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Carbon Pricing: Current State

In a world coming to a consensus on climate change, there exists a multitude of methods which governments can utilize to influence greenhouse emissions. The current global focus is on carbon pricing. Carbon pricing is an increase to the cost of carbon dioxide emissions.1 I would argue that carbon pricing is superior to other energy regulations due to its direct influence on the consumption of carbon.  The focus on carbon dioxide, CO2 emissions, stems from the fact that the use of coal, oil, and gas accounted for 69% of global anthropogenic greenhouse gas emissions in 2010.2

The two methods by which carbon pricing is implemented are carbon taxes, which are a direct increase in the cost of carbon dioxide, and emissions trading systems such as “cap and trade”.  The Organisation for Economic Co-operation & Development (“OECD”) created a metric which combines these two methods called the “effective carbon rate.”3 Meanwhile, the World Bank has released a study specifically analyzing the carbon tax.4 The possibility of a carbon tax has been the focus of a lot of attention; the OECD specifically stated that it is the most effective method for controlling greenhouse gas emissions.5 Both reports will be used to explain the global carbon pricing situation.

Currently, thirty-eight countries implement carbon pricing and twenty cities collect a tax.6 The sum of these countries’ emissions represents about a quarter of those of the planet.7 Their taxes only hit about half of their emissions, so carbon pricing only affects just over 12% of carbon emissions.8 For a carbon tax, though, the prices applied to the 12% vary widely. The variance is between just $1 per ton of CO2 to $130 per ton of CO2.9 However, the clear majority, 85%, are priced less than 10%.10 Economists have predicted the need for the tax to be around €30-50.11

The use of energy trading systems is far more prevalent. Of the 50 billion dollar-value of carbon pricing in 2015, around 35 billion, or 70%, was attributable to energy trading systems.12 China and the United States create the most carbon emissions, and both nations use energy trading systems.13 Therefore, the carbon tax is a poor metric for progress. The OECD gathered data from forty-one countries for the effective carbon rate which includes energy trading systems.14 The forty-one countries include all OECD countries and Argentina, Brazil, China, India, Indonesia, Russia and South Africa. The forty-one countries constitute about 80% of the world’s carbon emission.15

While the inclusive metric developed by the OECD boosts the numbers given by the World Bank, the coverage of carbon curbing policies is still lacking. 60% of CO2 emissions are not subject to carbon rates at all. 90% of emissions are below €30 per ton, which is the low end of economic modeling for required carbon pricing.16 Specifically, “some analysts have suggested that a global carbon price will need to be increased to a level of 30-40 euro/ton CO2 by 2020 to stabilize atmospheric concentrations, the price at which CO2 is traded under the cap in the European ETS is presently about 15 euro/ton.”17 Furthermore, the taxes disproportionately affect travel, and the effective carbon rate outside of travel is relatively low.18 “This is because specific taxes on energy use are higher in road transport than in other sectors.”19

The focus on energy as opposed to carbon is an inefficient method for reducing greenhouse emissions. Detractors fear carbon pricing snuffing out sectors of the economy or even forcing corporate flight. Specifically, “carbon leaking” is a term which denotes the movement of carbon-creating businesses from an area with a high carbon tax to a low carbon jurisdiction.20 The threat of carbon leakage is one of a collective action problem: countries will race to the bottom to create growth. However, the World Bank has not noticed any material carbon leakage. Some have proposed the use of a border adjusted tax for international trade, and therefore the tax could still have teeth regardless.21

The fear of economic slowing through additional taxes at a system-wide level as opposed to just an excise tax on travel is another hold-up for carbon pricing. European countries that implemented energy-trade restrictions did not experience any negative growth, and most even experienced a small growth.22 Indeed, Sweden has a hefty tax at about $140, and yet has not experienced any negative growth. The energy idiosyncrasies of a country make extrapolation difficult, but the enormous tax having no effect shows promise. Additionally, as Harvard economist Michael Porter has discussed, there is even potential for growth due to a carbon tax.23 Should a government create a revenue neutral approach, the corresponding decrease in the income tax could incentivize production and accordingly economic growth. Thus, environmental policies may not lead to the economic quagmire feared by many.24

  1. World Bank & Ecofys, State and Trends of Carbon Pricing 3 (2015),

  2. CO2 Emissions from Fuel Combustion – Highlights – 2014 Edition, IEA, (last visited Nov. 6, 2017). 

  3. Effective Carbon Rates on Energy, OECD (2016),

  4. World Bank, supra note 1. 

  5. Carbon Taxes and Emissions Trading are Cheapest Ways of Reducing CO2, OECD Says, OECD, (last visited Sept. 18, 2017). 

  6. World Bank, supra note 1, at 10. 

  7. Id. 

  8. Id. 

  9. Id. at 13. 

  10. Id. 

  11. Effective Carbon Ratessupra note 3, at 3. 

  12. World Bank, supra note 1, at 13. 

  13. Id. at 10. 

  14. Effective Carbon Rates, supra note 3. 

  15. Id. at 2. 

  16. Id

  17. Mikael Skou Andersen, Europe’s Experience with Carbon-Energy Taxation 1 (2010),

  18. Id. at 8. 

  19. Id

  20. World Bank, supra note 1, at 14. 

  21. Andersen, supra note 17, at 2. 

  22. Id. at 33. 

  23. Michael E. Porter, The Competitive Advantage of Nations, H. Bus. Rev. (1990),

  24. Id

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Samuel Parks

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