Putting a Price on Carbon

Should there be a global price on carbon? Many world leaders and other representatives at the United Nations Climate Change Conference (COP21) in Paris say yes.

Carbon pricing is not an official part of the Paris negotiation agenda. Establishing a global price for carbon is, so far, politically impossible. But the issue has stimulated interesting conversation during panel discussions and side events at the conference this week. Those in favor have argued that putting a price on carbon would shift the social costs of climate change from the public to polluters and incentivize polluters to reduce emissions and invest in clean energy and low-carbon growth. Usually, carbon pricing takes the form of a carbon tax or an emissions trading system.

On Monday, the leaders of the World Bank Group and the International Monetary Fund convened a panel at COP21 that brought together six heads of state and government to declare support for carbon pricing. These leaders hailed carbon pricing as a necessary and effective measure to limit warming to 2 degrees Celsius. They cited California’s decade-old cap-and-trade program as an example of an effective carbon pricing system.

The panel included French President Francois Hollande, German Chancellor Angela Merkel, Mexican President Enrique Pena Nieto, Canadaian Prime Minister Justin Trudeau, Ethiopian Prime Minister Hailemariam Dessalegn, and Chilean President Michelle Bachelet.

“The goal is to gradually set a sufficiently high carbon price around the world to encourage better behavior,” said President Hollande. “In France, the Energy Transition Act has already made provision for a substantial increase in the price of carbon, to €22 per metric ton next year and a projected €100 by 2030. In Europe, we will also improve our carbon market while ensuring that the most compliant countries remain competitive. Very quickly, a company consuming less [carbon dioxide] should gain a decisive competitive advantage.”

Calls to put a price on carbon were echoed during a second COP21 event on Monday: the official launch of the Carbon Pricing Leadership Coalition. The Coalition formed from a groundswell of support for carbon pricing at the 2014 UN Climate Summit, where 74 countries and more than 1,000 companies expressed support for carbon pricing. The Coalition, which includes the energy companies BP and Statoil, aims to expand the use of effective carbon pricing policies that can maintain competitiveness, create jobs, encourage innovation, and deliver meaningful emissions reductions.

During the launch event, Chilean President Bachelet said: “Cheap and dirty energy is not cheap for the planet or the health of our people… When green taxes are incorporated into our climate policies, we can harness market forces that can lead to profound changes in our emissions patterns.”

Partners in the Coalition have adopted an agreed course of action that advances carbon pricing by collecting and sharing the best evidence of successful carbon pricing policy, mobilizing business support for more ambitious action, and convening leadership dialogues around the world with the goal of tackling the political challenges that prevent greater use of carbon pricing.

Although the United States has not joined the Carbon Pricing Leadership Coalition, President Barack Obama supports the idea of a carbon pricing. At a Paris press conference on Tuesday, he added, “I have long believed that the most elegant way to drive innovation and to reduce carbon emissions is to put a price on [carbon].” Obama compared carbon pricing to something out of an Economics 101 textbook.

Perhaps surprisingly, some of the world’s largest energy companies—including BG Group, BP, Royal Dutch Shell, Statoil, and Total—also support putting a price on carbon. These companies announced support for carbon pricing earlier this year, calling on the world’s governments and the United Nations to introduce carbon pricing systems and to create clear, stable, ambitious policy frameworks that could eventually connect national systems. Pricing carbon could give these companies’ natural gas businesses an economic advantage over their competitors in the coal industry.

Although world leaders will not establish a global carbon price in Paris, a growing movement of forward-looking countries, civil society organizations, and companies are paving the way for subnational, national, and regional carbon pricing programs.

As World Bank Group President Jim Yong Kim observed: “There has never been a global movement to put a price on carbon at this level and with this degree of unison. It marks a turning point from the debate on the economic systems needed for low-carbon growth to the implementation of policies and pricing mechanisms to deliver jobs, clean growth, and prosperity. The science is clear, the economics compelling, and we now see political leadership emerging to take green investment to scale at a speed commensurate with the climate challenge.”

Sophie Wenzlau is a Senior Fellow at the Worldwatch Institute and a  student at the UC Davis School of Law. Her research focuses on the role of sub-national governments in climate change mitigation and adaptation.

2 thoughts on “Putting a Price on Carbon”

  1. I would like to understand more about how carbon Emission Pricing can be used to reduce the emissions . There must be a cost to someone ? Who ? and how do they pay ?. Can you give me a website that can properly explain this.

    Thank you .

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