Pricing carbon

There is now indisputable evidence that the climate is changing because of the continuing emissions of greenhouse gases from the combustion of fossil fuels: coal, oil, and natural gas. Although there are several natural sources of some of these carbon gases, most of the emissions are coming from electrical power generation using fossil fuels, from the combustion of gasoline and diesel fuel in cars and trucks, and from natural gas and other fuels used for space heating and water heating in commercial buildings and homes.

If the principle that ‘the polluter pays’ is to be rigorously applied, then the emissions of carbon dioxide and methane should be taxed at their source or at the point where people use the fuels that produce the emissions. This approach is favoured by most economists and is now applied in over 45 countries in the form of a carbon tax or a cap-and-trade arrangement. However, countries have adopted different strategies when it comes to the disbursement of the substantial carbon revenues that governments receive from setting a price on carbon. 

In these pages we will look at how effective these carbon pricing policies have been in the US and Canada. We also examine the feasibility of policies that aim to power the world’s countries one hundred percent on renewable sources of energy, and whether we can really run a modern industrial economy without fossil fuels. 

Dialling it down

There are essentially three approaches to reducing emissions of carbon dioxide and methane. The first one, favoured by economists, is to impose a levy of some kind on these emissions.  If polluting the environment incurs costs for the polluter because of charges they are forced to pay that are proportional to the level of their emissions, most industries will find a way to reduce them.

The second approach is for regulators to set standards, performance targets, or emissions limits and to impose a financial penalty–a fine—if the standards are not met or the limits on emissions are exceeded. This approach works well in some circumstances: improving the fuel efficiency of vehicles, setting stringent building codes, or stopping the constant pollution of a river with toxic industrial waste.

The third approach is to incentivise industries to transition to a more efficient or less polluting system of production, and to encourage consumers to switch to less polluting modes of transport, by subsidizing zero- or low-emission technologies to the point where they are clearly the least-cost option. The cost of shifting to the less polluting option may also be subsidized if it is potentially a barrier to making the transition.

Each of these policies is being implemented in different ways and to different degrees in many countries around the world.  Over 190 countries signed up to the 2015 Paris Agreement under which they agreed to substantially reduce their emissions of greenhouse gases over the next ten or fifteen years, and many of them have imposed, or plan to impose, a price on carbon.

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