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id	title	slug	type	status	content	archieml	archieml_update_statistics	published_at	updated_at	gdocSuccessorId	authors	excerpt	created_at_in_wordpress	updated_at_in_wordpress	featured_image	formattingOptions	markdown	wpApiSnapshot
43232	The argument for a carbon price	carbon-price	post	publish	<!-- wp:html --> <div class="blog-info"> <p>Our World in Data presents the data and research to make progress against the world’s largest problems.<br>This post draws on data and research discussed in our entry on <strong><a href="https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions" target="_blank" rel="noopener noreferrer">Greenhouse Gas Emissions</a></strong>. Some changes and updates were made after the text was first published.</p> </div> <!-- /wp:html --> <!-- wp:owid/summary --> <!-- wp:paragraph --> <p>It is a mistake to believe that we are not paying for emitting greenhouse gases. Even if we do not pay a <em>monetary</em> price for carbon emissions we do pay a very large price, the consequences of climate change.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Without a monetary carbon price it is those who have the smallest emissions that suffer the largest costs from climate change. A carbon price, in contrast, means that those who cause the emissions also pay for them.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>A key reason why voters are not in favour of carbon pricing is that many believe it won’t actually reduce emissions, but empirical research and theory show that this is wrong: pricing carbon emissions – either via a carbon tax or a ‘cap and trade’-system – is effective. It shifts production and consumption from carbon-intensive goods and services to low-carbon alternatives and does reduce emissions.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Many are deeply concerned about climate change yet feel hopeless that anything can be done to meet this challenge. Increasing the understanding that carbon pricing works, correcting common misconceptions, and showing that there <em>is</em> a way forward are key steps for a successful fight against climate change.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>I believe a carbon price should be complemented by other policies and in this article I make the case that it is one of the most important policy options we have to achieve a better future.</p> <!-- /wp:paragraph --> <!-- /wp:owid/summary --> <!-- wp:paragraph --> <p>We are paying a price for burning fossil fuels and emitting greenhouse gases.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Some of the consequences of climate change are already visible today, but the most severe consequences will hit us in the years and decades to come:{ref}See IPCC (2014) – <a href="https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf">Climate Change 2014: Synthesis Report</a>. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.</p> <!-- /wp:paragraph --> <!-- wp:list --> <ul><li>Box 2.2: “It is <em>very likely</em> that <strong>heat waves</strong> will occur more often and last longer, and that <strong>extreme precipitation</strong> events will become more intense and frequent in many regions. The ocean will <strong>continue to warm and acidify</strong>, and <strong>global mean sea level to rise</strong>.”</li><li>Box 2.3: “Risks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development.”</li></ul> <!-- /wp:list --> <!-- wp:paragraph --> <p>On the risk to biodiversity see Urban, Mark C. (2015). <a href="https://science.sciencemag.org/content/348/6234/571">"Accelerating extinction risk from climate change"</a>. In Science. 348 (6234): 571–573.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>For a larger overview see Wikipedia’s pages on the <a href="https://en.wikipedia.org/wiki/Effects_of_climate_change">Effects of Climate Change</a> and <a href="https://en.wikipedia.org/wiki/Climate_change#Effects">the relevant section on their page on climate change</a>.{/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>These consequences include the negative economic impacts of climate change through its effects on people’s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for <a href="https://owid.cloud/extreme-poverty" data-type="page" data-id="1701">the world’s poorest people</a> they pose a threat to their lives, as they increase the risk of hunger and food insecurity.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Climate change isn’t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in <a href="https://ourworldindata.org/grapher/pollution-deaths-from-fossil-fuels?stackMode=absolute&region=World">countries around the world</a> every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.{ref}In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Lelieveld, J., Klingmüller, K., Pozzer, A., Burnett, R. T., Haines, A., & Ramanathan, V. (2019). <a href="https://www.pnas.org/content/116/15/7192/">Effects of fossil fuel and total anthropogenic emission removal on public health and climate</a>. Proceedings of the National Academy of Sciences, 116(15), 7192-7197<br><br>The death toll of the three counts of violence for 2017 <a href="https://ourworldindata.org/grapher/annual-number-of-deaths-by-cause">according to the IHME</a> is 561,511.<br>• Homicides: 405,346 deaths<br>• War battles: 129,720 deaths<br>• Terrorism: 26,445 deaths<br><br>The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study – Vohra et al (2021) –  estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels.<br>Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., & Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. <em>Environmental Research</em>, <em>195</em>, 110754.<a href="https://doi.org/10.1016/j.envres.2021.110754"> https://doi.org/10.1016/j.envres.2021.110754</a>.{/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p><em>This</em> is the price we are <em>already</em> paying for burning fossil fuels.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The International Monetary Fund (IMF) estimates the sum of these costs in a major study that they update regularly. The title of the study is <em>‘How Large Are Global Fossil Fuel Subsidies?’</em> and in the study’s latest issue the researchers estimate them to amount to US-$ 5.2 trillion.{ref}The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) – How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. <a href="https://doi.org/10.1016/j.worlddev.2016.10.004">https://doi.org/10.1016/j.worlddev.2016.10.004</a><br><br>In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) – <a href="https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=doi.org%2F10.5089%2F9781484393178.001&btnG=">Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates</a>. Published as an IMF Working Paper. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>In my text I am citing the latest figures of the authors.<br><br>By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent).<br>Coal: $5,200 billion * 0.44 = $2,288 billion<br>Oil: $5,200 billion * 0.41 = $2,132 billion<br>Natural gas: $5,200 billion * 0.1 = $520 billion</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that  “the subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.”, This data is according to the <a href="https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Energy_subsidies_2020.pdf">International Renewable Energy Agency (2020) – Energy subsidies</a> Unfortunately this source does not break down the subsidies to renewables by source of energy.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The <a href="https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&time=earliest..latest">energy production from these sources</a> in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455).<br><br>This means the subsidy per TWh of energy is:<br>Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh<br>Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh<br>Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh<br>Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh<br>Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies.<br><br>What I am calling explicit subsidies is called “pre-tax subsidies” by these authors. What I am calling implicit subsidies is called “post-tax subsidies” by these authors. {/ref} This is equivalent to 6.5% of global GDP.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>As the study’s title makes clear, the IMF sees the sum of damage done by fossil fuels as a <em>subsidy</em>. That might be surprising at first, but it makes sense if you think about it. A good is subsidized when consumers and producers of that good do not have to pay the full cost for it. This can either be an <em>explicit subsidy</em>, for example when governments pay for the school education of the country’s children, or it can be an <em>implicit subsidy</em>, when producers and consumers cause damage, but do not have to pay a monetary price for it.{ref}One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost.<br><br>An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.{/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>You find examples of both types of subsidies in your own life. If you pay for you and your neighbour’s dinner then you are <em>explicitly </em>subsidizing them. If your neighbour crashes into your car and you do not charge him for the damage he caused, you are <em>implicitly </em>subsidizing them.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Fossil fuels are subsidized in both ways. They are <a href="https://ourworldindata.org/grapher/fossil-fuel-subsidies-per-capita?time=2015">explicitly subsidized in many places</a>, and they are implicitly subsidized <em>everywhere</em>, as the consumers and producers of fossil fuels do not have to pay the monetary cost for the damage they cause.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Ending the subsidies to fossil fuels would mean to put a monetary price on them that corresponds to the damage they do. Since the alternatives to fossil fuels are both <a href="https://ourworldindata.org/safest-sources-of-energy">cleaner and safer</a> this would allow the world to make massive progress according to the IMF study: Ending these subsidies and pricing them into the cost that producers and consumers have to pay for fossil fuels would substantially decrease global carbon emissions and save the lives of people who would otherwise be killed by air pollution.{ref}The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it's undeniable that the costs are very large.{/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The damage caused by burning fossil fuels is a textbook example of what economists call an externality: Putting a monetary price on carbon emissions makes it possible to internalize the costs of the negative impact on our health, the environment, and future generations.{ref}The <a href="https://www.core-econ.org/the-economy/book/text/12.html">free online textbook CORE ECON</a> provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.{/ref}</p> <!-- /wp:paragraph --> <!-- wp:heading {"level":4} --> <h4>This means that we do not have the option to not pay a price</h4> <!-- /wp:heading --> <!-- wp:paragraph --> <p>It is a mistake to think that it is possible to not pay for emitting carbon. As we have just seen, <em>we </em><strong><em>are</em></strong><em> already paying a price</em>. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>This is the economists’ argument for putting an explicit monetary price on carbon emissions.</p> <!-- /wp:paragraph --> <!-- wp:heading {"level":5} --> <h5>What would change if we put a monetary price on carbon?</h5> <!-- /wp:heading --> <!-- wp:paragraph --> <p>There are two ways in which a carbon price can be implemented: a carbon tax or a ‘cap and trade’ system:{ref}Some alternatives to carbon taxes and cap and trade – such as clean energy standards or regulations – can be viewed as implicit prices on carbon emissions.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>It's a core result in resource economics  that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON <a href="https://www.core-econ.org/the-economy/book/text/20.html">here</a>.{/ref} </p> <!-- /wp:paragraph --> <!-- wp:list --> <ul><li>In a ‘cap and trade’ system the carbon price changes over time. A maximum level of pollution (a ‘cap’) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap. </li><li>A carbon tax is simply a levy that is applied to all goods and services which lead to carbon emissions in their production.</li></ul> <!-- /wp:list --> <!-- wp:paragraph --> <p>In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they’re not available yet producers will be incentivised to develop low-carbon alternatives.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Carbon pricing changes the relative prices between carbon-intensive and low-carbon products and this changes consumption choices towards a low-carbon lifestyle: Carbon prices make it more likely that we rely on low-carbon electricity rather than fossil fuels; that we take the bicycle rather than the car; that we buy the smaller car rather than the bigger one; that we buy electric vehicles rather than gas-powered ones; that we eat <a href="https://ourworldindata.org/food-choice-vs-eating-local">chicken rather than beef</a>; or that we organize a video conference rather than an event that is a flight away. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Both of the intended consequences – transition to and innovation of alternative low-carbon technologies – increase with the carbon price. The incentive for consumers and entrepreneurs is to reduce their emissions whenever doing so costs them less than paying the carbon price. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Because access to energy often constitutes a large share of the budget of poorer families, successful carbon pricing policies include support for those households to offset the increased cost of energy.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – <a href="https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669–677.{/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>In the case of a carbon tax, the government revenue can be used to finance this support for poorer households and it can also be used to pay for additional measures that slow down climate change and support environmental regeneration: including <a href="https://ourworldindata.org/afforestation">reforestation</a>, more walkable and cyclable cities, or research and development for renewable energy and low-carbon technologies. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>With a carbon price one can establish a mechanism that ensures that those who are causing emissions are those who pay for the countermeasures that benefit society and the environment.</p> <!-- /wp:paragraph --> <!-- wp:heading {"level":4} --> <h4>A carbon price allows us to make two decisions</h4> <!-- /wp:heading --> <!-- wp:paragraph --> <p>Levying a monetary price on emissions allows us to choose our answer to two important questions: <em>Who</em> should pay the price for carbon emissions? <em>How much</em> do we want them to pay for emitting greenhouse gases?</p> <!-- /wp:paragraph --> <!-- wp:heading {"level":5} --> <h5><em>Who</em> should pay the price for emitting greenhouse gases?</h5> <!-- /wp:heading --> <!-- wp:paragraph --> <p>At the most fundamental level the argument for carbon pricing is the hard truth that we have to pay a price for carbon emissions. What we can decide is who pays for them.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The status quo in a society without carbon pricing could not be more brutal:</p> <!-- /wp:paragraph --> <!-- wp:list --> <ul><li>The people who live in high-income countries – those who enjoy the best living conditions in human history – are those who will be least affected by climate change, yet they are <a href="https://ourworldindata.org/worlds-energy-problem">the ones with the highest emissions</a>.</li><li>The people who will be most affected by the negative consequences of a hotter planet are those that have contributed the least to climate change: the poorest people in the world – who are at risk of increasing food insecurity and do not have the resources to adapt to changes as rapidly – and the generations that come after us.</li></ul> <!-- /wp:list --> <!-- wp:paragraph --> <p>Without a monetary price on carbon it is those who have the lowest emissions that pay the most. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>With carbon pricing we make sure that those who cause emissions also pay for them.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Because emissions rise with income, a carbon price ensures that it will be the rich who pay most.{ref}That they pay the most is a statement about absolute spending. As explained below, the <em>relative</em> spending on energy is often highest for poorer households.{/ref} For the very rich it is the case that a few consumption choices – flights, large cars, meat – are responsible for the bulk of their emissions.{ref}Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1–12. <a href="https://doi.org/10.1017/sus.2020.12">https://doi.org/10.1017/sus.2020.12</a>.{/ref} Carbon pricing is a policy targeted to address these consumption choices, it makes carbon-intensive goods less affordable and ‘degrows’ the consumption of those goods.</p> <!-- /wp:paragraph --> <!-- wp:heading {"level":5} --> <h5><em>How much</em> do we make people pay for emitting greenhouse gases? </h5> <!-- /wp:heading --> <!-- wp:paragraph --> <p>The second decision that we can influence with a price on carbon is: <em>How much</em> do we want to pay for fossil fuels? </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>If we continue emitting high volumes of greenhouse gases we will cause severe climate change and eventually have to pay a high price from the damages. Several studies find that if we don’t achieve a reduction in emissions now, economic growth would be much lower in the decades ahead (and that surely wouldn’t be our main concern in such a future).