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Carbon Pricing: An Important Tool in the Fight Against Climate Change

by | Mar 4, 2022 | Industry, Sustainability

A question by New York Times columnist Tom Friedman to Former US President Barack Obama:

“What is the one thing you would still like to see us do to address climate change? Said Obama: put a price on carbon.”

Companies are driven by money and cause a lot of pollution on their way. So putting a price on carbon emissions should encourage businesses to stop polluting, right?

That’s exactly what carbon pricing is designed for, to reduce emissions by charging polluters. It is increasingly mentioned in debates around the fight against climate change and the need to take action. But what exactly is carbon pricing?

What is carbon pricing?

Carbon pricing is about putting a price on greenhouse gas emissions and thereby creating an incentive to reduce these emissions. It can take the form of carbon taxes or carbon market or a combination of both.

The emission tax consists of implementing the polluter-pays principle for greenhouse gases commonly in the form of a tax or an obligation to purchase pollution permits.

Carbon Market tracks carbon price developments around the world, uncovers policy gaps and promotes tough pricing measures as part of a policy mix to reduce the climate crisis.

The aim of environmental taxation policy is that the damage inflicted by organization activities can be included in the cost of related transactions.

More and more countries have started to put a price on emissions via tax as an incentive to reduce pollution. However, the majority of carbon pricing policies around the world are not enough to reduce global warming to safer levels.

Why carbon pricing is important?

The global situation is worrying as per the 6th Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) published in August 2021. The intensity of climate change is being increasingly felt in terms of heat waves, droughts and hurricanes.

A huge increase since the previous report which was published in 2014. Moreover, it has become undeniable that these changes are attributable to human activities.

Only massive emission reductions in the coming decades can prevent a global average temperature increase of more than 2°C. And to achieve this objective sanctions need to be imposed on the polluter.

Carbon pricing has proven to be successful in several countries around the world. The pricing is passed on to organizations that generate greenhouse gas emissions and also encourages consumers to abandon them in favor of cleaner alternatives.

Broad coalitions for efficient carbon pricing are mobilizing to send clear signals to industry to cut pollution faster and invest in climate-friendly alternatives as well as boost low-emission innovations of carbon.

Properly implemented carbon pricing policy can bring real benefits such as reducing air pollution, generating revenue for climate action and in some cases reducing other taxes.

Putting a price on greenhouse gas emissions contributes to placing the weight of the damage on those who are responsible for it and who are therefore also in a position to reduce it.

Instead of imposing who must reduce their emissions, the price sends a clear economic signal. The big polluters then decide on their own to reduce their emissions, polluting activity or to continue to pollute but at a cost.

Technically, the tax takes the form of a charge priced per ton of CO2 emitted with progressive increases. These increases aim to encourage long-term investments in favor of a reduction in emissions without excessively penalizing companies and consumers in the short term.

In this way, the overall environmental objective is achieved in the most flexible and least costly way for the community. Moreover, the price of gas emissions continually stimulates technological and commercial innovation.

Thus giving rise to new engines of low-carbon economic growth. The primary objective of the carbon tax is to combat global warming by reducing the emissions of CO2. Its principle is simple, the more a product emits greenhouse gases the more it is taxed.

Benefits of carbon pricing

The main advantage of the carbon tax is to limit polluting behavior. It encourages both individuals and professionals to turn to more ecological solutions. Other advantages are:

Reduce polluting behavior

Like any other tax, emissions pricing is an incentive tax tool that helps guide economic behavior. In theory, the idea of ​​the tax is simple, by increasing the price of polluting activities, polluters adopt more sustainable methods. The emission tax is therefore an effective lever to discourage polluting behavior.

Finance public services

This is quite logical from a taxing point of view to reinvest the money in public services. Polluting activities cost society more, so taxation money can help to offset the inconvenience caused.

For example, automobile traffic using fossil fuels has several consequences such as air pollution, noise, and greenhouse gas emissions which require States to spend more money on health services,  cleaning buildings, and fighting against global warming. By taxing this activity, it can therefore finance part of these additional costs.

Promote local product

Taxing gas emitters can promote local goods if a product needs to be transported by truck for 5,000 km before being marketed, a tax will significantly increase the price of this transportation. This will make local products that required less transport and fuel more competitive in terms of price.

Promote renewable energy

Carbon taxes encourage firms to use and develop more environmentally friendly production processes. If emissions are taxed, this can change the balance and make renewable energy more competitive than burning fossil fuels. This will encourage investment in renewable energy and lead to further technological developments.

Future of carbon pricing

For now, it seems difficult to envisage a more serious policy other than carbon pricing to fight against global warming. Indeed to limit CO2 emissions, it is necessary to limit the use of fossil fuels.

However, fossil fuels are currently much more profitable than clean energies which could be used as a substitute. Behavioral changes are therefore difficult for economic actors who have no financial interest in choosing clean energies.

Among the measures available to public authorities to guide economic choices, the carbon tax is one of the most relevant tools.

Short of purely and simply prohibiting certain polluting behaviors, the tax is one of the most effective levers for acting on the ecological level. It is one of the only ways to promote ecological production over polluting production.

The emission tax is an essential tool for modifying behavior and limiting global warming which more and more countries around the world have understood.

Still marginal in terms of its rate, the price of greenhouse gas and the few industrialized countries that have implemented it will certainly become a major component of their economy in the years to come.

In Europe, the Members of European Parliamentary (MEP) has voted on March 2021 in favor of a carbon tax penalizing imports of products from countries with less stringent climate standards. The mechanism should come into force by 2023.

It should also be noted that China has set up a carbon market on its territory in February 2021. The country has also set itself the goal of achieving carbon neutrality by 2060.

It is also worth mentioning that China is responsible for 27% of global emissions. Which is a third of global greenhouse gas emissions. Hence China’s objective of carbon neutrality can consider a good start.

As a tool of the market economy, emission taxing allows each company and each consumer to make decentralized decisions in the areas where carbon savings are most efficient. It also ultimately leads to higher prices for climate-damaging consumer goods.

However, it is legitimate to fear that this tax will hit poor households very hard and aggravate social injustices. But whether a tax reaches poorer households more than wealthier ones depends on the taxed product.  

Also, the most important thing about tax revenues is how it is being used. The tax has great potential to offset social injustices and even facilitate the redistribution of income and wealth within society.

The Climate Action Network calls for the establishment of a “climate income”. The purpose of this would be to redistribute part of the revenue from the emissions tax to the poorest households through tax credits.

Today, the carbon tax is one of the best tools for promoting energy transition and limiting polluting activities. This is necessary to meet climate commitments and reduce CO2 emissions.