The Cost of Carbon
Putting a Price on Pollution
When factories belch smoke, everybody pays. Shouldn’t polluters feel the sting? That’s the big idea behind carbon pricing. Putting a price tag on each ton of carbon dioxide released into the atmosphere reflects its cost to the environment and fires up the search for the cheapest ways to fight climate change. Many policymakers accept that it’s the way to go, but they can’t agree on the best way to do it. Europe, parts of the U.S. and China use markets where companies buy and sell permits to pollute. So far, it’s not clear if that’s working better than a simple carbon tax.
In the U.S. state of Washington, voters rejected a measure on the Nov. 8 ballot that would have introduced the first state-wide carbon tax in the nation. Next door in Canada, the government said in October that it will set a minimum price for carbon pollution in 2018 in a bid to meet the country's climate-agreement targets. Some provinces are joining California’s emissions market. Worldwide, about 30 countries or jurisdictions including the European Union have developed or plan to start markets, known as cap-and-trade systems. About 15 have a tax, ranging from $3 a metric ton in Mexico to $150 a metric ton in Sweden. China, the world’s biggest emitter, has seven pilot trading programs that aren’t yet cutting pollution levels but aim to build up the infrastructure needed to start a national system by 2017. U.S. President Barack Obama tried and failed to start a national cap-and-trade system during his first term. Since the idea of a national carbon tax is unpopular in the U.S., he’s turned to direct regulation of power plants instead. Pollution levels have fallen in many of the areas covered by carbon trading, though much of the drop is attributed to the global recession and the lower price of natural gas, which is cleaner than coal or oil.
Carbon pricing aims to create incentives to invest in clean technology or switch to less carbon-intensive fuels. When a tax is used, it’s up to governments to set the levy at a level that’s high enough to encourage companies to act, but not so high that it forces factories to close or relocate. With cap-and-trade, governments typically set a target for how much pollution-cutting their economies can tolerate, then distribute or sell individual rights to release CO2. As the pool of permits is reduced over time, companies that clean up have more allowances than they need and can sell them. The EU was the first to require carbon dioxide permits, in 2005, only to see them plunge in value when industrial output and demand tumbled in the global recession, creating a glut. The price remains low because 2020 targets are almost met. It had dropped to 3.87 euros ($4.33) a metric ton by September 2016, the lowest in more than two years. Carbon markets of various forms have followed in the northeastern U.S., California, New Zealand and South Korea, all of them learning from the EU’s mistakes. As carbon pricing has spread, there have been setbacks. Australia repealed its carbon tax in 2014 and scrapped plans for permit trading after the measures were blamed for destroying jobs.
In the emissions markets now up and running, the price probably isn’t high enough to change behavior. That’s brought criticism from opponents such as New Jersey Governor Chris Christie, who pulled out of the trading system used by nine other U.S. states, saying it cost too much and did little. Advocates of cap-and-trade argue that it’s better than a tax because it ensures a certain level of cuts and uses a market mechanism to identify the cheapest opportunities to curb pollution. Many countries — including the U.K. and most Scandinavian nations — use both permit trading and targeted taxes on dirty fuels like coal. Emissions markets can also provide important price signals to drive investment in green technologies ranging from energy-saving lightbulbs to carbon capture and storage. Critics of all types of carbon pricing say it hits the poor hardest by raising household energy prices, though the burden can be offset by redirecting revenue raised from polluters to low-income families.
The Reference Shelf
- Bloomberg New Energy Finance provides data and analysis on the future of energy, including white papers and blog posts.
- The World Bank’s 2015 report and an update on developments in carbon pricing.
- New York Times graphic showing how carbon markets work.
- International Emissions Trading Association’s annual report.
- McKinsey publishes research on carbon prices and the economics of different types of energy-saving investments.
- A series of 2014 editorials from Bloomberg View advocating a carbon tax.
First published Nov. 28, 2013
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