{ref}On the relation between future warming and growth see:<br>Pretis, F., Schwarz, M., Tang, K., Haustein, K., & Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5°C or 2°C warming. <em>Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences</em>, <em>376</em>(2119), 20160460.<a href="https://doi.org/10.1098/rsta.2016.0460"> https://doi.org/10.1098/rsta.2016.0460<br></a></p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. <em>Nature</em>, <em>527</em>(7577), 235–239.<a href="https://doi.org/10.1038/nature15725"> https://doi.org/10.1038/nature15725</a> {/ref} </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Levying a fee on carbon emissions can be a key policy to bring down emissions quickly so that we avoid large costs in the future.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>In the past many macroeconomists considered the need to cut emissions as a drag on the economy that lowers economic growth. This idea, that decarbonisation of our economies conflicts with economic growth, is still shared by many.{ref}In <a href="https://ourworldindata.org/shrink-emissions-not-the-economy">a guest post for Our World in Data</a> Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this:<br><em>“Ironically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed “degrowth”). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.”</em>{/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>But this is no longer the mainstream view. The latest annual IMF report estimates that policies, including carbon pricing, that mitigate climate change actually <em>increase</em> economic growth over the coming decades.{ref}<a href="https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020">World Economic Outlook, October 2020: A Long and Difficult Ascent</a>. In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.{/ref} This means that there is no trade-off between fighting climate change and economic growth. Fighting climate change is a way to achieve <em>more growth</em>.{ref}Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2°C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, <em>relative to a baseline growth of 1.6% to 3%</em>. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today’s economy. With measures in place to limit warming to 2°C, growth would be 0.06% smaller – i.e. 1.54% per year. The world economy would then ‘only' be 461% of the size of today.<br><br>In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today’s economy. With measures to limit warming to 2°C, growth would be 0.06% smaller – i.e. 2.94% per year. The economy would then ‘only' be 1813% the size of today.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2°C.<br><br>The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions.<br><br>See:<br>Edenhofer et al. (2014). <a href="https://www.ipcc.ch/report/ar5/wg3/">IPCC, 2014: Summary for Policymakers</a>. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.<br><br>See also: IPCC (2014) – <a href="https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf">Climate Change 2014: Synthesis Report</a>. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.<br><br><a href="https://www.sciencedirect.com/science/article/pii/S0095069617308707">https://www.sciencedirect.com/science/article/pii/S0095069617308707</a><br>{/ref} </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>From the responses to my recent writing on <a href="https://ourworldindata.org/poverty-minimum-growth-needed">the need of growth for ending poverty</a> I saw that some people have not caught up with this. Fighting climate change is not just compatible with fighting poverty, the two goals — to reduce emissions and to increase economic growth — actually <em>strengthen</em> each other.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>It is very good news that fighting climate change is expected to increase growth over the coming decades, but the benefits to climate mitigation are larger than just additional growth: it also means a modernisation of key infrastructure, faster innovation, the protection of the biosphere on our planet, and the major health benefits of reduced air pollution caused by burning fossil fuels, including millions of lives saved. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Taking both the costs and benefits into account makes a very clear argument for climate action now. Putting a price on carbon to build a low-carbon world is an investment for a much better future.</p> <!-- /wp:paragraph --> <!-- wp:heading {"level":4} --> <h4>For once even economists agree</h4> <!-- /wp:heading --> <!-- wp:paragraph --> <p>Economists are not known for agreeing much with one another. But regarding the challenge of how to reduce greenhouse gas emissions there is more agreement among economists than in perhaps any other big policy question. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>What is particularly encouraging is that this is a policy that is supported by both left- and right-leaning economists. That left-leaning economists are in favour of a tax that will mostly be paid for by richer people is not surprising. It is perhaps more surprising that many right-leaning economists – who are generally in favor of a small state with only minimal taxes – are also in favor. Economists on the conservative side of the spectrum, such as Greg Mankiw, <a href="https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf">advocate strongly for a carbon tax</a> and widespread support for carbon taxes of economists across the political spectrum is documented in many relevant surveys.{ref}The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly <a href="https://www.igmchicago.org/?s=carbon+tax">asked them about their opinion on a carbon tax</a> and invariably finds large support for such a tax.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>See also the survey of 365 economists who have published papers related to climate change “in a highly ranked, peer-reviewed economics or environmental economics journal” conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published <a href="https://policyintegrity.org/files/publications/ExpertConsensusReport.pdf">here</a>. (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now – see Figure 2a.)</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>In a 2006 survey of the American Economic Association, 65% agreed that “the US should increase energy taxes”.<br>Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists’ Voice, 3(9).</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The Wall Street Journal asked business economists in 2007, ‘‘What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?’’ 54 percent advocated for ‘‘taxes that raise the cost of purchasing fossil fuels’’.<br>Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Keohane, M. N. O., & Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington.<br>Last year over 3,500 economists, including twenty-seven Nobel laureates, signed <a href="https://clcouncil.org/economists-statement/">this letter supporting carbon pricing</a>.{/ref} </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>An alternative to a carbon price that many governments pursue is to rely on specific guidelines, but doing this well is an incredibly difficult task. A government with the goal to reduce emissions can try to regulate each specific sector and decide which types of production and consumption should be reduced or forbidden. But the planner who is tasked with doing this needs to have an enormous knowledge of all kinds of technologies, their carbon footprint, their cost, the possible alternatives, and their future potential. The carbon price is such an effective alternative to the central planner, because it doesn’t require a central authority to have enormous knowledge. Instead it incentivizes everyone to reduce carbon emissions – since they are incentivized to save money – and thereby distributes the task of reducing emissions to <em>everyone</em> – every producer, every investor, every consumer. Instead of one central agency, it incentivizes billions of people to search for ways to reduce their costs and thereby to find millions of solutions to reduce their emissions.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Another aspect that is convincing even to those who favour a small state is that if you want to have <em>any public spending at all</em> – and very few want a state that is so small that neither roads nor the police are publicly funded – you have to raise state revenue <em>somewhere</em>. The argument then is that if you have to have some taxes, it’s better to tax something that harms people rather than something that we want to encourage, like work. There are big losers from a carbon price – the fossil fuel industry – but for citizens, the overall taxes do not have to increase: the carbon price is government revenue so that it can reduce taxes elsewhere. It is actually the other way around: the implicit subsidies to fossil fuels are costly and thereby increase taxes for everyone – as we have seen, the IMF estimates that the lack of carbon pricing means that governments lose 3.8% of GDP and this loss either means greater public debt or it has to be made up by all of us paying higher taxes.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Poorer households spend a larger share of their income on energy so that a carbon price would hit these households hardest. It is possible to avoid this consequence by making the poorest households benefit from the spending that the carbon tax allows. The famous call for a carbon tax signed by a large number of leading economists at <a href="https://www.econstatement.org/">econstatement.org</a> has this goal. "To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in ‘carbon dividends’ than they pay in increased energy prices."</p> <!-- /wp:paragraph --> <!-- wp:heading {"level":4} --> <h4>What is stopping us?</h4> <!-- /wp:heading --> <!-- wp:paragraph --> <p>The world did make a start on carbon pricing. 78 different jurisdictions have implemented a carbon price and this year (2021) a price will be paid on 22% of the world’s carbon emissions.{ref}All data points and references here refer to the 2020 issue: World Bank (2020) – <a href="https://openknowledge.worldbank.org/handle/10986/33809">State and Trends of Carbon Pricing 2020</a>. Washington, DC: World Bank. © World Bank. License: CC BY 3.0 IGO.{/ref} 17 years ago a price was paid on much less than 1% of all emissions.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>But the carbon price is low in many places and the figures just cited mean that there is no monetary price on three-quarters of emissions.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Given all the arguments above, why is effective carbon pricing not implemented in many more places? </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>A big reason is of course that those that will lose out from carbon pricing – the fossil fuel industry – rally against them. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>But it is also the case that carbon pricing is not very popular among voters. Study after study finds that a key reason for this is that <em>many do not believe that a price on carbon is actually effective in reducing emissions</em>.{ref}See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). <a href="https://doi.org/10.1007/s10640-017-0133-8.%7B/ref">https://doi.org/10.1007/s10640-017-0133-8</a><br><br>Baranzini A, Carattini S (2017) – Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197–227</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – <a href="https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669–677. {/ref} While it is the effectiveness of carbon prices that makes them popular among experts, it is the perceived ineffectiveness that makes them unpopular among non-experts. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>But it is also the case that people change their mind about carbon prices when they learn that they do actually work.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – <a href="https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669–677. {/ref} After the Swiss population rejected a carbon price in a referendum, a group of researchers – Carattini et al (2017){ref}Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). <a href="https://doi.org/10.1007/s10640-017-0133-8.%7B/ref">https://doi.org/10.1007/s10640-017-0133-8</a> {/ref} – ran a study to investigate what could have made the proposal more popular. They found that “the effectiveness of energy taxes is not an established fact for the general public” and their study showed that the most important successful argument in favour of the tax is information on the expected effectiveness in reducing emissions.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>It shouldn’t be surprising that the communication of successful strategies is of such great importance. Many of us care a lot about climate change – people around the world <a href="https://www.pewresearch.org/global/2020/09/09/despite-pandemic-many-europeans-still-see-climate-change-as-greatest-threat-to-their-countries/">consistently view</a> it as one of the largest challenges that humanity faces – and at the same time many feel hopeless that we can actually do anything about it. Showing that there <em>is</em> a way forward is key for the successful fight against climate change.</p> <!-- /wp:paragraph --> <!-- wp:heading {"level":4} --> <h4>Empirical evidence: Does a price on carbon reduce carbon emissions?</h4> <!-- /wp:heading --> <!-- wp:paragraph --> <p>Back in 1991 Sweden was one of the first countries in the world to implement a carbon tax. Over time the carbon tax was gradually increased, but it still mainly affects the transport sector (around 90 percent of the revenues from the carbon tax come from the consumption of gasoline and motor diesel).{ref}The transport sector is of significant importance for Sweden’s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden’s total annual CO<sub>2</sub> emissions.{/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The researcher Julius Andersson studied whether the carbon price worked as intended by studying its impact on emissions from the transport sector.{ref}Julius J. Andersson (2019) – <a href="https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144">Carbon Taxes and CO2 Emissions: Sweden as a Case Study</a>. American Economic Journal: Economic Policy. 11 (4): 1–30. doi:10.1257/pol.20170144. ISSN 1945-7731.{/ref} </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>He finds that “CO<sub>2</sub> emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone.” A very strong effect.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>How did prosperity and emissions change in Sweden over this period? Average incomes in Sweden – GDP per capita – increased by 52% since the year before the tax was introduced, and emissions declined by 29%.{ref}In <a href="https://ourworldindata.org/grapher/consumption-co2-per-capita-vs-gdppc?endpointsOnly=1&time=2017..latest">this scatterplot of CO2 emissions vs GDP per capita</a> you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.{/ref} </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Sweden’s emissions are still far from where they need to be, but the direction of change – growing prosperity, but declining emissions – is right.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>And Sweden is not the only country that reduced emissions while growing the economy, as the chart shows.{ref}<a href="https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest&country=~SWE">In the interactive version of this chart</a> you can view this data for many more countries.{/ref} Shown in the chart are consumption-based CO<sub>2</sub> emissions, which means that they account for the carbon emissions caused by products that were consumed within the country but which were produced elsewhere.</p> <!-- /wp:paragraph --> <!-- wp:image {"id":52668,"sizeSlug":"full","linkDestination":"none"} --> <figure class="wp-block-image size-full"><img src="https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all.png" alt="" class="wp-image-52668"/></figure> <!-- /wp:image --> <!-- wp:paragraph --> <p>Carbon pricing is not the only reason emissions are falling in these countries. As we just saw, the paper on Sweden attributes about half of the decline to the carbon tax. Other reasons include technological progress (such as rising efficiency and <a href="https://ourworldindata.org/cheap-renewables-growth">cheaper renewables</a>), declining demand for energy, and other regulations (for example, on air pollution). </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Like all policies that are based on a price mechanism, the level of the price matters. If it is too low it won’t have much of an effect. This is what Felix Pretis (2020) has found for the carbon tax in British Columbia.{ref}The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because “existing carbon taxes (and prices) are too low to be effective in the time frame since their introduction.”</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Felix Pretis (2020) – Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria & Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.{/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>But in places that have a substantial carbon price, they can play an important role in reducing emissions, as a number of studies have shown.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>In a recent global study, researchers Best, Burke, and Jotzo (2020) analysed 142 countries and found that those that have a carbon price do, as one would expect, have lower CO<sub>2</sub> emissions than those who do not.