Why we ought to support carbon pricing | Guest Opinion

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Carbon pricing is an economic approach that is designed to reduce greenhouse gas emissions by putting a price on carbon emissions, thereby creating incentives for businesses and consumers to cut emissions. Carbon pricing generally takes two main forms: carbon taxes and cap-and-trade systems. A carbon tax directly sets a price on emissions, whereas a cap-and-trade system sets an emissions limit and allows firms to trade emission permits. If we are to meaningfully address the existential problem that is climate change then we ought to support carbon pricing for two salient reasons. First, it is presently the single best way of fighting climate change. Second, the bulk of the criticisms made against carbon pricing are misguided if not altogether specious.

There are many advantages of carbon pricing. First, it encourages emission reductions. Specifically, by assigning a cost to carbon emissions, carbon pricing incentivizes individuals and businesses to reduce their carbon footprints. This, in turn, helps lower the overall emission levels, steering society toward more sustainable practices.

Second, carbon pricing promotes technological innovations. In this regard, observe that with the added cost on carbon, industries are more likely to innovate and develop low-carbon technologies and processes. Renewable energy, electric vehicles, energy efficiency improvements, and carbon capture and storage are examples of technologies that can benefit from such incentives. Over time, these innovations may become more cost-effective, thereby making them accessible and appealing even without concrete policy support.

Third, carbon pricing generates revenue for governments. To see this, note that carbon pricing can be a salient source of revenue, especially for governments needing funds to combat climate change or support social programs. Revenue from carbon taxes or auctioned permits in a cap-and-trade system can fund renewable energy projects, climate adaptation, and infrastructure improvements, or provide financial relief for low-income households impacted by rising energy costs.

Fourth, carbon pricing provides a cost-effective solution for emission control. This means that unlike some regulatory approaches that impose uniform emissions standards across sectors, carbon pricing provides flexibility, allowing firms and individuals to determine the most efficient ways of cutting emissions. This flexibility can make carbon pricing more cost-effective, achieving the same emission reduction goals at a lower overall cost.

Finally, carbon pricing does have a global influence and can lead to policy consistency. By this I mean countries with established carbon pricing mechanisms, such as the European Union and Canada, can influence global carbon pricing policy. Therefore, as more countries adopt carbon pricing, international cooperation on emission reductions becomes more manageable, potentially leading to a global carbon pricing framework.

Even though carbon pricing has many advantages, it is also true that it has several detractors. However, as the recent work of Jeroen van den Bergh, Wouter Botzen, and many others has shown, most of the criticisms are misguided and sometimes just wrong. I now address the five key animadversions briefly.

Many critics complain that the only real advantage of carbon pricing is that it is efficient and not that it is effective. This ignores the fact that if it is implemented well then carbon pricing will lead all decisions by investors, innovators, producers, and consumers towards low-carbon options and, in this way, it accomplishes what some have called “systemic effectiveness.” A second complaint is that carbon pricing leads only to small emissions reductions. This argument is invalid because carbon pricing leads to non-trivial emission reduction gains in the following three ways: it limits rebound which is the more intense use of energy efficient technologies, it ensures that renewables replace rather than add to fossil fuels, and it makes sure that the life-cycle emissions of technologies are dealt with.

Some detractors contend that there is limited empirical evidence that carbon pricing leads to emissions reduction. This might have once been true but there is now ample evidence to the contrary. The final denunciation of carbon pricing is that it is inequitable. In this regard, empirical evidence demonstrates that in low-income nations, carbon pricing is generally progressive and that it is regressive only in some high-income nations. Even so, this regressivity can be addressed by using the revenue from carbon pricing to compensate low-income households.

Let me close with two points. First, I am not claiming that carbon pricing has no downsides. Second and more importantly, if one is going to criticize carbon pricing then these criticisms should be discussed alongside the criticisms that one can make about the suggested alternatives to carbon pricing such as the use of industrial policies and subsidies. When this is done, it will be difficult to avoid the conclusion that no other policy instrument comes close to carbon pricing in meaningfully fighting the scourge of climate change.

Batabyal is a Distinguished Professor, the Arthur J. Gosnell professor of economics, and the Interim Head of the Sustainability Department, all at RIT, but these views are his own.