If economists ruled the world, carbon prices would drive most of the action on climate change. Polluters would pay for the negative externality their emissions inflict on the planet. There might be differences on the method of payment—some might lean more towards taxes, others towards the permits used in “cap and trade” schemes. But the idea that some sort of price would help people find an efficient means of reducing emissions is a given.
In the absence of a global econocracy, the policy has fared less well. Take the experience of Yoram Bauman. He is unusual, among those with doctorates in economics, in earning his living as a stand-up comedian. But he is in line with the professional mainstream on carbon prices. In 2016 he led an attempt to get the state of Washington to raise a new tax on emissions of carbon dioxide and use the revenues mostly to cut sales taxes. The ballot measure gained some support from politicians of both parties, but it was opposed by environmental groups on the left who wanted its revenues spent on clean energy investments and redistribution, not tax cuts. It was defeated 41% to 59%.
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As a result only 20% of global emissions are currently subject to a pricing scheme or soon to become so (see chart 1). And the prices in these plans are too low. The Paris agreement, adopted in 2015, commits its signatories to keeping the rise in global temperature, compared to that of the preindustrial climate, “well below 2°C”. A serious attempt to use carbon prices to that end, according to Nicholas Stern and Joseph Stiglitz, two noted economists, would require a price in the range of $40-80 to be levied on all the world’s industrial greenhouse-gas emissions (as well as some other interventions). In existing schemes the median tonne of carbon emissions is priced at only $15. Nowhere is there a carbon price that is both above $40 and applies to more than half a country’s greenhouse-gas emissions.
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Prices change behaviour less when there are few immediate alternatives to emitting carbon. Cars are taxed heavily in many places, for example. In 2018 a study by the oecd, a club of mostly rich countries, found that in 34 of 42 countries at least 90% of road transport emissions incurred taxes equivalent to a carbon price of more than €60 per tonne. Yet in the absence of readily available alternatives many people pay these taxes and drive lots.
In principle, faced with a price on carbon companies will invest in the development of alternatives that are not yet competitive. But only if they believe that the carbon price will be high enough in the future to make this worthwhile. And there is nothing to stop governments scrapping carbon-pricing schemes. That is what Australia did in 2014 after a campaign to “axe the tax” helped to swing an election. Britain, while in the ets, imposed a carbon-price floor that drove a decisive shift away from coal, but in 2014 the government reneged on a commitment to raise that floor. When an oil giant such as ExxonMobil supports a carbon-pricing plan such as that touted by America’s Climate Leadership Council (clc), a campaign group, sceptical observers may well have a point in thinking that the company imagines either that the scheme will not survive or that lobbying will keep the price low.
How can high prices be made credible? Ben Caldecott of Oxford University points out that it is possible for governments to strike contracts that will cost them money if the price underperforms. His example is Britain’s Woodland Carbon Guarantee (wcag). One of the purported charms of cap-and-trade carbon markets is that those who can see no alternative but to emit greenhouse gases can buy permission to do so from those businesses which are more flexible, or who make it their business to suck carbon out of the air (see article).
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The environmental argument for a bca ultimately rests on the idea that countries like China and India would respond by pricing carbon-dioxide emissions adequately. Some countries might even want to join the ets, edging towards the global carbon market which economists have long dreamed of. But it is also possible that bcas could undermine the international co-operation on which the fight against climate change depends—say by provoking a trading partner to withdraw from the Paris agreement. Ensuring that carbon emissions carry a high price everywhere is vital, and increasingly so. But rarely is so stark a contrast found between the simplicity of the theory and that of the practice.