{ref}Best, R., Burke, P.J. & Jotzo, F. (2020) – Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69–94. <a href="https://doi.org/10.1007/s10640-020-00436-x">https://doi.org/10.1007/s10640-020-00436-x</a> {/ref}</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Germany too reduced emissions while becoming richer. The research by Petrick and Wagner (2014) showed how EU-wide carbon pricing contributed to this achievement.{ref}Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. <a href="https://econpapers.repec.org/RePEc:zbw:ifwkwp:1912">https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912</a>}{/ref} </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Countries in the European Union have established a cap-and-trade system called the <a href="https://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme">EU Emission Trading Scheme</a> (EU ETS). Recent research by Bayer and Akin showed that this system of carbon pricing has been effective in reducing emissions.{ref} Bayer, Patrick; Aklin, Michaël (2020) – The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117{/ref} </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Lastly, let’s look at the motherland of fossil-fuel-powered industrialization: the chart shows the sources of power production in the UK over the last century. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Electricity production in the UK has been dominated by coal since its early days; as soon as the light bulb was invented, the UK had its first coal power plant, the Holborn Viaduct power station in London. But this changed in recent decades, and especially rapidly after the UK introduced two carbon price systems. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The UK was already part of the EU ETS, but went even further in 2013 when the country implemented the ‘carbon price floor’: <a href="https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor">a top-up carbon tax</a> to the European system. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>In the decade before the tax was introduced one third of electricity in the UK came from coal, <a href="https://ourworldindata.org/safest-sources-of-energy">the worst of power sources</a>. Since then the carbon tax “has led to an unprecedented reduction in coal generation” according to the research of Castagneto et al (2019).{ref}G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) – <a href="https://www.ucl.ac.uk/bartlett/sustainable/sites/bartlett/files/ucl_report_ofgem_20102019_final.pdf">The value of international electricity trading</a>. UCL and University of Cambridge. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>See also: Marion Leroutier (2021) – Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK. In Journal of Environmental Economics and Management.{/ref} In the years following the policy change, the share of electricity generated from coal declined to just 2%.{ref}These days it is common that the UK runs for <a href="https://www.theguardian.com/environment/ng-interactive/2019/may/25/the-power-switch-tracking-britains-record-coal-free-run">months without any coal electricity</a> at all, and like many countries that have a carbon price the UK has also <a href="https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest">achieved</a> an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.{/ref} </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>As the share of electricity from fossil fuel sources declined, the carbon intensity of electricity production <a href="https://ourworldindata.org/grapher/carbon-intensity-electricity?tab=chart&time=2000..latest&country=~GBR">more than halved</a> and carbon emissions from power generation have <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972583/2020_Provisional_emissions_statistics_report.pdf">fallen <em>by two-thirds</em></a> in the UK!</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The Law of Demand – if the price of something goes up, consumption goes down – also holds in this case. Places that have implemented a substantial carbon price are achieving the intended effect, the consumption of carbon-intensive products declines and emissions fall.</p> <!-- /wp:paragraph --> <!-- wp:columns {"className":"is-style-sticky-right"} --> <div class="wp-block-columns is-style-sticky-right"><!-- wp:column --> <div class="wp-block-column"><!-- wp:html --> <iframe src="https://ourworldindata.org/grapher/electricity-mix-uk?country=~GBR" loading="lazy" style="width: 100%; height: 600px; border: 0px none;"></iframe> <!-- /wp:html --></div> <!-- /wp:column --> <!-- wp:column --> <div class="wp-block-column"></div> <!-- /wp:column --></div> <!-- /wp:columns --> <!-- wp:owid/prominent-link {"title":"Shrink emissions, not the economy","linkUrl":"https://ourworldindata.org/shrink-emissions-not-the-economy","mediaId":18342,"mediaUrl":"https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1.png","mediaAlt":"","className":"is-style-thin"} --> <!-- wp:paragraph --> <p><em>If you want to understand why it is possible to reduce emissions while growing the economy, see this Our World in Data guest post by Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova that answers this question.</em></p> <!-- /wp:paragraph --> <!-- /wp:owid/prominent-link --> <!-- wp:heading {"level":4} --> <h4>Conclusion</h4> <!-- /wp:heading --> <!-- wp:paragraph --> <p>What’s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>The reason our societies are powered by fossil fuels is that they provided energy at the cheapest monetary price. If we want to transition away from fossil fuels and build a world that is powered by their alternatives we can rely on the price mechanism as well.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>What makes carbon pricing so powerful is that it is a policy that changes the entire system. No decision about any carbon-intensive activity escapes its influence: it changes the choices of consumers, producers, investors, entrepreneurs and innovators in all relevant sectors at once. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>I want to make clear that I do not believe that carbon pricing can be the one policy change that will end climate change.{ref}On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) – <a href="https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions">Carbon Pricing and the Elasticity of CO2 Emissions</a>. INET Working Paper.{/ref} But the theory and evidence is clear that carbon prices work as intended and if we are able to end climate change in this century I would be surprised if we achieve this without putting a price on carbon. In other words, I don’t think this is sufficient, but I do think it would be a key step towards a better future.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>Our challenge is big. We need to build a new world that still solves the problems that fossil fuels solve today. Carbon-intensive goods and services are often in high demand today, because they are important for people. They have the unfortunate by-product of carbon emissions, but they solve other problems for us and everyone around us. Key to making the transition to a low-carbon future will be to innovate and scale-up alternatives. Carbon prices are useful for this transition because they give <em>everyone</em> an incentive to get there, especially in <a href="https://ourworldindata.org/cheap-renewables-growth">those sectors where alternatives <em>do</em> exist</a>. </p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>And in those areas where low-carbon alternatives do not yet exist, support for research and development will be key. Because these two policies are working towards the same goal they <em>complement</em> each other, a higher price on carbon provides an incentive to increase R&D.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>We<em> do</em> have options, and understanding them is not exactly rocket science. Consumption goes down, when prices go up. If we want to reduce carbon emissions we should not be paying people to burn fossil-fuels. We should end subsidies.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>What is hard, is to win the necessary political support for pricing carbon. The article linked below draws the political lessons from places that were successful in establishing carbon prices.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>I believe that putting a price on carbon is one of the most important goals to fight for in our lifetime. The current world is not sustainable and it is just not right that the richest have the highest emissions, while those who emit the least – the poorest and those who come after us – pay the highest price. Carbon pricing addresses the current injustice where we are allowing the richest to privately enjoy the gains from fossil fuels, while they pass off the costs to everyone else.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p>If we are serious about decarbonizing the global economy – and building the low-carbon future – we should make the fight for a monetary price on carbon central to our efforts over the years ahead.</p> <!-- /wp:paragraph --> <!-- wp:separator --> <hr class="wp-block-separator"/> <!-- /wp:separator --> <!-- wp:paragraph --> <p><strong>Acknowledgements:</strong> I would like to thank Hannah Ritchie, Marcel Gerber, Charlie Giattino, Esteban Ortiz-Ospina for reading drafts of this text and for their very helpful comments and ideas.</p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p><strong>Update:</strong> I updated the figure that shows the decoupling of emissions and economic growth on September 3, 2022.</p> <!-- /wp:paragraph --> <!-- wp:spacer {"height":"144px"} --> <div style="height:144px" aria-hidden="true" class="wp-block-spacer"></div> <!-- /wp:spacer --> <!-- wp:separator --> <hr class="wp-block-separator"/> <!-- /wp:separator --> <!-- wp:paragraph --> <p>If you want to think through the <strong>counterarguments to pricing carbon</strong>, here is a list of references to get you started with:</p> <!-- /wp:paragraph --> <!-- wp:list --> <ul><li>One of the most widely discussed recent articles on the topic is <a href="https://bostonreview.net/science-nature-politics/leah-c-stokes-matto-mildenberger-trouble-carbon-pricing">The Trouble with Carbon Pricing</a> authored by Leah Stokes and Matto Mildenberger. As I emphasized above, the authors’ main point is that while carbon prices make economic and environmental sense, it is difficult to get the political support that they need to be free of loopholes and to be high enough to make a difference. They also argue that it would be wrong to believe that no other policy is needed to bring emissions to zero. I largely agree with the authors. Carbon taxes cannot be the only solution – they emphasise clean energy standards, I’d emphasise public R&D – but I disagree that this means we should not make it our political goal to put a price on carbon. I think they should be part of a big package of successful climate policy tools – carbon prices are one tool in our hands and we shouldn’t weaken ourselves by throwing away solutions that we do have.</li><li>Ramez Naam wrote <a href="https://twitter.com/ramez/status/1094380540394795008">this very good Twitter thread</a> on why carbon taxes are a good policy, but why he believes that subsidies for specific technologies can be even better in some cases.</li><li>Rosenbloom et al (2020) discuss the weaknesses of carbon pricing and offer their own alternative, which they call “sustainability transition policy”,  a “mix of contextually and politically sensitive policies that simultaneously drive low-carbon innovation and the decline of fossil fuels”.<ul><li>Daniel Rosenbloom, Jochen Markard, Frank W. Geels, and Lea Fuenfschilling (2020) – <a href="https://www.pnas.org/content/117/16/8664.short">Opinion: Why carbon pricing is not sufficient to mitigate climate change—and how “sustainability transition policy” can help</a>. In PNAS.</li></ul><ul><li>I am personally not impressed by the Rosenbloom et al (2020) critique and agree largely with the reply by Jeroen van den Berg and Wouter Botzen (2020) also published in PNAS.</li><li>Jeroen van den Berg and Wouter Botzen (2020) – <a href="https://www.pnas.org/content/117/38/23219">Low-carbon transition is improbable without carbon pricing</a>, PNAS.</li></ul></li><li>Goulder et al. (2016) argue that implementing a closely related policy – a clean energy standard (CES) – can be more cost-effective than a carbon price.</li><li>Lawrence H. Goulder, Marc A. C. Hafstead, Roberton C. Williams III (2016) – General Equilibrium Impacts of a Federal Clean Energy Standard. In the American Economic Journal: Economic Policy. VOL. 8, NO. 2, MAY 2016. (pp. 186-218).</li><li>Three more pointers:<ul><li>Garth Heutel (2020) – <a href="https://econfip.org/policy-brief/in-defense-of-alternatives-to-pollution-pricing/#">In Defense of Alternatives to Pollution Pricing</a></li><li>See <a href="https://marginalrevolution.com/marginalrevolution/2011/09/do-all-serious-economists-favor-a-carbon-tax.html">this list of 10 arguments by Tyler Cowen</a>.</li><li>And finally I have also asked the question <a href="https://twitter.com/MaxCRoser/status/1326671354654023682">‘What are the best papers or essays with arguments against a carbon price?</a>’, publicly on Twitter. There are several helpful replies there.</li></ul></li></ul> <!-- /wp:list --> <!-- wp:separator --> <hr class="wp-block-separator"/> <!-- /wp:separator --> <!-- wp:paragraph --> <p></p> <!-- /wp:paragraph --> <!-- wp:paragraph --> <p><em>Continue reading on Our World in Data:</em></p> <!-- /wp:paragraph --> <!-- wp:owid/prominent-link {"title":"Why is carbon pricing in some countries more successful than in others?","linkUrl":"https://ourworldindata.org/carbon-pricing-popular","mediaId":20047,"mediaUrl":"https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust.png","mediaAlt":"","className":"is-style-thin"} --> <!-- wp:paragraph --> <p>In some countries the public is very supportive of carbon taxes. In other countries they are largely against them. </p> <!-- /wp:paragraph --> <!-- /wp:owid/prominent-link -->	{ "id": "wp-43232", "slug": "carbon-price", "content": { "toc": [], "body": [ { "type": "text", "value": [ { "text": "Our World in Data presents the data and research to make progress against the world\u2019s largest problems.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "This post draws on data and research discussed in our entry on ", "spanType": "span-simple-text" }, { "children": [ { "url": "https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions", "children": [ { "text": "Greenhouse Gas Emissions", "spanType": "span-simple-text" } ], "spanType": "span-link" } ], "spanType": "span-bold" }, { "text": ". Some changes and updates were made after the text was first published.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "type": "text", "value": [ { "text": "It is a mistake to believe that we are not paying for emitting greenhouse gases. Even if we do not pay a ", "spanType": "span-simple-text" }, { "children": [ { "text": "monetary", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " price for carbon emissions we do pay a very large price, the consequences of climate change.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Without a monetary carbon price it is those who have the smallest emissions that suffer the largest costs from climate change. A carbon price, in contrast, means that those who cause the emissions also pay for them.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "A key reason why voters are not in favour of carbon pricing is that many believe it won\u2019t actually reduce emissions, but empirical research and theory show that this is wrong: pricing carbon emissions \u2013 either via a carbon tax or a \u2018cap and trade\u2019-system \u2013 is effective. It shifts production and consumption from carbon-intensive goods and services to low-carbon alternatives and does reduce emissions.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Many are deeply concerned about climate change yet feel hopeless that anything can be done to meet this challenge. Increasing the understanding that carbon pricing works, correcting common misconceptions, and showing that there ", "spanType": "span-simple-text" }, { "children": [ { "text": "is", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " a way forward are key steps for a successful fight against climate change.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "I believe a carbon price should be complemented by other policies and in this article I make the case that it is one of the most important policy options we have to achieve a better future.", "spanType": "span-simple-text" } ], "parseErrors": [] } ], "type": "callout", "title": "Summary", "parseErrors": [] }, { "type": "text", "value": [ { "text": "We are paying a price for burning fossil fuels and emitting greenhouse gases.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Some of the consequences of climate change are already visible today, but the most severe consequences will hit us in the years and decades to come:{ref}See IPCC (2014) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf", "children": [ { "text": "Climate Change 2014: Synthesis Report", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "list", "items": [ { "type": "text", "value": [ { "text": "Box 2.2: \u201cIt is ", "spanType": "span-simple-text" }, { "children": [ { "text": "very likely", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " that ", "spanType": "span-simple-text" }, { "children": [ { "text": "heat waves", "spanType": "span-simple-text" } ], "spanType": "span-bold" }, { "text": " will occur more often and last longer, and that ", "spanType": "span-simple-text" }, { "children": [ { "text": "extreme precipitation", "spanType": "span-simple-text" } ], "spanType": "span-bold" }, { "text": " events will become more intense and frequent in many regions. The ocean will ", "spanType": "span-simple-text" }, { "children": [ { "text": "continue to warm and acidify", "spanType": "span-simple-text" } ], "spanType": "span-bold" }, { "text": ", and ", "spanType": "span-simple-text" }, { "children": [ { "text": "global mean sea level to rise", "spanType": "span-simple-text" } ], "spanType": "span-bold" }, { "text": ".