ConservationAN INTRODUCTION TO CARBON PRICING

6 min read
AN INTRODUCTION TO CARBON PRICING

WHAT IS CARBON PRICING?

Simply put, carbon pricing refers to measures that require a producer or consumer to pay for the damage their behaviour is causing to the natural world as a result of carbon emissions.

Those measures include carbon taxes, carbon caps, and tradable carbon credits.

WHY IS CARBON PRICING NECESSARY?

Carbon pricing addresses an issue that takes me way back to my A-Level economics: market failure. Market failure refers to inefficiencies in the free market. Often, these inefficiencies arise because individuals act in a way that benefits themselves, to the detriment of the group.

The type of market failure that carbon pricing seeks to address is that caused by externalities. Negative externalities are costs incurred by a producer that the producer doesn’t pay for.

For instance, an oil company extracting fossil fuels generates all kinds of costs that, in the free market, it does not pay for. It contributes to global warming, biodiversity decline, and reduced public health for free.  

This generates a gap between the gain by individuals and loss to the population. The individual owners of the company get the benefit derived from the activity that causes the harm without ever having to pay for that harm – the population ends up bearing the brunt of the damage the company is causing.

WHAT ARE THE AIMS OF CARBON PRICING?

The base aim of carbon pricing is to fix the market failure: to ensure that people who profit from activities that cause harm pay for the cost of that harm. You can take an economic view, a sociological view, or a moral view – the outcome is the same: companies shouldn’t get the benefits without having to pay their fair share of the costs.

The justifications for carbon pricing go way beyond basic fairness, though. Here are some examples:

  • It encourages innovation. Most organisations exist to make a profit and when something stands in the way of that, they’re pretty good at coming up with solutions. If the cost of production is higher because it more accurately represents the harms caused, companies have an incentive to invest in greener approaches.

  • It might be the way to get the best outcome. Alternatives to carbon pricing include a lot of decision-making by government. For instance, subsidising instead of taxing relies on the government making scientific, commercial, and technological decisions about which green approaches or initiatives are most viable and worthwhile. Carbon pricing allows the market to decide, and many people view this as the most efficient way to get things done.

  • It has a knock-on effect on individual decision-making. If carbon pricing makes carbon-intensive products more expensive, consumers have an incentive to opt for cheaper, greener alternatives – without relying solely on the bolstering of subsidies for green alternatives.

  • It’s cheaper. Requiring the market to pay for the harms it’s causing and thereby prompting innovation is thought to be the cheapest way to create progress in reducing carbon emissions. Subsidising green approaches is all well and good, but whilst carbon-intensive producers can still cause those harms for free, excessive carbon emission will continue.

  • There’s room for polluters to pay. I doubt anyone is worried that the fossil fuel burners will go out of business due to carbon pricing, but in case you are: Shell declared income of $3.2 billion in the first quarter of 2021 and BP dished out $500 million to investors for the same period from a $3.3 billion quarterly profit – and this is an industry recovering after the COVID-19 pandemic. Carbon pricing affects lots of other types of business too – but there’s an argument that if a business isn’t viable unless it profits from creating harms that it does not pay for, it probably shouldn’t exist.

  • It generates revenue that can be used for green initiatives. Subsidising green approaches is expensive, and carbon pricing can provide the funding. This way of raising funds – as opposed to general taxation – ensures that the people contributing most heavily to the climate crisis are those that pay.    

WON'T CARBON PRICING HARM THOSE ON LOWER INCOMES?

Yes, but the effect can be remediated to some extent.

Carbon pricing increases the cost of carbon-intensive products for consumers, including things like fuel. This would result in an increased cost burden that could put those on low incomes at risk of not being able to afford to heat their homes or travel to work.

The cost is regressive: the increased costs from carbon pricing would represent a higher proportion of the income of those on low incomes and so would have a disproportionately negative effect on those people, compared to those on higher incomes.

Some or all of the money collected by government from the carbon pricing can be redistributed to individuals. There have been several suggested and implemented approaches to this – including pre-emptive cheques, increased spending on welfare benefits and public services, etc.

Essentially, the logic is that charging the producer for the carbon use then redistributing that to the customer has two important benefits: it requires the polluter to pay for the harm they cause, changing their commercial approach, and it gives individuals an incentive to make greener choices. If individuals get the money back from the carbon pricing regardless of their own choices, they’re better off swapping to a green electricity tariff, cycling to work, and eating less meat because they get the cash benefit either way. If done properly (rather an important caveat), this can mean that low income consumers are at least no worse off and at best better off as a result of carbon pricing.

What do you think about carbon pricing? Have you experienced it in your jurisdiction?

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