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The Holy Grail of Climate Economics? A Price on Carbon.

camuzeauz-jonathan-EDFIf there were a competition for the most important number in the world, the price on carbon would certainly be a strong contender.

The World Bank has been a long-time supporter of carbon pricing and its recent report, Decarbonizing Development, adds a strong voice to the chorus of climate policy experts, economists, and business leaders who champion the economic, social and environmental benefits of pricing pollution.

The report underscores the importance of getting the economics of climate change policies right so we can transition cost-effectively to a carbon-neutral economy.

Because we live in a world of “bottom-up” climate policy, the authors rightfully say, this will require multi-pronged policy solutions, each tailored to a country’s particular economic and political conditions.

At the heart of this broader approach, however, lies the holy grail of climate economics: a price on carbon.

Markets Bring Results — Fossil Fuel Subsidies Don’t

Global temperatures must stay below the 2°C threshold for the world to avoid catastrophic climate change. This requires that net carbon emissions are reduced to zero by the middle to the end of the century.

A price on pollution has been shown time and time again to be the most cost-effective way to reduce emissions. By internalizing the cost of pollution to firms — meaning, making polluters pay for the right to emit carbon — they will have an incentive to reduce emissions and look for the cheapest emissions reduction options.

A tax on carbon, or a cap-and-trade system where permits — or allowances to emit carbon — are auctioned to firms, have the added benefit of bolstering government coffers. The additional revenue can be used to, for example, offset costs low-income households incur should power rates or costs on goods rise.

It can also be used to reduce taxes, including taxes on labor and capital that can affect social welfare and create market inefficiencies.

The World Bank reminds us that getting the price right will include removing costly subsidies on fossil fuels – now estimated at $548 billion worldwide. In addition to encouraging the overconsumption of fossil fuels, these subsidies have proven ineffective for helping the poor or for promoting competitiveness.

A Mix of Policies Can Boost Clean Energy

A comprehensive climate policy package should include a mix of additional policies to help address other market failures, the report notes. Policy makers can help boost innovation in clean technologies, for example, by supplementing a carbon price with temporary support for investments, targeted subsidies, performance standards and technology mandates.

Jonathan Camuzeaux
Jonathan Camuzeaux is a senior economic analyst in the Office of Economic Policy and Analysis at the Environmental Defense Fund. He provides economic analysis to support the development of market-based solutions to environmental issues with a focus on climate and energy economics.
 
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2 thoughts on “The Holy Grail of Climate Economics? A Price on Carbon.

  1. IF it were an actual “global threat” then science would be allowed to say; “PROVEN” not disallowed.
    Exaggerating vague science is criminal fear mongering.

  2. “The World Bank reminds us that getting the price right will include removing costly subsidies on fossil fuels – now estimated at $548 billion worldwide. In addition to encouraging the overconsumption of fossil fuels, these subsidies have proven ineffective for helping the poor or for promoting competitiveness.”

    I wish you would elaborate on the evidence you have that this is true. While I don’t support subsidies and fossil fuels, anytime you subsidize a service you going to make it cheaper which means that is going to disproportionately help the poor and economically disadvantaged. However, if you have evidence – some real evidence from unreliable source – that fossil fuel subsidies don’t help the poor then you should have included them here for us to examine instead of having to rely upon taking your word for it.

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