\u201d", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Box 2.3: \u201cRisks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development.\u201d", "spanType": "span-simple-text" } ], "parseErrors": [] } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "On the risk to biodiversity see Urban, Mark C. (2015). ", "spanType": "span-simple-text" }, { "url": "https://science.sciencemag.org/content/348/6234/571", "children": [ { "text": "\"Accelerating extinction risk from climate change\"", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". In Science. 348 (6234): 571\u2013573.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "For a larger overview see Wikipedia\u2019s pages on the ", "spanType": "span-simple-text" }, { "url": "https://en.wikipedia.org/wiki/Effects_of_climate_change", "children": [ { "text": "Effects of Climate Change", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " and ", "spanType": "span-simple-text" }, { "url": "https://en.wikipedia.org/wiki/Climate_change#Effects", "children": [ { "text": "the relevant section on their page on climate change", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ".{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "These consequences include the negative economic impacts of climate change through its effects on people\u2019s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for ", "spanType": "span-simple-text" }, { "url": "https://owid.cloud/extreme-poverty", "children": [ { "text": "the world\u2019s poorest people", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " they pose a threat to their lives, as they increase the risk of hunger and food insecurity.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Climate change isn\u2019t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/grapher/pollution-deaths-from-fossil-fuels?stackMode=absolute&region=World", "children": [ { "text": "countries around the world", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.{ref}In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Lelieveld, J., Klingm\u00fcller, K., Pozzer, A., Burnett, R. T., Haines, A., & Ramanathan, V. (2019). ", "spanType": "span-simple-text" }, { "url": "https://www.pnas.org/content/116/15/7192/", "children": [ { "text": "Effects of fossil fuel and total anthropogenic emission removal on public health and climate", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". Proceedings of the National Academy of Sciences, 116(15), 7192-7197", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "The death toll of the three counts of violence for 2017 ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/grapher/annual-number-of-deaths-by-cause", "children": [ { "text": "according to the IHME", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " is 561,511.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "\u2022 Homicides: 405,346 deaths", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "\u2022 War battles: 129,720 deaths", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "\u2022 Terrorism: 26,445 deaths", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study \u2013 Vohra et al (2021) \u2013\u00a0 estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., & Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. ", "spanType": "span-simple-text" }, { "children": [ { "text": "Environmental Research", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ", ", "spanType": "span-simple-text" }, { "children": [ { "text": "195", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ", 110754.", "spanType": "span-simple-text" }, { "url": "https://doi.org/10.1016/j.envres.2021.110754", "children": [ { "text": " https://doi.org/10.1016/j.envres.2021.110754", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ".{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "children": [ { "text": "This", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " is the price we are ", "spanType": "span-simple-text" }, { "children": [ { "text": "already", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " paying for burning fossil fuels.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The International Monetary Fund (IMF) estimates the sum of these costs in a major study that they update regularly. The title of the study is ", "spanType": "span-simple-text" }, { "children": [ { "text": "\u2018How Large Are Global Fossil Fuel Subsidies?\u2019", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " and in the study\u2019s latest issue the researchers estimate them to amount to US-$ 5.2 trillion.{ref}The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) \u2013 How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. ", "spanType": "span-simple-text" }, { "url": "https://doi.org/10.1016/j.worlddev.2016.10.004", "children": [ { "text": "https://doi.org/10.1016/j.worlddev.2016.10.004", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=doi.org%2F10.5089%2F9781484393178.001&btnG=", "children": [ { "text": "Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". Published as an IMF Working Paper.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "In my text I am citing the latest figures of the authors.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent).", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Coal: $5,200 billion * 0.44 = $2,288 billion", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Oil: $5,200 billion * 0.41 = $2,132 billion", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Natural gas: $5,200 billion * 0.1 = $520 billion", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that\u00a0 \u201cthe subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.\u201d, This data is according to the ", "spanType": "span-simple-text" }, { "url": "https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Energy_subsidies_2020.pdf", "children": [ { "text": "International Renewable Energy Agency (2020) \u2013 Energy subsidies", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " Unfortunately this source does not break down the subsidies to renewables by source of energy.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&time=earliest..latest", "children": [ { "text": "energy production from these sources", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455).", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "This means the subsidy per TWh of energy is:", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "What I am calling explicit subsidies is called \u201cpre-tax subsidies\u201d by these authors. What I am calling implicit subsidies is called \u201cpost-tax subsidies\u201d by these authors. {/ref} This is equivalent to 6.5% of global GDP.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "As the study\u2019s title makes clear, the IMF sees the sum of damage done by fossil fuels as a ", "spanType": "span-simple-text" }, { "children": [ { "text": "subsidy", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ". That might be surprising at first, but it makes sense if you think about it. A good is subsidized when consumers and producers of that good do not have to pay the full cost for it. This can either be an ", "spanType": "span-simple-text" }, { "children": [ { "text": "explicit subsidy", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ", for example when governments pay for the school education of the country\u2019s children, or it can be an ", "spanType": "span-simple-text" }, { "children": [ { "text": "implicit subsidy", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ", when producers and consumers cause damage, but do not have to pay a monetary price for it.{ref}One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "You find examples of both types of subsidies in your own life. If you pay for you and your neighbour\u2019s dinner then you are ", "spanType": "span-simple-text" }, { "children": [ { "text": "explicitly ", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": "subsidizing them. If your neighbour crashes into your car and you do not charge him for the damage he caused, you are ", "spanType": "span-simple-text" }, { "children": [ { "text": "implicitly ", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": "subsidizing them.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Fossil fuels are subsidized in both ways. They are ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/grapher/fossil-fuel-subsidies-per-capita?time=2015", "children": [ { "text": "explicitly subsidized in many places", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ", and they are implicitly subsidized ", "spanType": "span-simple-text" }, { "children": [ { "text": "everywhere", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ", as the consumers and producers of fossil fuels do not have to pay the monetary cost for the damage they cause.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Ending the subsidies to fossil fuels would mean to put a monetary price on them that corresponds to the damage they do. Since the alternatives to fossil fuels are both ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/safest-sources-of-energy", "children": [ { "text": "cleaner and safer", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " this would allow the world to make massive progress according to the IMF study: Ending these subsidies and pricing them into the cost that producers and consumers have to pay for fossil fuels would substantially decrease global carbon emissions and save the lives of people who would otherwise be killed by air pollution.{ref}The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it's undeniable that the costs are very large.{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The damage caused by burning fossil fuels is a textbook example of what economists call an externality: Putting a monetary price on carbon emissions makes it possible to internalize the costs of the negative impact on our health, the environment, and future generations.{ref}The ", "spanType": "span-simple-text" }, { "url": "https://www.core-econ.org/the-economy/book/text/12.html", "children": [ { "text": "free online textbook CORE ECON", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "text": "This means that we do not have the option to not pay a price", "spanType": "span-simple-text" } ], "type": "heading", "level": 2, "parseErrors": [] }, { "type": "text", "value": [ { "text": "It is a mistake to think that it is possible to not pay for emitting carbon. As we have just seen, ", "spanType": "span-simple-text" }, { "children": [ { "text": "we ", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "children": [ { "children": [ { "text": "are", "spanType": "span-simple-text" } ], "spanType": "span-italic" } ], "spanType": "span-bold" }, { "children": [ { "text": " already paying a price", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ".\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "This is the economists\u2019 argument for putting an explicit monetary price on carbon emissions.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "text": "What would change if we put a monetary price on carbon?", "spanType": "span-simple-text" } ], "type": "heading", "level": 3, "parseErrors": [] }, { "type": "text", "value": [ { "text": "There are two ways in which a carbon price can be implemented: a carbon tax or a \u2018cap and trade\u2019 system:{ref}Some alternatives to carbon taxes and cap and trade \u2013 such as clean energy standards or regulations \u2013 can be viewed as implicit prices on carbon emissions.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "It's a core result in resource economics\u00a0 that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON ", "spanType": "span-simple-text" }, { "url": "https://www.core-econ.org/the-economy/book/text/20.html", "children": [ { "text": "here", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ".{/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "list", "items": [ { "type": "text", "value": [ { "text": "In a \u2018cap and trade\u2019 system the carbon price changes over time. A maximum level of pollution (a \u2018cap\u2019) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "A carbon tax is simply a levy that is applied to all goods and services which lead to carbon emissions in their production.", "spanType": "span-simple-text" } ], "parseErrors": [] } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they\u2019re not available yet producers will be incentivised to develop low-carbon alternatives.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Carbon pricing changes the relative prices between carbon-intensive and low-carbon products and this changes consumption choices towards a low-carbon lifestyle: Carbon prices make it more likely that we rely on low-carbon electricity rather than fossil fuels; that we take the bicycle rather than the car; that we buy the smaller car rather than the bigger one; that we buy electric vehicles rather than gas-powered ones; that we eat ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/food-choice-vs-eating-local", "children": [ { "text": "chicken rather than beef", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": "; or that we organize a video conference rather than an event that is a flight away.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Both of the intended consequences \u2013 transition to and innovation of alternative low-carbon technologies \u2013 increase with the carbon price. The incentive for consumers and entrepreneurs is to reduce their emissions whenever doing so costs them less than paying the carbon price.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Because access to energy often constitutes a large share of the budget of poorer families, successful carbon pricing policies include support for those households to offset the increased cost of energy.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics", "children": [ { "text": "Making Carbon Pricing Work for Citizens", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". In Nature Climate Change 8, 669\u2013677.{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "In the case of a carbon tax, the government revenue can be used to finance this support for poorer households and it can also be used to pay for additional measures that slow down climate change and support environmental regeneration: including ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/afforestation", "children": [ { "text": "reforestation", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ", more walkable and cyclable cities, or research and development for renewable energy and low-carbon technologies.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "With a carbon price one can establish a mechanism that ensures that those who are causing emissions are those who pay for the countermeasures that benefit society and the environment.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "text": "A carbon price allows us to make two decisions", "spanType": "span-simple-text" } ], "type": "heading", "level": 2, "parseErrors": [] }, { "type": "text", "value": [ { "text": "Levying a monetary price on emissions allows us to choose our answer to two important questions: ", "spanType": "span-simple-text" }, { "children": [ { "text": "Who", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " should pay the price for carbon emissions? ", "spanType": "span-simple-text" }, { "children": [ { "text": "How much", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " do we want them to pay for emitting greenhouse gases?", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "children": [ { "text": "Who", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " should pay the price for emitting greenhouse gases?", "spanType": "span-simple-text" } ], "type": "heading", "level": 3, "parseErrors": [] }, { "type": "text", "value": [ { "text": "At the most fundamental level the argument for carbon pricing is the hard truth that we have to pay a price for carbon emissions. What we can decide is who pays for them.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The status quo in a society without carbon pricing could not be more brutal:", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "list", "items": [ { "type": "text", "value": [ { "text": "The people who live in high-income countries \u2013 those who enjoy the best living conditions in human history \u2013 are those who will be least affected by climate change, yet they are ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/worlds-energy-problem", "children": [ { "text": "the ones with the highest emissions", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ".", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The people who will be most affected by the negative consequences of a hotter planet are those that have contributed the least to climate change: the poorest people in the world \u2013 who are at risk of increasing food insecurity and do not have the resources to adapt to changes as rapidly \u2013 and the generations that come after us.", "spanType": "span-simple-text" } ], "parseErrors": [] } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Without a monetary price on carbon it is those who have the lowest emissions that pay the most.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "With carbon pricing we make sure that those who cause emissions also pay for them.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Because emissions rise with income, a carbon price ensures that it will be the rich who pay most.