their carbon price labelling to dividends to make it more popular amongst people by highlighting and delivering the public benefits arising out of carbon pricing policies.29

Policymakers can further enhance the legitimacy of carbon pricing if the benefits of the carbon policies are more highlighted to the public than the tax cut. For instance, carbon footprints can be potentially harnessed in changing human behaviour. The carbon footprints can be assigned standardized numbers and these can be included in the branding of food products and various other consumer goods. When consumers buy these labelled carbon-footprinted products, it can serve to trigger a new rationality in the minds of the consumers. The enhancement of the visibility of environment-friendly tools such as carbon footprints can trigger consumers towards a more deliberative pattern of thinking which is crucial for behaviour change. Similarly, financial sectors such as banks can reward their customers based on the carbon foot prints numbers rather than the number of transactions. Consumers can then redeem the earned carbon footprint numbers. This re-orientation of consumer behaviour through such examples can be a game-changer in sustaining carbon policies.

Carbon Policies play a decisive role in curbing GHG emissions. However, its implementation is often hindered by the debate of the state versus the market-based approach. The current carbon pricing policy discourse needs reorientation. Governance and behavioural approaches highlight the potential to improve the delivery of carbon pricing policies whether the policies are carbon trading or carbon taxation. The decentralised approach in governance can potentially transform the carbon policies into a workable form. Other governance parameters such as studying human behaviour, degree of corruption and political trust are defining parameters for the successful implementation of carbon pricing policies.

REFERENCES:-


1. “Greta Thunberg tells world leaders ‘you are failing … – UN News.” 23 Sep. 2019, https://news.un.org/en/story/2019/09/1047052. Accessed 30 Dec. 2019.

2. “State and Trends of Carbon Pricing 2019 – World Bank ….” 6 Jun. 2019, http://documents.worldbank.org/curated/en/191801559846379845/State-and-Trends-of-Carbon-Pricing-2019. Accessed 30 Dec. 2019.

3. Frank, Charles. “Pricing Carbon: A Carbon Tax or Cap-And-Trade?” Brookings. Brookings, July 29, 2016. https://www.brookings.edu/blog/planetpolicy/2014/08/12/pricing-carbon-a-carbon-tax-or-cap-and-trade/.

4. “When It Comes to Emissions, Sweden Has Its Cake and Eats It ….” 16 May. 2016, https://www.worldbank.org/en/news/feature/2016/05/16/when-it-comes-to-emissions-sweden-has-its-cake-and-eats-it-too. Accessed 30 Dec. 2019.

5. Ibid.

6. “Climate Change – Open Knowledge Repository – World Bank ….” https://openknowledge.worldbank.org/oai/request?verb=ListRecords&metadataPrefix=oai_dc&set=climate_change. Accessed 30 ec. 2019.

7. “Renewable Energy Certificate (REC) Mechanism in India.” http://www.iitk.ac.in/npsc/Papers/NPSC2012/papers/12266.pdf. Accessed 30 Dec. 2019.

8. Ibid.

9. “Summary for Policymakers of IPCC Special Report on Global Warming of 1.5°C Approved by Governments.” IPCC Summary for Policymakers of IPCC Special Report on Global Warming of 15C approved by governments Comments. Accessed February 9, 2020. https://www.ipcc.ch/2018/10/08/summary-for-policymakers-of-ipcc-special-report-on-global-warming-of-1-5c-approved-by-governments/.

10. “What Is Carbon Pricing?” What is Carbon Pricing? | Carbon Pricing Dashboard. Accessed February 9, 2020. https://carbonpricingdashboard.worldbank.org/what-carbon-pricing.

11. Pettinger, Tejvan. “Carbon Tax- Advantages and Disadvantages.” Economics Help, November 28, 2016. https://www.economicshelp.org/blog/glossary/carbon-tax/

12. “Wealthier countries ‘outsource’ their carbon … – Stanford News.” https://news.stanford.edu/news/2010/march/outsource-carbon-emissions-030910.html. Accessed 30 Dec. 2019.

13. “Effects of a Carbon Tax on the Economy and the Environment.” 6 May. 2013, http://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/44223_Carbon_0.pdf. Accessed 30 Dec. 2019.

14. “Lobbying for and against Climate Solutions.” Nature News. Nature Publishing Group, May 28, 2019. https://www.nature.com/articles/s41558-019-0499-4.

15. “Conflicts of Interest: My Journey through India’s Green ….” 2 Apr. 2018, https://www.downtoearth.org.in/reviews/conflicts-of-interest-my-journey-through-india-s-green-movement-58987. Accessed 30 Dec. 2019.

16.Schroeder, Miriam. “How Things Work: Carbon Trading.” Our World. Potsdam University. Accessed October 2, 2019. https://ourworld.unu.edu/en/the-pros-and-cons-of-carbon-trading

17. “State and Trends of Carbon Pricing 2019 – World Bank ….” 6 Jun. 2019, http://documents.worldbank.org/curated/en/191801559846379845/State-and-Trends-of-Carbon-Pricing-2019. Accessed 30 Dec. 2019.

18. Ibid.

19.Ibid.

20. Press, Associated. “Anti-Carbon Tax Rally Hits Australian Parliament.” The Guardian. Guardian News and Media, August 16, 2011. https://www.theguardian.com/world/2011/aug/16/anti-carbon-tax-rally-australia.

21. DePillis, Lydia. “Washington State Voters Reject Carbon Tax.” CNN. Cable News Network, November 7, 2018. https://edition.cnn.com/2018/11/07/business/washington-carbon-tax/index.html.

22. Barber, Michael. How to Run a Government: so That Citizens Benefit and Taxpayers Don’t Go Crazy. London, UK: Penguin Books, 2016..

23. Rafaty, R. (2018). Perceptions of Corruption, Political Distrust, and the Weakening of Climate Policy. Global Environmental Politics, 18 (3) 2018 .

24. Why Is Carbon Pricing in Some Countries More Successful than in Others?” Our World in Data. Accessed October 8, 2019. https://ourworldindata.org/carbon-pricing-popular#note-15.

25. Ibid.

26. “Gujarat Pilots World’s First Emissions Trading Project In Surat ….” 15 Sep. 2019, https://epic.uchicago.edu/news/gujarat-pilots-worlds-first-emissions-trading-project-in-surat-to-tackle-industrial-air-pollution/. Accessed 30 Dec. 2019.

27. “2019 State and Trends of Carbon Pricing – World Bank ….” 1 Jun. 2019, http://documents.worldbank.org/curated/en/191801559846379845/pdf/State-and-Trends-of-Carbon-Pricing-2019.pdf. Accessed 30 Dec. 2019.

28. Why Is Carbon Pricing in Some Countries More Successful than in Others?” Our World in Data. Accessed October 8, 2019. https://ourworldindata.org/carbon-pricing-popular#note-15

29. Ibid

Download White Paper

Leave a Reply

avatar
Related Articles
Author:
June 18, 2020
The COVID-19 pandemic has taken the wraps off the environmental vulnerabilities of the existing development paradigm of modern economies. The endeavour of governments should now be to institutionalise an administrative framework which sets precedence for sustainable and climate-friendly policies. Junior Fellow at the Observer Research Foundation, Tanushree Chandra makes a case for deploying green strategies to combat the myriad economic challenges brought about by the COVID-19 crisis. She locates the inadequacies in the government’s reform package and proposes an alternative policy agenda.
Close Menu