WHY PRICE CARBON?

There is widespread recognition and scientific consensus that in order to stabilize the climate and prevent the worst consequences of the climate crisis, greenhouse gas emissions must be reduced by at least 80 percent by 2050.  

The fuels responsible for emitting the gases that are causing this crisis have long been cheap and subsidized by governments around the world. In turn, we have failed to account for the true cost of these fuels as the main agents of global climate change, and all the impacts that come with it, which we are already living with today.

What if instead of subsidizing these dirty fuels, we actually began to account for their true cost?

The record-setting amounts of carbon dioxide and other heat-trapping gases in the atmosphere are not just an environmental catastrophe. In fact, this crisis is fundamentally an economic and social challenge. By putting a value on the emissions of these polluting gases, we can tackle the issue at the source, and begin to mitigate the worst impacts of a warmer planet.  

Doing so has the potential to decarbonize our economy while safeguarding economic growth, by gradually changing the behavior of consumers, businesses, and investors.

By putting a charge on polluting fuels, we can not only incentivize the market away from them and toward cleaner energy sources, but also generate the necessary revenue for community investment. Meaning that not only does carbon pollution pricing allow us to level the playing field for clean energy choices, it can also create meaningful jobs and make our communities more resilient.

Putting a price on carbon pollution is therefore a necessary tool within the suite of policies we will need to reduce emissions and create the low-carbon economy of the future. 

The best part? This can all happen while protecting low- and middle-income families and vulnerable sectors in our current economy. 

Intrigued by the Economics of Carbon Pricing? Learn More on our Research and Policy Design Page

Carbon pricing has the potential to radically decarbonize global economic activity by changing the behavior of consumers, businesses, and investors while unleashing technological innovation and generating revenues that can be put to productive use.

A basic economic principle is that the price of goods reflects their costs. However, the market has failed to account for the very significant and widespread damage from extracting and burning fossil fuels, otherwise known as “externalities.” The cost of pollution is in fact hidden behind massive subsidies, leading to overconsumption of fossil fuels without addressing the environmental and health challenges of burning them.

How does carbon pricing address this challenge? First, it creates an incentive for companies and individuals to shift away from gasoline, natural gas, and coal toward clean energy sources such as solar and wind power, and to use energy more efficiently. Second, it can generate substantial revenue to invest in the transition to clean energy, such as subsidizing clean vehicle purchases, increasing renewable energy capacity, making buildings more efficient, and research and development of new climate solutions.

Putting a price on carbon pollution is increasingly seen as the most powerful policy to achieve the necessary changes in energy use across the economy. Not only is it widely supported by economists, it also has bipartisan support. Carbon pricing does not pick winners or losers, but instead gives businesses, residents and industry the flexibility to decide how they want to reduce their carbon footprint. Therefore, while greenhouse gases are reduced the economy can continue to grow.

Have there been successful cases of such a policy?

This policy is not something new. We have used pricing schemes to incentivize choices that have positive outcomes for our health as well as the health of our planet. Currently, 46 countries and 28 subnational jurisdictions have implemented or scheduled a price on carbon pollution, and that number is growing. As the federal government lags behind on climate action, states across the union are taking matters into their own hands and introducing carbon pricing legislation at the state level.

In fact, 16 states have proposed carbon pricing legislation in 2019. Efforts for carbon pricing legislation have begun in more than 10 other states where legislation hasn’t yet been introduced.  

Carbon pricing isn’t just effective at reducing GHG emissions – it also comes with the lowest cost of all known policy approaches. It allows people and private entities to make the switch away from fossil fuels on their own terms and has been shown to spur innovation and local economic growth.

While CXC focuses on state-based and regional initiatives, opportunities for pricing pollution also exist in towns and cities. 

Carbon Fees

Want to learn more about carbon fee activity on the state level? Our State Carbon Pricing Network page has you covered.

A carbon fee is a simple yet effective approach to carbon pricing. The government introduces a fee on CO₂ emissions, leading consumers to favor cleaner forms of living and doing business.

This raises substantial government revenue, which can be returned to households and businesses and/or invested into new programs. Both uses have value – financially protecting low-income and moderate-income people, and our most vulnerable communities, is essential to building a carbon pricing program that is equitable. At the same time, revenue can be invested in order to reduce pollution, improve public health, and develop the local economy. Most current carbon fee proposals do a mixture of both.

A carbon fee enjoys several advantages over other forms of carbon pricing, namely simplicity and stability. By scheduling the carbon price to increase gradually over time, companies can fully incorporate the carbon price in their long-term investment decisions, leading to deeper decarbonization. This also leads to stable and predictable government revenue, making it easier to finance long-term decarbonization projects in the toughest sectors of our economy.

The approach is also simpler and cheaper to implement, compared to the administrative overhead of a cap-and-trade system.

Traditionally, carbon taxes are seen as more difficult to pass than cap-and-trade, due to the political unpopularity of tax increases. However, that notion is changing rapidly as carbon fee bills proliferate on a yearly basis. By rebating some of the revenue back to vulnerable households and businesses, or targeting investment of revenue in disadvantaged communities, carbon fee bills are finding support from both sides of the aisle.

Carbon fees have been implemented or scheduled in 25 nations and 4 subnational jurisdictions to date, covering over 5% of global emissions. 

Cap-and-Trade

Under a cap-and-trade system, major polluters have to submit one permit, called an allowance, for every metric ton of carbon dioxide they emit. These allowances are distributed by the government, either through an auction or free allocation. By reducing the amount of allowances available over time, companies have to reduce emissions in order to stay under the “cap.”

Compared to a carbon fee, a cap-and-trade system provides a more certain end-result on emissions. Governments can set the cap to decline according to their targets, and whatever carbon price is required to adhere to that cap will be reflected in the price of allowances. Given the urgency of reaching our emissions reduction targets, certainty in reaching them is vital, and this is one reason for preferring cap-and-trade to carbon taxes. 

38 nations and 27 subnational jurisdictions have implemented or scheduled a form of cap-and-trade, covering 14.7% of global emissions.

Two examples of cap-and-trade are currently operating in the United States: The Regional Greenhouse Gas Initiative (or RGGI for short) in the Northeast and Mid-Atlantic, and the Western Climate Initiative which involves California and Québec. The Transportation Climate Initiative, an additional cap-and-trade program for transportation fuels, is also under development in the RGGI region.