{ref}That they pay the most is a statement about absolute spending. As explained below, the ", "spanType": "span-simple-text" }, { "children": [ { "text": "relative", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " spending on energy is often highest for poorer households.{/ref} For the very rich it is the case that a few consumption choices \u2013 flights, large cars, meat \u2013 are responsible for the bulk of their emissions.{ref}Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1\u201312. ", "spanType": "span-simple-text" }, { "url": "https://doi.org/10.1017/sus.2020.12", "children": [ { "text": "https://doi.org/10.1017/sus.2020.12", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ".{/ref} Carbon pricing is a policy targeted to address these consumption choices, it makes carbon-intensive goods less affordable and \u2018degrows\u2019 the consumption of those goods.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "children": [ { "text": "How much", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " do we make people pay for emitting greenhouse gases?\u00a0", "spanType": "span-simple-text" } ], "type": "heading", "level": 3, "parseErrors": [] }, { "type": "text", "value": [ { "text": "The second decision that we can influence with a price on carbon is: ", "spanType": "span-simple-text" }, { "children": [ { "text": "How much", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " do we want to pay for fossil fuels?\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "If we continue emitting high volumes of greenhouse gases we will cause severe climate change and eventually have to pay a high price from the damages. Several studies find that if we don\u2019t achieve a reduction in emissions now, economic growth would be much lower in the decades ahead (and that surely wouldn\u2019t be our main concern in such a future).{ref}On the relation between future warming and growth see:", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Pretis, F., Schwarz, M., Tang, K., Haustein, K., & Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5\u00b0C or 2\u00b0C warming. ", "spanType": "span-simple-text" }, { "children": [ { "text": "Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ", ", "spanType": "span-simple-text" }, { "children": [ { "text": "376", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": "(2119), 20160460.", "spanType": "span-simple-text" }, { "url": "https://doi.org/10.1098/rsta.2016.0460", "children": [ { "text": " https://doi.org/10.1098/rsta.2016.0460", "spanType": "span-simple-text" }, { "spanType": "span-newline" } ], "spanType": "span-link" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. ", "spanType": "span-simple-text" }, { "children": [ { "text": "Nature", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ", ", "spanType": "span-simple-text" }, { "children": [ { "text": "527", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": "(7577), 235\u2013239.", "spanType": "span-simple-text" }, { "url": "https://doi.org/10.1038/nature15725", "children": [ { "text": " https://doi.org/10.1038/nature15725", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " {/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Levying a fee on carbon emissions can be a key policy to bring down emissions quickly so that we avoid large costs in the future.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "In the past many macroeconomists considered the need to cut emissions as a drag on the economy that lowers economic growth. This idea, that decarbonisation of our economies conflicts with economic growth, is still shared by many.{ref}In ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/shrink-emissions-not-the-economy", "children": [ { "text": "a guest post for Our World in Data", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this:", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "children": [ { "text": "\u201cIronically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed \u201cdegrowth\u201d). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.\u201d", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": "{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "But this is no longer the mainstream view. The latest annual IMF report estimates that policies, including carbon pricing, that mitigate climate change actually ", "spanType": "span-simple-text" }, { "children": [ { "text": "increase", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " economic growth over the coming decades.{ref}", "spanType": "span-simple-text" }, { "url": "https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020", "children": [ { "text": "World Economic Outlook, October 2020: A Long and Difficult Ascent", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.{/ref} This means that there is no trade-off between fighting climate change and economic growth. Fighting climate change is a way to achieve ", "spanType": "span-simple-text" }, { "children": [ { "text": "more growth", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ".{ref}Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2\u00b0C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, ", "spanType": "span-simple-text" }, { "children": [ { "text": "relative to a baseline growth of 1.6% to 3%", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ".\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today\u2019s economy. With measures in place to limit warming to 2\u00b0C, growth would be 0.06% smaller \u2013 i.e. 1.54% per year. The world economy would then \u2018only' be 461% of the size of today.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today\u2019s economy. With measures to limit warming to 2\u00b0C, growth would be 0.06% smaller \u2013 i.e. 2.94% per year. The economy would then \u2018only' be 1813% the size of today.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2\u00b0C.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "See:", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Edenhofer et al. (2014). ", "spanType": "span-simple-text" }, { "url": "https://www.ipcc.ch/report/ar5/wg3/", "children": [ { "text": "IPCC, 2014: Summary for Policymakers", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "See also: IPCC (2014) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf", "children": [ { "text": "Climate Change 2014: Synthesis Report", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "url": "https://www.sciencedirect.com/science/article/pii/S0095069617308707", "children": [ { "text": "https://www.sciencedirect.com/science/article/pii/S0095069617308707", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "spanType": "span-newline" }, { "text": "{/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "From the responses to my recent writing on ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/poverty-minimum-growth-needed", "children": [ { "text": "the need of growth for ending poverty", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " I saw that some people have not caught up with this. Fighting climate change is not just compatible with fighting poverty, the two goals \u2014 to reduce emissions and to increase economic growth \u2014 actually ", "spanType": "span-simple-text" }, { "children": [ { "text": "strengthen", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " each other.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "It is very good news that fighting climate change is expected to increase growth over the coming decades, but the benefits to climate mitigation are larger than just additional growth: it also means a modernisation of key infrastructure, faster innovation, the protection of the biosphere on our planet, and the major health benefits of reduced air pollution caused by burning fossil fuels, including millions of lives saved.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Taking both the costs and benefits into account makes a very clear argument for climate action now. Putting a price on carbon to build a low-carbon world is an investment for a much better future.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "text": "For once even economists agree", "spanType": "span-simple-text" } ], "type": "heading", "level": 2, "parseErrors": [] }, { "type": "text", "value": [ { "text": "Economists are not known for agreeing much with one another. But regarding the challenge of how to reduce greenhouse gas emissions there is more agreement among economists than in perhaps any other big policy question.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "What is particularly encouraging is that this is a policy that is supported by both left- and right-leaning economists. That left-leaning economists are in favour of a tax that will mostly be paid for by richer people is not surprising. It is perhaps more surprising that many right-leaning economists \u2013 who are generally in favor of a small state with only minimal taxes \u2013 are also in favor. Economists on the conservative side of the spectrum, such as Greg Mankiw, ", "spanType": "span-simple-text" }, { "url": "https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf", "children": [ { "text": "advocate strongly for a carbon tax", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " and widespread support for carbon taxes of economists across the political spectrum is documented in many relevant surveys.{ref}The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly ", "spanType": "span-simple-text" }, { "url": "https://www.igmchicago.org/?s=carbon+tax", "children": [ { "text": "asked them about their opinion on a carbon tax", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " and invariably finds large support for such a tax.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "See also the survey of 365 economists who have published papers related to climate change \u201cin a highly ranked, peer-reviewed economics or environmental economics journal\u201d conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published ", "spanType": "span-simple-text" }, { "url": "https://policyintegrity.org/files/publications/ExpertConsensusReport.pdf", "children": [ { "text": "here", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now \u2013 see Figure 2a.)", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "In a 2006 survey of the American Economic Association, 65% agreed that \u201cthe US should increase energy taxes\u201d.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists\u2019 Voice, 3(9).", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The Wall Street Journal asked business economists in 2007, \u2018\u2018What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?\u2019\u2019 54 percent advocated for \u2018\u2018taxes that raise the cost of purchasing fossil fuels\u2019\u2019.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Keohane, M. N. O., & Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington.", "spanType": "span-simple-text" }, { "spanType": "span-newline" }, { "text": "Last year over 3,500 economists, including twenty-seven Nobel laureates, signed ", "spanType": "span-simple-text" }, { "url": "https://clcouncil.org/economists-statement/", "children": [ { "text": "this letter supporting carbon pricing", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ".{/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "An alternative to a carbon price that many governments pursue is to rely on specific guidelines, but doing this well is an incredibly difficult task. A government with the goal to reduce emissions can try to regulate each specific sector and decide which types of production and consumption should be reduced or forbidden. But the planner who is tasked with doing this needs to have an enormous knowledge of all kinds of technologies, their carbon footprint, their cost, the possible alternatives, and their future potential. The carbon price is such an effective alternative to the central planner, because it doesn\u2019t require a central authority to have enormous knowledge. Instead it incentivizes everyone to reduce carbon emissions \u2013 since they are incentivized to save money \u2013 and thereby distributes the task of reducing emissions to ", "spanType": "span-simple-text" }, { "children": [ { "text": "everyone", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " \u2013 every producer, every investor, every consumer. Instead of one central agency, it incentivizes billions of people to search for ways to reduce their costs and thereby to find millions of solutions to reduce their emissions.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Another aspect that is convincing even to those who favour a small state is that if you want to have ", "spanType": "span-simple-text" }, { "children": [ { "text": "any public spending at all", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " \u2013 and very few want a state that is so small that neither roads nor the police are publicly funded \u2013\u00a0you have to raise state revenue ", "spanType": "span-simple-text" }, { "children": [ { "text": "somewhere", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ". The argument then is that if you have to have some taxes, it\u2019s better to tax something that harms people rather than something that we want to encourage, like work. There are big losers from a carbon price \u2013 the fossil fuel industry \u2013 but for citizens, the overall taxes do not have to increase: the carbon price is government revenue so that it can reduce taxes elsewhere. It is actually the other way around: the implicit subsidies to fossil fuels are costly and thereby increase taxes for everyone \u2013 as we have seen, the IMF estimates that the lack of carbon pricing means that governments lose 3.8% of GDP and this loss either means greater public debt or it has to be made up by all of us paying higher taxes.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Poorer households spend a larger share of their income on energy so that a carbon price would hit these households hardest. It is possible to avoid this consequence by making the poorest households benefit from the spending that the carbon tax allows. The famous call for a carbon tax signed by a large number of leading economists at ", "spanType": "span-simple-text" }, { "url": "https://www.econstatement.org/", "children": [ { "text": "econstatement.org", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " has this goal. \"To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in \u2018carbon dividends\u2019 than they pay in increased energy prices.\"", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "text": "What is stopping us?", "spanType": "span-simple-text" } ], "type": "heading", "level": 2, "parseErrors": [] }, { "type": "text", "value": [ { "text": "The world did make a start on carbon pricing. 78 different jurisdictions have implemented a carbon price and this year (2021) a price will be paid on 22% of the world\u2019s carbon emissions.{ref}All data points and references here refer to the 2020 issue: World Bank (2020) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://openknowledge.worldbank.org/handle/10986/33809", "children": [ { "text": "State and Trends of Carbon Pricing 2020", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". Washington, DC: World Bank. \u00a9 World Bank. License: CC BY 3.0 IGO.{/ref} 17 years ago a price was paid on much less than 1% of all emissions.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "But the carbon price is low in many places and the figures just cited mean that there is no monetary price on three-quarters of emissions.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Given all the arguments above, why is effective carbon pricing not implemented in many more places?\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "A big reason is of course that those that will lose out from carbon pricing \u2013 the fossil fuel industry \u2013 rally against them.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "But it is also the case that carbon pricing is not very popular among voters. Study after study finds that a key reason for this is that ", "spanType": "span-simple-text" }, { "children": [ { "text": "many do not believe that a price on carbon is actually effective in reducing emissions", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": ".{ref}See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Fr\u00e9d\u00e9ric Varone, and Frank V\u00f6hringer (2017) \u2013 \u201cGreen Taxes in a Post-Paris World: Are Millions of Nays Inevitable?\u201d Environ Resource Econ 68, 97\u2013128 (2017). ", "spanType": "span-simple-text" }, { "url": "https://doi.org/10.1007/s10640-017-0133-8.%7B/ref", "children": [ { "text": "https://doi.org/10.1007/s10640-017-0133-8", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "spanType": "span-newline" }, { "spanType": "span-newline" }, { "text": "Baranzini A, Carattini S (2017) \u2013 Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197\u2013227", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics", "children": [ { "text": "Making Carbon Pricing Work for Citizens", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". In Nature Climate Change 8, 669\u2013677. {/ref} While it is the effectiveness of carbon prices that makes them popular among experts, it is the perceived ineffectiveness that makes them unpopular among non-experts.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "But it is also the case that people change their mind about carbon prices when they learn that they do actually work.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics", "children": [ { "text": "Making Carbon Pricing Work for Citizens", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". In Nature Climate Change 8, 669\u2013677. {/ref} After the Swiss population rejected a carbon price in a referendum, a group of researchers \u2013 Carattini et al (2017){ref}Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Fr\u00e9d\u00e9ric Varone, and Frank V\u00f6hringer (2017) \u2013 \u201cGreen Taxes in a Post-Paris World: Are Millions of Nays Inevitable?