- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.
After four years of tough negotiations, increasing numbers of multinational businesses and global institutions came out in support of carbon pricing which was adopted on Dec. 12, 2015, at the 21st COP21 conference. Among the 190 parties who attended the COP 21, 162 submitted their intended nationally determined contributions (INDCs) to the United Nations Framework Convention on Climate Change as of May 1, 2016. To reach their emission reduction target, more than 90 of the submitted INDCs expressed interest in an emission trading system and on carbon taxing.
Since carbon emissions are the foremost reason for climate change and while emitters do not directly pay the cost of these emissions, carbon pricing can shift the burden inflicted on society as a whole to those responsible for greenhouse gas emissions. Carbon pricing, therefore, could be used as a means of reducing greenhouse gas emissions by sending signals to economic actors to include their costs in their final investment and consumption decisions to promote a lower carbon economy.
A carbon pricing mechanism works mainly in two ways – through an emission trading system (ETS) and in carbon taxation. Despite having the same goal, both have two distinct applications. Carbon taxing and ETS can generate revenue and provide cost-effective carbon emission mitigation. With carbon taxing, the market determines the volume, and the cost of carbon taxation is easily administered providing more predictability for the future thus boosting investment. In the case of ETS, its administration is more difficult since the future price is less certain and therefore investment potential is curtailed. With the ETS, the overall quantity is set beforehand but the changing environment determines the price.
As early as the 1990s, Finland was the first among the majority of Scandinavian countries to start taxing carbon emissions. Following the Scandinavian experience, some other countries employed a similar mechanism in tackling climate change and in overall enhancing the quality of life in cities. With the Paris agreement, the use of carbon pricing globally was further mobilized.
Although the implementation of carbon pricing differs in developing and developed countries, almost 20 countries around the world already tax carbon consumption. The amount of tax levied also varies from country to country. In Sweden, the cost of CO2 taxed is $150 per ton compared to France where the price drops to as low as $15 per ton of CO2. The European Union established the world’s largest CO2 cap and trade program in 2005, following long and tough negotiations among its member states. Since then, the ETS has been working in a stable manner serving Europe-wide carbon emissions reduction.
Several other countries have shown interest in implementing carbon-pricing measures for the future. Brazil, South Korea, China as well as Ukraine have all progressed towards adopting a tax mechanism or ETS in their fight against climate change as part of their commitment to their INDCs.
The benefits of carbon pricing include, as mentioned previously, the consideration of negative externalities of climate change in overall costs. The promotion of technological innovation in energy sources and even technological advancements can be enhanced by reflecting the overall costs of carbon in goods and fuels, thereby encouraging investment in less carbon-intensive technologies. In addition, carbon-pricing revenues can support underfunded research and developments projects in the private sector.
Revenues received through carbon pricing, either in the form of tax or through an ETS can be used to invest in infrastructure maintenance, promote less carbon- intensive sectors, provide job training to those who are disproportionately affected and lastly, mitigate the negative impact of climate change.
Ironically, revenues received from carbon can also be used as tax cuts particularly in personal income tax and corporate income tax, which would further increase the overall productivity in the economy by increasing disposable income. While carbon taxing is aimed at emissions reduction, it would be necessary to levy differential tax cuts on income.
Indirectly, the reduction in gas emissions, through taxation or ETS, would benefit local and regional public health. The adverse effects of climate change are unavoidable, according to studies of the Intergovernmental Panel on Climate Change under the auspices of the United Nations. Therefore, in the fight against climate change, adaptation and mitigation policies pursued by governments have become vitally important. A tremendous amount of investment is needed to create resiliency for an energy system that would be funded through carbon pricing. Furthermore, if the volume of national deficits is sufficiently large to the extent that it would slow down economic growth by crowding out private sector investment, revenues received through carbon pricing could be used for the deficit reduction.
The formation of carbon pricing rules requires a well-structured policy mechanism. Firstly, the scope of carbon pricing needs to be determined i.e. what sectors will be covered and what greenhouse gases other than CO2 will be included. Secondly, the balance between economic, political and environmental considerations needs to be measured, with priorities accordingly drawn up adjusting to the needs of consumers and businesses. Lastly, to measure the direct consequences of the implementation of carbon pricing, a reliable reporting and verification system should be put in place.
A well-designed carbon market would bring together the key elements required for the previously pledged emission reduction targets in line with the Paris agreement. With the help of an efficient carbon-pricing mechanism supported by inter-nation knowledge sharing and technology transfer, the potential for achievement in nationally determined contributions, signed at the COP21, would be more promising in the fight against climate change.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.