Carbon Pricing: How does it work?
We have been witnessing many impacts of climate change — from uncontrollable wildfires to massive tsunamis, melting glaciers to frequent tornadoes; global warming to expanding ozone hole. There’s no doubt about climate change and its impacts, but one thing where we get stuck is: what do we do about it? How do we control this?
One solution which is being proposed and has been implemented in various parts of the world is Carbon pricing.
In simple terms, carbon pricing is the price for emitting greenhouse gases during production of goods and services. In majority of cases, the greenhouse gas being considered is carbon dioxide, as carbon dioxide accounts for 82 percent of the greenhouse gas emissions by humans.
Carbon pricing can be implemented in two ways: The first is a Carbon tax in which the government can fix a standard fee per ton of carbon emitted by industries. The second is Cap-and-trade system in which the government sets a cap (upper limit) on the emissions by industries. To emit more than the limit, industries can buy “allowances” from the government or from other low-emitters who still haven’t reached their cap. This trade can have varying costs for carbon — based on the market in which they are traded.
The carbon tax has a fixed carbon price, whereas the cap-and-trade has fixed emissions reduction.
Each of these carbon pricing methods rely on the expected outcome that once the industries will have to pay for their emissions, they will try to find the cheapest available options for reducing emissions and also invest in innovating for lower carbon producing technologies. The revenue generated from these will also be invested for mitigating the negative impacts of climate change.
Challenges in Implementation
There are many challenges in implementation of both of these systems. The first and the major challenge is deciding the cost of the carbon tax — what is the appropriate amount per ton of carbon emission. It shouldn’t be so low that it’s not effective, nor too high that it impacts smaller industries disproportionately. There is also a question whether the costs remain same or keep on increasing every year to keep on reducing the emissions. The second question is who pays this cost as there are many points along the supply chain starting from extraction of raw materials to sale of goods. This is a complicated case particularly for goods which are made by assembling many parts. For instance, cars are manufactured by assembling parts produced in different facilities which are sometimes located in different countries. So, will the parts production facilities pay the tax in their country, or the car manufacturer in the country of final assembly? The next decision is how to use the revenue generated — environmental justice needs to be considered as climate change has been disproportionately impacting vulnerable communities.
Benefits of Carbon Pricing
Even though there are many aspects to be considered while implementation, it remains the most effective solution for climate change. Carbon pricing has already been implemented by 45 national jurisdictions as per the WHO Climate Change Dashboard. Some of the countries successfully implemented these long ago in 1990s — like Sweden, Germany, Denmark, and the Netherlands to name a few. European Union has the largest cap-and-trade program which covers 30 countries. Using the learnings from these countries, a carbon pricing program can be implemented in US successfully which can help in achieving the ambitious goal of reducing emissions to half by 2030 set by the Biden administration. These schemes also provide rebates to companies/industries which take measures to reduce or offset their emissions. These systems will also motivate companies to invest long-term in low-carbon technologies as it will be economically beneficial for them.
The revenue generated from these schemes can also be used in various ways to help vulnerable communities. One approach is to help mitigate the impacts on vulnerable communities as climate change impacts them more disproportionately. The industries may eventually pass on these costs to consumers by increasing their goods prices. The government can provide subsidy/rebates to consumers to help with these increased costs.
Climate change is real and its impacts are real. We have to start taking steps to reduce greenhouse gas emissions without impacting our economic growth. Carbon pricing seems to be the most promising solution to this problem, in the present scenario.