\u201d Environ Resource Econ 68, 97\u2013128 (2017). ", "spanType": "span-simple-text" }, { "url": "https://doi.org/10.1007/s10640-017-0133-8.%7B/ref", "children": [ { "text": "https://doi.org/10.1007/s10640-017-0133-8", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " {/ref} \u2013 ran a study to investigate what could have made the proposal more popular. They found that \u201cthe effectiveness of energy taxes is not an established fact for the general public\u201d and their study showed that the most important successful argument in favour of the tax is information on the expected effectiveness in reducing emissions.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "It shouldn\u2019t be surprising that the communication of successful strategies is of such great importance. Many of us care a lot about climate change \u2013 people around the world ", "spanType": "span-simple-text" }, { "url": "https://www.pewresearch.org/global/2020/09/09/despite-pandemic-many-europeans-still-see-climate-change-as-greatest-threat-to-their-countries/", "children": [ { "text": "consistently view", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " it as one of the largest challenges that humanity faces \u2013 and at the same time many feel hopeless that we can actually do anything about it. Showing that there ", "spanType": "span-simple-text" }, { "children": [ { "text": "is", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " a way forward is key for the successful fight against climate change.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "text": [ { "text": "Empirical evidence: Does a price on carbon reduce carbon emissions?", "spanType": "span-simple-text" } ], "type": "heading", "level": 2, "parseErrors": [] }, { "type": "text", "value": [ { "text": "Back in 1991 Sweden was one of the first countries in the world to implement a carbon tax. Over time the carbon tax was gradually increased, but it still mainly affects the transport sector (around 90 percent of the revenues from the carbon tax come from the consumption of gasoline and motor diesel).{ref}The transport sector is of significant importance for Sweden\u2019s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden\u2019s total annual CO", "spanType": "span-simple-text" }, { "children": [ { "text": "2", "spanType": "span-simple-text" } ], "spanType": "span-subscript" }, { "text": " emissions.{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The researcher Julius Andersson studied whether the carbon price worked as intended by studying its impact on emissions from the transport sector.{ref}Julius J. Andersson (2019) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144", "children": [ { "text": "Carbon Taxes and CO2 Emissions: Sweden as a Case Study", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". American Economic Journal: Economic Policy. 11 (4): 1\u201330. doi:10.1257/pol.20170144. ISSN 1945-7731.{/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "He finds that \u201cCO", "spanType": "span-simple-text" }, { "children": [ { "text": "2", "spanType": "span-simple-text" } ], "spanType": "span-subscript" }, { "text": " emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone.\u201d A very strong effect.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "How did prosperity and emissions change in Sweden over this period? Average incomes in Sweden \u2013\u00a0GDP per capita \u2013 increased by 52% since the year before the tax was introduced, and emissions declined by 29%.{ref}In ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/grapher/consumption-co2-per-capita-vs-gdppc?endpointsOnly=1&time=2017..latest", "children": [ { "text": "this scatterplot of CO2 emissions vs GDP per capita", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.{/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Sweden\u2019s emissions are still far from where they need to be, but the direction of change \u2013 growing prosperity, but declining emissions \u2013 is right.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "And Sweden is not the only country that reduced emissions while growing the economy, as the chart shows.{ref}", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest&country=~SWE", "children": [ { "text": "In the interactive version of this chart", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " you can view this data for many more countries.{/ref} Shown in the chart are consumption-based CO", "spanType": "span-simple-text" }, { "children": [ { "text": "2", "spanType": "span-simple-text" } ], "spanType": "span-subscript" }, { "text": " emissions, which means that they account for the carbon emissions caused by products that were consumed within the country but which were produced elsewhere.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "alt": "", "size": "wide", "type": "image", "filename": "Absolute-decoupling-Growth-and-falling-emissions-all.png", "parseErrors": [] }, { "type": "text", "value": [ { "text": "Carbon pricing is not the only reason emissions are falling in these countries. As we just saw, the paper on Sweden attributes about half of the decline to the carbon tax. Other reasons include technological progress (such as rising efficiency and ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/cheap-renewables-growth", "children": [ { "text": "cheaper renewables", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": "), declining demand for energy, and other regulations (for example, on air pollution).\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Like all policies that are based on a price mechanism, the level of the price matters. If it is too low it won\u2019t have much of an effect. This is what Felix Pretis (2020) has found for the carbon tax in British Columbia.{ref}The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because \u201cexisting carbon taxes (and prices) are too low to be effective in the time frame since their introduction.\u201d", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Felix Pretis (2020) \u2013 Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria & Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.{/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "But in places that have a substantial carbon price, they can play an important role in reducing emissions, as a number of studies have shown.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "In a recent global study, researchers Best, Burke, and Jotzo (2020) analysed 142 countries and found that those that have a carbon price do, as one would expect, have lower CO", "spanType": "span-simple-text" }, { "children": [ { "text": "2", "spanType": "span-simple-text" } ], "spanType": "span-subscript" }, { "text": " emissions than those who do not.{ref}Best, R., Burke, P.J. & Jotzo, F. (2020) \u2013 Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69\u201394. ", "spanType": "span-simple-text" }, { "url": "https://doi.org/10.1007/s10640-020-00436-x", "children": [ { "text": "https://doi.org/10.1007/s10640-020-00436-x", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " {/ref}", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Germany too reduced emissions while becoming richer. The research by Petrick and Wagner (2014) showed how EU-wide carbon pricing contributed to this achievement.{ref}Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. ", "spanType": "span-simple-text" }, { "url": "https://econpapers.repec.org/RePEc:zbw:ifwkwp:1912", "children": [ { "text": "https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": "}{/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Countries in the European Union have established a cap-and-trade system called the ", "spanType": "span-simple-text" }, { "url": "https://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme", "children": [ { "text": "EU Emission Trading Scheme", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " (EU ETS). Recent research by Bayer and Akin showed that this system of carbon pricing has been effective in reducing emissions.{ref} Bayer, Patrick; Aklin, Micha\u00ebl (2020) \u2013 The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117{/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Lastly, let\u2019s look at the motherland of fossil-fuel-powered industrialization: the chart shows the sources of power production in the UK over the last century.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Electricity production in the UK has been dominated by coal since its early days; as soon as the light bulb was invented, the UK had its first coal power plant, the Holborn Viaduct power station in London. But this changed in recent decades, and especially rapidly after the UK introduced two carbon price systems.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The UK was already part of the EU ETS, but went even further in 2013 when the country implemented the \u2018carbon price floor\u2019: ", "spanType": "span-simple-text" }, { "url": "https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor", "children": [ { "text": "a top-up carbon tax", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " to the European system.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "In the decade before the tax was introduced one third of electricity in the UK came from coal, ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/safest-sources-of-energy", "children": [ { "text": "the worst of power sources", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". Since then the carbon tax \u201chas led to an unprecedented reduction in coal generation\u201d according to the research of Castagneto et al (2019).{ref}G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://www.ucl.ac.uk/bartlett/sustainable/sites/bartlett/files/ucl_report_ofgem_20102019_final.pdf", "children": [ { "text": "The value of international electricity trading", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". UCL and University of Cambridge. ", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "See also: Marion Leroutier (2021) \u2013 Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK. In Journal of Environmental Economics and Management.{/ref} In the years following the policy change, the share of electricity generated from coal declined to just 2%.{ref}These days it is common that the UK runs for ", "spanType": "span-simple-text" }, { "url": "https://www.theguardian.com/environment/ng-interactive/2019/may/25/the-power-switch-tracking-britains-record-coal-free-run", "children": [ { "text": "months without any coal electricity", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " at all, and like many countries that have a carbon price the UK has also ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest", "children": [ { "text": "achieved", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.{/ref}\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "As the share of electricity from fossil fuel sources declined, the carbon intensity of electricity production ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/grapher/carbon-intensity-electricity?tab=chart&time=2000..latest&country=~GBR", "children": [ { "text": "more than halved", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " and carbon emissions from power generation have ", "spanType": "span-simple-text" }, { "url": "https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972583/2020_Provisional_emissions_statistics_report.pdf", "children": [ { "text": "fallen ", "spanType": "span-simple-text" }, { "children": [ { "text": "by two-thirds", "spanType": "span-simple-text" } ], "spanType": "span-italic" } ], "spanType": "span-link" }, { "text": " in the UK!", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The Law of Demand \u2013 if the price of something goes up, consumption goes down \u2013 also holds in this case. Places that have implemented a substantial carbon price are achieving the intended effect, the consumption of carbon-intensive products declines and emissions fall.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "url": "https://ourworldindata.org/grapher/electricity-mix-uk?country=~GBR", "type": "chart", "parseErrors": [] }, { "url": "https://ourworldindata.org/shrink-emissions-not-the-economy", "type": "prominent-link", "title": "Shrink emissions, not the economy", "description": "If you want to understand why it is possible to reduce emissions while growing the economy, see this Our World in Data guest post by Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova that answers this question.", "parseErrors": [] }, { "text": [ { "text": "Conclusion", "spanType": "span-simple-text" } ], "type": "heading", "level": 2, "parseErrors": [] }, { "type": "text", "value": [ { "text": "What\u2019s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "The reason our societies are powered by fossil fuels is that they provided energy at the cheapest monetary price. If we want to transition away from fossil fuels and build a world that is powered by their alternatives we can rely on the price mechanism as well.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "What makes carbon pricing so powerful is that it is a policy that changes the entire system. No decision about any carbon-intensive activity escapes its influence: it changes the choices of consumers, producers, investors, entrepreneurs and innovators in all relevant sectors at once.\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "I want to make clear that I do not believe that carbon pricing can be the one policy change that will end climate change.{ref}On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) \u2013 ", "spanType": "span-simple-text" }, { "url": "https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions", "children": [ { "text": "Carbon Pricing and the Elasticity of CO2 Emissions", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ". INET Working Paper.{/ref} But the theory and evidence is clear that carbon prices work as intended and if we are able to end climate change in this century I would be surprised if we achieve this without putting a price on carbon. In other words, I don\u2019t think this is sufficient, but I do think it would be a key step towards a better future.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Our challenge is big. We need to build a new world that still solves the problems that fossil fuels solve today. Carbon-intensive goods and services are often in high demand today, because they are important for people. They have the unfortunate by-product of carbon emissions, but they solve other problems for us and everyone around us. Key to making the transition to a low-carbon future will be to innovate and scale-up alternatives. Carbon prices are useful for this transition because they give ", "spanType": "span-simple-text" }, { "children": [ { "text": "everyone", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " an incentive to get there, especially in ", "spanType": "span-simple-text" }, { "url": "https://ourworldindata.org/cheap-renewables-growth", "children": [ { "text": "those sectors where alternatives ", "spanType": "span-simple-text" }, { "children": [ { "text": "do", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " exist", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": ".\u00a0", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "And in those areas where low-carbon alternatives do not yet exist, support for research and development will be key. Because these two policies are working towards the same goal they ", "spanType": "span-simple-text" }, { "children": [ { "text": "complement", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " each other, a higher price on carbon provides an incentive to increase R&D.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "We", "spanType": "span-simple-text" }, { "children": [ { "text": " do", "spanType": "span-simple-text" } ], "spanType": "span-italic" }, { "text": " have options, and understanding them is not exactly rocket science. Consumption goes down, when prices go up. If we want to reduce carbon emissions we should not be paying people to burn fossil-fuels. We should end subsidies.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "What is hard, is to win the necessary political support for pricing carbon. The article linked below draws the political lessons from places that were successful in establishing carbon prices.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "I believe that putting a price on carbon is one of the most important goals to fight for in our lifetime. The current world is not sustainable and it is just not right that the richest have the highest emissions, while those who emit the least \u2013 the poorest and those who come after us \u2013 pay the highest price. Carbon pricing addresses the current injustice where we are allowing the richest to privately enjoy the gains from fossil fuels, while they pass off the costs to everyone else.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "If we are serious about decarbonizing the global economy \u2013 and building the low-carbon future \u2013 we should make the fight for a monetary price on carbon central to our efforts over the years ahead.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "children": [ { "text": "Acknowledgements:", "spanType": "span-simple-text" } ], "spanType": "span-bold" }, { "text": " I would like to thank Hannah Ritchie, Marcel Gerber, Charlie Giattino, Esteban Ortiz-Ospina for reading drafts of this text and for their very helpful comments and ideas.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "children": [ { "text": "Update:", "spanType": "span-simple-text" } ], "spanType": "span-bold" }, { "text": " I updated the figure that shows the decoupling of emissions and economic growth on September 3, 2022.