Carbon Pricing in Climate Policy: Seven Reasons

Carbon pricing is a recurrent theme in debates on climate policy. As there is much misunderstanding about the many reasons to implement a global carbon price, ideological resistance against it prospers.

In the aftermath of COP21 in Paris, countries will have to turn pledges into effective policies, to guarantee that their promises about reduction of greenhouse gas emissions are actually achieved. It is easy to underestimate this challenge. In an advanced review directed at non-economists, recently published in WIREs Climate Change, authors Baranzini et al. argue that to achieve the Paris targets and go beyond these, to meet the goal of no more than 2°C global warming, the use of the instrument of carbon pricing is essential, even though not sufficient.

Carbon pricing is a recurrent theme in debates on climate policy. As there is much misunderstanding about the many reasons to implement a global carbon price, ideological resistance against it prospers. Baranzini et al.’s article presents the main arguments for carbon pricing, stimulating a fair and well-informed discussion on the topic. These include considerations that have received surprisingly little attention so far.

The authors stress that a main reason to use carbon pricing is environmental effectiveness at a relatively low cost, which in turn contributes to enhance the social and political acceptability of climate policy. This includes the property that corrected prices stimulate rapid environmental innovations. These arguments are underappreciated in the public debate, where pricing is frequently downplayed and the erroneous view that innovation policies are sufficient is widespread. Carbon pricing and technology policies are, though, largely complementary and thus are both needed for effective climate policy.

The review also comments on the complementarity of other instruments to carbon pricing, such as information provision and various additional policies. The authors further discuss distributional consequences of carbon pricing and present suggestions on how to address these. They will argue that carbon pricing is perhaps the best instrument for addressing equity as it generates revenues for complementary measures. Other political economic issues receive attention, namely lobbying, co-benefits, international policy coordination, motivational crowding in/out and long-term commitment. The review ends with reflections on implementing a global carbon price, whether through a carbon tax or emissions trading. The discussion goes beyond traditional arguments from environmental economics by including relevant insights from energy research and innovation studies as well.

Text contributed by Jeroen van den Bergh

Ref.: WIREs Climate Change

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