Why Pricing Carbon Is Still More Theory Than Reality: QuickTake

(Bloomberg) -- It’s an idea that’s been around for more than two decades: To slow climate change, make polluters pay for the damage they cause. More than 60 nations, states and cities have adopted what’s known as carbon pricing, an approach held up by environmentalists, global institutions and even many oil companies as an elegant, free-market approach to global warming — one that creates incentives to find the best solutions and avoids burdensome regulation. In practice, though, carbon pricing has proved politically difficult, reflecting pushback from the public as well as business groups.

1. How does carbon pricing work?

Governments either levy a tax on each metric ton of carbon dioxide emitted, or start a market to trade permits to pollute. In both cases, companies in certain industries are targeted — say utilities that produce electricity — which means that carbon pricing will only cover a portion of a country’s total emissions. With a market, a limit is set on the total volume of emissions allowed, then permits are either allocated to, or purchased by, polluters. The credits can then be bought and sold, a system known as cap-and-trade.

2. Is carbon pricing effective?

Environmentalists say most policy makers have been unwilling to set prices high enough to force changes in behavior, or to make enough companies pay them. That said, the levies have encouraged more switching to cleaner natural gas, and their cost has begun to creep into electricity prices around the world. The U.K.’s carbon tax is credited with helping the country rapidly phase out coal.

3. How widespread is it?

About 40 countries or jurisdictions have developed markets or plan to do so. They include China, the European Union and a handful of U.S. states. About half that number have a carbon tax, from roughly $1 a metric ton in Mexico to $139 in Sweden. Many countries — such as the U.K. and most Scandinavian nations — use permit trading alongside targeted taxes on dirty fuels such as coal. Still, carbon pricing only covers about 20 percent of global emissions. California’s program, for example, is one of the few that includes transport fuels.

4. How high does the price need to be?

A price of about $40 a ton, among other climate policies, is needed to achieve targets in the 2015 United Nations Paris accord to stem climate change, according to a 2017 report from a commission of economists and scientists. The price would need to rise to more than $100 a ton by the middle of the century to keep up with the Paris pledges and encourage expensive technologies such as carbon capture and storage. About half of the almost 200 nations that signed the agreement expect to use some form of carbon pricing to reach their goals.

5. Who’s opposed to carbon pricing?

Political leaders have struggled to sell the system as it raised the cost of many goods and services, from steel to cement. Some business leaders say it distorts markets for goods where trade occurs with countries that don’t levy a price. Australia repealed its carbon tax in 2014 after it was blamed for destroying jobs. Carbon prices can hit the poor hardest by raising household energy prices, though that burden can be offset by redirecting revenue raised. But perhaps nowhere is the debate more heated than in Canada.

6. Why is it an issue in Canada?

Prime Minister Justin Trudeau has made a national minimum carbon price a key part of his environment policy; it was set to start at C$10 per metric ton in January 2019 and rise to C$50 by 2022. It’s unpopular in provinces such as Ontario where power prices have soared, partly because of a shift to renewables. Trudeau’s rivals in the Conservative Party plan to make it a key issue in the country’s 2019 election.

7. So is carbon pricing here to stay?

Many environmentalists say the world will continue to fall short of its emissions goals unless there are carbon prices with real teeth. Many companies already use a “shadow” carbon price to test the viability of new projects.

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