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "If you want to think through the ", "spanType": "span-simple-text" }, { "children": [ { "text": "counterarguments to pricing carbon", "spanType": "span-simple-text" } ], "spanType": "span-bold" }, { "text": ", here is a list of references to get you started with:", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "list", "items": [ { "type": "text", "value": [ { "text": "One of the most widely discussed recent articles on the topic is ", "spanType": "span-simple-text" }, { "url": "https://bostonreview.net/science-nature-politics/leah-c-stokes-matto-mildenberger-trouble-carbon-pricing", "children": [ { "text": "The Trouble with Carbon Pricing", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " authored by Leah Stokes and Matto Mildenberger. As I emphasized above, the authors\u2019 main point is that while carbon prices make economic and environmental sense, it is difficult to get the political support that they need to be free of loopholes and to be high enough to make a difference. They also argue that it would be wrong to believe that no other policy is needed to bring emissions to zero. I largely agree with the authors. Carbon taxes cannot be the only solution \u2013 they emphasise clean energy standards, I\u2019d emphasise public R&D \u2013 but I disagree that this means we should not make it our political goal to put a price on carbon. I think they should be part of a big package of successful climate policy tools \u2013 carbon prices are one tool in our hands and we shouldn\u2019t weaken ourselves by throwing away solutions that we do have.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Ramez Naam wrote ", "spanType": "span-simple-text" }, { "url": "https://twitter.com/ramez/status/1094380540394795008", "children": [ { "text": "this very good Twitter thread", "spanType": "span-simple-text" } ], "spanType": "span-link" }, { "text": " on why carbon taxes are a good policy, but why he believes that subsidies for specific technologies can be even better in some cases.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Rosenbloom et al (2020) discuss the weaknesses of carbon pricing and offer their own alternative, which they call \u201csustainability transition policy\u201d,\u00a0 a \u201cmix of contextually and politically sensitive policies that simultaneously drive low-carbon innovation and the decline of fossil fuels\u201d.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Goulder et al. (2016) argue that implementing a closely related policy \u2013 a clean energy standard (CES) \u2013 can be more cost-effective than a carbon price.", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Lawrence H. Goulder, Marc A. C. Hafstead, Roberton C. Williams III (2016) \u2013 General Equilibrium Impacts of a Federal Clean Energy Standard. In the American Economic Journal: Economic Policy. VOL. 8, NO. 2, MAY 2016. (pp. 186-218).", "spanType": "span-simple-text" } ], "parseErrors": [] }, { "type": "text", "value": [ { "text": "Three more pointers:", "spanType": "span-simple-text" } ], "parseErrors": [] } ], "parseErrors": [] }, { "type": "text", "value": [ { "children": [ { "text": "Continue reading on Our World in Data:", "spanType": "span-simple-text" } ], "spanType": "span-italic" } ], "parseErrors": [] }, { "url": "https://ourworldindata.org/carbon-pricing-popular", "type": "prominent-link", "title": "Why is carbon pricing in some countries more successful than in others?", "description": "In some countries the public is very supportive of carbon taxes. In other countries they are largely against them.\u00a0", "parseErrors": [] } ], "type": "article", "title": "The argument for a carbon price", "authors": [ "Max Roser" ], "excerpt": "We are paying a price for fossil fuels, but that price is not paid by those that burn the fossil fuels \u2013 we need to change that.", "dateline": "June 1, 2021", "subtitle": "We are paying a price for fossil fuels, but that price is not paid by those that burn the fossil fuels \u2013 we need to change that.", "sidebar-toc": false, "featured-image": "Screen-Shot-2021-05-31-at-21.19.57.png" }, "createdAt": "2021-05-31T15:31:12.000Z", "published": false, "updatedAt": "2022-09-04T09:57:33.000Z", "revisionId": null, "publishedAt": "2021-06-01T10:30:00.000Z", "relatedCharts": [], "publicationContext": "listed" }	{ "errors": [ { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag list" }, { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag list" }, { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag list" }, { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag image" }, { "name": "unhandled html tag found", "details": "Encountered the unhandled tag hr" }, { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag separator" }, { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag spacer" }, { "name": "unhandled html tag found", "details": "Encountered the unhandled tag hr" }, { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag separator" }, { "name": "unexpected elements in list item", "details": "Found 2 elements" }, { "name": "unexpected elements in list item", "details": "Found 1 elements" }, { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag list" }, { "name": "unhandled html tag found", "details": "Encountered the unhandled tag hr" }, { "name": "unexpected wp component tag", "details": "Found unhandled wp:comment tag separator" } ], "numBlocks": 116, "numErrors": 14, "wpTagCounts": { "html": 2, "list": 4, "image": 1, "column": 2, "spacer": 1, "columns": 1, "heading": 9, "paragraph": 105, "separator": 3, "owid/summary": 1, "owid/prominent-link": 2 }, "htmlTagCounts": { "p": 106, "h4": 6, "h5": 3, "hr": 3, "ul": 7, "div": 5, "figure": 1, "iframe": 1 } }	2021-06-01 10:30:00	2024-02-16 14:22:51	1Ipzcq2jM8Puji3iatUcxr_C1M3CBTW2Kk0jg2-FssnU	[ "Max Roser" ]	We are paying a price for fossil fuels, but that price is not paid by those that burn the fossil fuels – we need to change that.	2021-05-31 15:31:12	2022-09-04 09:57:33	https://ourworldindata.org/wp-content/uploads/2021/05/Screen-Shot-2021-05-31-at-21.19.57.png	{}	Our World in Data presents the data and research to make progress against the world’s largest problems. This post draws on data and research discussed in our entry on [Greenhouse Gas Emissions](https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions). Some changes and updates were made after the text was first published. <Callout title="Summary"/> We are paying a price for burning fossil fuels and emitting greenhouse gases. Some of the consequences of climate change are already visible today, but the most severe consequences will hit us in the years and decades to come:{ref}See IPCC (2014) – [Climate Change 2014: Synthesis Report](https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf). Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp. * Box 2.2: “It is _very likely_ that heat waves will occur more often and last longer, and that extreme precipitation events will become more intense and frequent in many regions. The ocean will continue to warm and acidify, and global mean sea level to rise.” * Box 2.3: “Risks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development.” On the risk to biodiversity see Urban, Mark C. (2015). ["Accelerating extinction risk from climate change"](https://science.sciencemag.org/content/348/6234/571). In Science. 348 (6234): 571–573. For a larger overview see Wikipedia’s pages on the [Effects of Climate Change](https://en.wikipedia.org/wiki/Effects_of_climate_change) and [the relevant section on their page on climate change](https://en.wikipedia.org/wiki/Climate_change#Effects).{/ref} These consequences include the negative economic impacts of climate change through its effects on people’s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for [the world’s poorest people](https://owid.cloud/extreme-poverty) they pose a threat to their lives, as they increase the risk of hunger and food insecurity. Climate change isn’t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in [countries around the world](https://ourworldindata.org/grapher/pollution-deaths-from-fossil-fuels?stackMode=absolute&region=World) every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.{ref}In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels. Lelieveld, J., Klingmüller, K., Pozzer, A., Burnett, R. T., Haines, A., & Ramanathan, V. (2019). [Effects of fossil fuel and total anthropogenic emission removal on public health and climate](https://www.pnas.org/content/116/15/7192/). Proceedings of the National Academy of Sciences, 116(15), 7192-7197 The death toll of the three counts of violence for 2017 [according to the IHME](https://ourworldindata.org/grapher/annual-number-of-deaths-by-cause) is 561,511. • Homicides: 405,346 deaths • War battles: 129,720 deaths • Terrorism: 26,445 deaths The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study – Vohra et al (2021) – estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels. Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., & Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. _Environmental Research_, _195_, 110754.[ https://doi.org/10.1016/j.envres.2021.110754](https://doi.org/10.1016/j.envres.2021.110754).{/ref} _This_ is the price we are _already_ paying for burning fossil fuels. The International Monetary Fund (IMF) estimates the sum of these costs in a major study that they update regularly. The title of the study is _‘How Large Are Global Fossil Fuel Subsidies?’_ and in the study’s latest issue the researchers estimate them to amount to US-$ 5.2 trillion.{ref}The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) – How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. [https://doi.org/10.1016/j.worlddev.2016.10.004](https://doi.org/10.1016/j.worlddev.2016.10.004) In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) – [Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates](https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=doi.org%2F10.5089%2F9781484393178.001&btnG=). Published as an IMF Working Paper. In my text I am citing the latest figures of the authors. By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent). Coal: $5,200 billion * 0.44 = $2,288 billion Oil: $5,200 billion * 0.41 = $2,132 billion Natural gas: $5,200 billion * 0.1 = $520 billion Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that “the subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.”, This data is according to the [International Renewable Energy Agency (2020) – Energy subsidies](https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Energy_subsidies_2020.pdf) Unfortunately this source does not break down the subsidies to renewables by source of energy. The [energy production from these sources](https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&time=earliest..latest) in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455). This means the subsidy per TWh of energy is: Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies. What I am calling explicit subsidies is called “pre-tax subsidies” by these authors. What I am calling implicit subsidies is called “post-tax subsidies” by these authors. {/ref} This is equivalent to 6.5% of global GDP. As the study’s title makes clear, the IMF sees the sum of damage done by fossil fuels as a _subsidy_. That might be surprising at first, but it makes sense if you think about it. A good is subsidized when consumers and producers of that good do not have to pay the full cost for it. This can either be an _explicit subsidy_, for example when governments pay for the school education of the country’s children, or it can be an _implicit subsidy_, when producers and consumers cause damage, but do not have to pay a monetary price for it.{ref}One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost. An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.{/ref} You find examples of both types of subsidies in your own life. If you pay for you and your neighbour’s dinner then you are _explicitly _subsidizing them. If your neighbour crashes into your car and you do not charge him for the damage he caused, you are _implicitly _subsidizing them. Fossil fuels are subsidized in both ways. They are [explicitly subsidized in many places](https://ourworldindata.org/grapher/fossil-fuel-subsidies-per-capita?time=2015), and they are implicitly subsidized _everywhere_, as the consumers and producers of fossil fuels do not have to pay the monetary cost for the damage they cause. Ending the subsidies to fossil fuels would mean to put a monetary price on them that corresponds to the damage they do. Since the alternatives to fossil fuels are both [cleaner and safer](https://ourworldindata.org/safest-sources-of-energy) this would allow the world to make massive progress according to the IMF study: Ending these subsidies and pricing them into the cost that producers and consumers have to pay for fossil fuels would substantially decrease global carbon emissions and save the lives of people who would otherwise be killed by air pollution.{ref}The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it's undeniable that the costs are very large.{/ref} The damage caused by burning fossil fuels is a textbook example of what economists call an externality: Putting a monetary price on carbon emissions makes it possible to internalize the costs of the negative impact on our health, the environment, and future generations.{ref}The [free online textbook CORE ECON](https://www.core-econ.org/the-economy/book/text/12.html) provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.{/ref} ## This means that we do not have the option to not pay a price It is a mistake to think that it is possible to not pay for emitting carbon. As we have just seen, _we __are__ already paying a price_. This is the economists’ argument for putting an explicit monetary price on carbon emissions. ### What would change if we put a monetary price on carbon? There are two ways in which a carbon price can be implemented: a carbon tax or a ‘cap and trade’ system:{ref}Some alternatives to carbon taxes and cap and trade – such as clean energy standards or regulations – can be viewed as implicit prices on carbon emissions. It's a core result in resource economics that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON [here](https://www.core-econ.org/the-economy/book/text/20.html).{/ref} * In a ‘cap and trade’ system the carbon price changes over time. A maximum level of pollution (a ‘cap’) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap. * A carbon tax is simply a levy that is applied to all goods and services which lead to carbon emissions in their production. In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive. This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they’re not available yet producers will be incentivised to develop low-carbon alternatives. Carbon pricing changes the relative prices between carbon-intensive and low-carbon products and this changes consumption choices towards a low-carbon lifestyle: Carbon prices make it more likely that we rely on low-carbon electricity rather than fossil fuels; that we take the bicycle rather than the car; that we buy the smaller car rather than the bigger one; that we buy electric vehicles rather than gas-powered ones; that we eat [chicken rather than beef](https://ourworldindata.org/food-choice-vs-eating-local); or that we organize a video conference rather than an event that is a flight away. Both of the intended consequences – transition to and innovation of alternative low-carbon technologies – increase with the carbon price. The incentive for consumers and entrepreneurs is to reduce their emissions whenever doing so costs them less than paying the carbon price. Because access to energy often constitutes a large share of the budget of poorer families, successful carbon pricing policies include support for those households to offset the increased cost of energy.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – [Making Carbon Pricing Work for Citizens](https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics). In Nature Climate Change 8, 669–677.{/ref} In the case of a carbon tax, the government revenue can be used to finance this support for poorer households and it can also be used to pay for additional measures that slow down climate change and support environmental regeneration: including [reforestation](https://ourworldindata.org/afforestation), more walkable and cyclable cities, or research and development for renewable energy and low-carbon technologies. With a carbon price one can establish a mechanism that ensures that those who are causing emissions are those who pay for the countermeasures that benefit society and the environment. ## A carbon price allows us to make two decisions Levying a monetary price on emissions allows us to choose our answer to two important questions: _Who_ should pay the price for carbon emissions? _How much_ do we want them to pay for emitting greenhouse gases? ### _Who_ should pay the price for emitting greenhouse gases? At the most fundamental level the argument for carbon pricing is the hard truth that we have to pay a price for carbon emissions. What we can decide is who pays for them. The status quo in a society without carbon pricing could not be more brutal: * The people who live in high-income countries – those who enjoy the best living conditions in human history – are those who will be least affected by climate change, yet they are [the ones with the highest emissions](https://ourworldindata.org/worlds-energy-problem). * The people who will be most affected by the negative consequences of a hotter planet are those that have contributed the least to climate change: the poorest people in the world – who are at risk of increasing food insecurity and do not have the resources to adapt to changes as rapidly – and the generations that come after us. Without a monetary price on carbon it is those who have the lowest emissions that pay the most. With carbon pricing we make sure that those who cause emissions also pay for them. Because emissions rise with income, a carbon price ensures that it will be the rich who pay most.