If you want to see a solution to the climate crisis in your lifetime, they might be the two most important words you hear this year: carbon pricing.
Sure, the crisis is a complex challenge with no one solution. But while carbon pricing may not be a silver bullet, it’s one we’re going to need in the chamber—and critically, support is growing all along the political spectrum right when we need it.
First, a quick primer. Carbon pricing as a concept is basically just what it sounds like: attaching a market price to carbon pollution emitted from burning fossil fuels. From there, things get a little more complicated as there are several ways to do it.
Carbon Tax: The simplest approach, a carbon tax assigns a price to each unit of carbon emitted or the carbon content of a fuel, either for designated industries or entire societies. There’s a clear cause and effect: the more carbon you burn and emissions you put into the air, the more you pay. Plus, the price rises over time, gradually putting more and more pressure on people or industries to cut their emissions.
Emissions Trading Scheme (ETS): Usually called “cap-and-trade” in the U.S., the principle is that a state, provincial or national government establishes a market with a limit on how much a designated set of industries can emit in a year (the “cap” part). The government then distributes and/or sells allowances to emit a certain amount to everyone in the market. If a company, for example, is going to emit more than it originally bought, it has to buy more from someone else in the market who’s not planning to emit as much (the “trade” part).
Fuel Tax: This is where a government will directly tax a fuel based on the amount of say, coal itself, rather than the carbon it produces when burned.
Hybrid Instruments: An increasingly popular option, hybrid instruments combine elements of a carbon tax and an ETS.
There’s more to say about each of these—and we’ve put together the 2017 Handbook on Carbon Pricing Instruments to say it—but the important thing is that each uses market forces to encourage people or companies to burn less carbon—and so put less pollution driving climate change into the air.
There’s a flip side in that introducing some form of carbon pricing in turn makes low and no-carbon alternatives like solar and wind a lot more attractive because they don’t carry the same costs as coal, oil, or gas. Users save money while investors start shifting more into renewables as demand for the better economic option grows, encouraging more development that encourages prices to drop even further. And on and on in a virtuous cycle.
The important point: done right, carbon pricing shifts the transition to a clean energy economy into high gear. And does it by making one part of our economic system a little more fair, a little more just.
That’s because carbon pricing – as economists would say—helps to internalize externalities. As normal people would say, in many cases, those responsible for carbon pollution—think power plants, fossil fuel companies—aren’t the ones paying the cost of climate change. That goes to kids suffering from more frequent asthma attacks or families watching wildfires devour their houses or a hundred other examples. Carbon pricing reverses that dynamic and puts something closer to the big-picture costs of carbon into the price of burning it.
Best of all, carbon pricing can appeal to pretty much every political persuasion—and in a time when at least in the U.S., Republicans and Democrats seem to have trouble agreeing on anything other than the virtues of spicy salmon rolls and bacon cheeseburgers—that’s an important thing. More and more conservatives like carbon pricing because – if done right (and that’s a big “if”)—it can significantly cut government regulations and give businesses greater degrees of freedom, while achieving much of the same result. Better yet, carbon pricing can be designed to become revenue neutral, meaning the money generated from the plan goes back to individual taxpayers in one form or another.
This is the approach an all-star team of Republican thought leaders and policymakers from the Reagan and Bush administrations has taken, though there is a real danger of cutting regulators like the EPA almost completely out of the picture in exchange for a carbon price, as this plan would do. Meanwhile, one economist has even boiled an approach to carbon pricing he thinks can stop rising temperatures and heat up the economy down to one page.
On the other side of the spectrum, progressives like carbon pricing because, with the right design, it can help both cut down emissions and make the world a little more fair. Two factors in particular go into making this happen. First, structuring any plan to ensure that lower-income citizens get more in benefits than they personally pay in costs. Second, using a significant part of the revenue generated to actually lower emissions by investing in clean energy—and focusing investment in communities that are already suffering from climate impacts or fossil fuel industry pollution.
Progressives also like carbon pricing because it works in the real world. Scandinavian countries—Finland, Norway, and Sweden—were the first to embrace carbon pricing back in the 90s and contrary to the scare tactic stories you might expect, have actually seen their economies grow. After introducing a carbon tax in 1991, Sweden, for example, has seen emissions drop by 25 percent while its GDP has grown 60 percent—all with what has become the highest carbon tax in the world.
It’s not just idyllic Scandinavian countries making carbon pricing work either. Until the election of a premier friendly to fossil fuel interests in 2012 stalled annual rate increases, British Columbia was showing how a revenue-neutral carbon tax could work in North America to cut emissions without impeding economic growth.
More carbon pricing is on the way, too. China—the world’s largest carbon polluter—has been running ETS pilots in seven major industrial cities across the country with a view to launching a national system some time this year. In the U.S., lawmakers in Washington State, Massachusetts, Rhode Island, Connecticut, and Vermont have learned from past setbacks and are working to introduce plans at the state level. Plus, Canada just announced a new plan requiring all provinces to develop some approach to carbon pricing by 2018—or adopt a hybrid federal plan that’s one part fuel tax and one part ETS.
It’s not only the urgency of the crisis itself that’s driving policymakers to look at carbon pricing as a feasible strategy for cutting emissions. After promising to cut emissions as part of the Paris agreement in 2015, many leaders started looking into real-world paths to live up to their commitments. In a world where no country wants to be the one that can’t honor their word, carbon pricing looks like a very attractive and practical path forward.