{ref}That they pay the most is a statement about absolute spending. As explained below, the _relative_ spending on energy is often highest for poorer households.{/ref} For the very rich it is the case that a few consumption choices – flights, large cars, meat – are responsible for the bulk of their emissions.{ref}Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1–12. [https://doi.org/10.1017/sus.2020.12](https://doi.org/10.1017/sus.2020.12).{/ref} Carbon pricing is a policy targeted to address these consumption choices, it makes carbon-intensive goods less affordable and ‘degrows’ the consumption of those goods. ### _How much_ do we make people pay for emitting greenhouse gases? The second decision that we can influence with a price on carbon is: _How much_ do we want to pay for fossil fuels? If we continue emitting high volumes of greenhouse gases we will cause severe climate change and eventually have to pay a high price from the damages. Several studies find that if we don’t achieve a reduction in emissions now, economic growth would be much lower in the decades ahead (and that surely wouldn’t be our main concern in such a future).{ref}On the relation between future warming and growth see: Pretis, F., Schwarz, M., Tang, K., Haustein, K., & Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5°C or 2°C warming. _Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences_, _376_(2119), 20160460.[ https://doi.org/10.1098/rsta.2016.0460 ](https://doi.org/10.1098/rsta.2016.0460) Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. _Nature_, _527_(7577), 235–239.[ https://doi.org/10.1038/nature15725](https://doi.org/10.1038/nature15725) {/ref} Levying a fee on carbon emissions can be a key policy to bring down emissions quickly so that we avoid large costs in the future. In the past many macroeconomists considered the need to cut emissions as a drag on the economy that lowers economic growth. This idea, that decarbonisation of our economies conflicts with economic growth, is still shared by many.{ref}In [a guest post for Our World in Data](https://ourworldindata.org/shrink-emissions-not-the-economy) Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this: _“Ironically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed “degrowth”). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.”_{/ref} But this is no longer the mainstream view. The latest annual IMF report estimates that policies, including carbon pricing, that mitigate climate change actually _increase_ economic growth over the coming decades.{ref}[World Economic Outlook, October 2020: A Long and Difficult Ascent](https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020). In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.{/ref} This means that there is no trade-off between fighting climate change and economic growth. Fighting climate change is a way to achieve _more growth_.{ref}Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2°C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, _relative to a baseline growth of 1.6% to 3%_. In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today’s economy. With measures in place to limit warming to 2°C, growth would be 0.06% smaller – i.e. 1.54% per year. The world economy would then ‘only' be 461% of the size of today. In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today’s economy. With measures to limit warming to 2°C, growth would be 0.06% smaller – i.e. 2.94% per year. The economy would then ‘only' be 1813% the size of today. This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2°C. The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions. See: Edenhofer et al. (2014). [IPCC, 2014: Summary for Policymakers](https://www.ipcc.ch/report/ar5/wg3/). In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. See also: IPCC (2014) – [Climate Change 2014: Synthesis Report](https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf). Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp. [https://www.sciencedirect.com/science/article/pii/S0095069617308707](https://www.sciencedirect.com/science/article/pii/S0095069617308707) {/ref} From the responses to my recent writing on [the need of growth for ending poverty](https://ourworldindata.org/poverty-minimum-growth-needed) I saw that some people have not caught up with this. Fighting climate change is not just compatible with fighting poverty, the two goals — to reduce emissions and to increase economic growth — actually _strengthen_ each other. It is very good news that fighting climate change is expected to increase growth over the coming decades, but the benefits to climate mitigation are larger than just additional growth: it also means a modernisation of key infrastructure, faster innovation, the protection of the biosphere on our planet, and the major health benefits of reduced air pollution caused by burning fossil fuels, including millions of lives saved. Taking both the costs and benefits into account makes a very clear argument for climate action now. Putting a price on carbon to build a low-carbon world is an investment for a much better future. ## For once even economists agree Economists are not known for agreeing much with one another. But regarding the challenge of how to reduce greenhouse gas emissions there is more agreement among economists than in perhaps any other big policy question. What is particularly encouraging is that this is a policy that is supported by both left- and right-leaning economists. That left-leaning economists are in favour of a tax that will mostly be paid for by richer people is not surprising. It is perhaps more surprising that many right-leaning economists – who are generally in favor of a small state with only minimal taxes – are also in favor. Economists on the conservative side of the spectrum, such as Greg Mankiw, [advocate strongly for a carbon tax](https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf) and widespread support for carbon taxes of economists across the political spectrum is documented in many relevant surveys.{ref}The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly [asked them about their opinion on a carbon tax](https://www.igmchicago.org/?s=carbon+tax) and invariably finds large support for such a tax. See also the survey of 365 economists who have published papers related to climate change “in a highly ranked, peer-reviewed economics or environmental economics journal” conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published [here](https://policyintegrity.org/files/publications/ExpertConsensusReport.pdf). (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now – see Figure 2a.) In a 2006 survey of the American Economic Association, 65% agreed that “the US should increase energy taxes”. Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists’ Voice, 3(9). The Wall Street Journal asked business economists in 2007, ‘‘What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?’’ 54 percent advocated for ‘‘taxes that raise the cost of purchasing fossil fuels’’. Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007. Keohane, M. N. O., & Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington. Last year over 3,500 economists, including twenty-seven Nobel laureates, signed [this letter supporting carbon pricing](https://clcouncil.org/economists-statement/).{/ref} An alternative to a carbon price that many governments pursue is to rely on specific guidelines, but doing this well is an incredibly difficult task. A government with the goal to reduce emissions can try to regulate each specific sector and decide which types of production and consumption should be reduced or forbidden. But the planner who is tasked with doing this needs to have an enormous knowledge of all kinds of technologies, their carbon footprint, their cost, the possible alternatives, and their future potential. The carbon price is such an effective alternative to the central planner, because it doesn’t require a central authority to have enormous knowledge. Instead it incentivizes everyone to reduce carbon emissions – since they are incentivized to save money – and thereby distributes the task of reducing emissions to _everyone_ – every producer, every investor, every consumer. Instead of one central agency, it incentivizes billions of people to search for ways to reduce their costs and thereby to find millions of solutions to reduce their emissions. Another aspect that is convincing even to those who favour a small state is that if you want to have _any public spending at all_ – and very few want a state that is so small that neither roads nor the police are publicly funded – you have to raise state revenue _somewhere_. The argument then is that if you have to have some taxes, it’s better to tax something that harms people rather than something that we want to encourage, like work. There are big losers from a carbon price – the fossil fuel industry – but for citizens, the overall taxes do not have to increase: the carbon price is government revenue so that it can reduce taxes elsewhere. It is actually the other way around: the implicit subsidies to fossil fuels are costly and thereby increase taxes for everyone – as we have seen, the IMF estimates that the lack of carbon pricing means that governments lose 3.8% of GDP and this loss either means greater public debt or it has to be made up by all of us paying higher taxes. Poorer households spend a larger share of their income on energy so that a carbon price would hit these households hardest. It is possible to avoid this consequence by making the poorest households benefit from the spending that the carbon tax allows. The famous call for a carbon tax signed by a large number of leading economists at [econstatement.org](https://www.econstatement.org/) has this goal. "To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in ‘carbon dividends’ than they pay in increased energy prices." ## What is stopping us? The world did make a start on carbon pricing. 78 different jurisdictions have implemented a carbon price and this year (2021) a price will be paid on 22% of the world’s carbon emissions.{ref}All data points and references here refer to the 2020 issue: World Bank (2020) – [State and Trends of Carbon Pricing 2020](https://openknowledge.worldbank.org/handle/10986/33809). Washington, DC: World Bank. © World Bank. License: CC BY 3.0 IGO.{/ref} 17 years ago a price was paid on much less than 1% of all emissions. But the carbon price is low in many places and the figures just cited mean that there is no monetary price on three-quarters of emissions. Given all the arguments above, why is effective carbon pricing not implemented in many more places? A big reason is of course that those that will lose out from carbon pricing – the fossil fuel industry – rally against them. But it is also the case that carbon pricing is not very popular among voters. Study after study finds that a key reason for this is that _many do not believe that a price on carbon is actually effective in reducing emissions_.{ref}See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). [https://doi.org/10.1007/s10640-017-0133-8](https://doi.org/10.1007/s10640-017-0133-8.%7B/ref) Baranzini A, Carattini S (2017) – Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197–227 and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – [Making Carbon Pricing Work for Citizens](https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics). In Nature Climate Change 8, 669–677. {/ref} While it is the effectiveness of carbon prices that makes them popular among experts, it is the perceived ineffectiveness that makes them unpopular among non-experts. But it is also the case that people change their mind about carbon prices when they learn that they do actually work.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – [Making Carbon Pricing Work for Citizens](https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics). In Nature Climate Change 8, 669–677. {/ref} After the Swiss population rejected a carbon price in a referendum, a group of researchers – Carattini et al (2017){ref}Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). [https://doi.org/10.1007/s10640-017-0133-8](https://doi.org/10.1007/s10640-017-0133-8.%7B/ref) {/ref} – ran a study to investigate what could have made the proposal more popular. They found that “the effectiveness of energy taxes is not an established fact for the general public” and their study showed that the most important successful argument in favour of the tax is information on the expected effectiveness in reducing emissions. It shouldn’t be surprising that the communication of successful strategies is of such great importance. Many of us care a lot about climate change – people around the world [consistently view](https://www.pewresearch.org/global/2020/09/09/despite-pandemic-many-europeans-still-see-climate-change-as-greatest-threat-to-their-countries/) it as one of the largest challenges that humanity faces – and at the same time many feel hopeless that we can actually do anything about it. Showing that there _is_ a way forward is key for the successful fight against climate change. ## Empirical evidence: Does a price on carbon reduce carbon emissions? Back in 1991 Sweden was one of the first countries in the world to implement a carbon tax. Over time the carbon tax was gradually increased, but it still mainly affects the transport sector (around 90 percent of the revenues from the carbon tax come from the consumption of gasoline and motor diesel).{ref}The transport sector is of significant importance for Sweden’s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden’s total annual CO2 emissions.{/ref} The researcher Julius Andersson studied whether the carbon price worked as intended by studying its impact on emissions from the transport sector.{ref}Julius J. Andersson (2019) – [Carbon Taxes and CO2 Emissions: Sweden as a Case Study](https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144). American Economic Journal: Economic Policy. 11 (4): 1–30. doi:10.1257/pol.20170144. ISSN 1945-7731.{/ref} He finds that “CO2 emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone.” A very strong effect. How did prosperity and emissions change in Sweden over this period? Average incomes in Sweden – GDP per capita – increased by 52% since the year before the tax was introduced, and emissions declined by 29%.{ref}In [this scatterplot of CO2 emissions vs GDP per capita](https://ourworldindata.org/grapher/consumption-co2-per-capita-vs-gdppc?endpointsOnly=1&time=2017..latest) you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.{/ref} Sweden’s emissions are still far from where they need to be, but the direction of change – growing prosperity, but declining emissions – is right. And Sweden is not the only country that reduced emissions while growing the economy, as the chart shows.{ref}[In the interactive version of this chart](https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest&country=~SWE) you can view this data for many more countries.{/ref} Shown in the chart are consumption-based CO2 emissions, which means that they account for the carbon emissions caused by products that were consumed within the country but which were produced elsewhere. <Image filename="Absolute-decoupling-Growth-and-falling-emissions-all.png" alt=""/> Carbon pricing is not the only reason emissions are falling in these countries. As we just saw, the paper on Sweden attributes about half of the decline to the carbon tax. Other reasons include technological progress (such as rising efficiency and [cheaper renewables](https://ourworldindata.org/cheap-renewables-growth)), declining demand for energy, and other regulations (for example, on air pollution). Like all policies that are based on a price mechanism, the level of the price matters. If it is too low it won’t have much of an effect. This is what Felix Pretis (2020) has found for the carbon tax in British Columbia.{ref}The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because “existing carbon taxes (and prices) are too low to be effective in the time frame since their introduction.” Felix Pretis (2020) – Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria & Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.{/ref} But in places that have a substantial carbon price, they can play an important role in reducing emissions, as a number of studies have shown. In a recent global study, researchers Best, Burke, and Jotzo (2020) analysed 142 countries and found that those that have a carbon price do, as one would expect, have lower CO2 emissions than those who do not.{ref}Best, R., Burke, P.J. & Jotzo, F. (2020) – Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69–94. [https://doi.org/10.1007/s10640-020-00436-x](https://doi.org/10.1007/s10640-020-00436-x) {/ref} Germany too reduced emissions while becoming richer. The research by Petrick and Wagner (2014) showed how EU-wide carbon pricing contributed to this achievement.{ref}Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. [https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912](https://econpapers.repec.org/RePEc:zbw:ifwkwp:1912)}{/ref} Countries in the European Union have established a cap-and-trade system called the [EU Emission Trading Scheme](https://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme) (EU ETS). Recent research by Bayer and Akin showed that this system of carbon pricing has been effective in reducing emissions.{ref} Bayer, Patrick; Aklin, Michaël (2020) – The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117{/ref} Lastly, let’s look at the motherland of fossil-fuel-powered industrialization: the chart shows the sources of power production in the UK over the last century. Electricity production in the UK has been dominated by coal since its early days; as soon as the light bulb was invented, the UK had its first coal power plant, the Holborn Viaduct power station in London. But this changed in recent decades, and especially rapidly after the UK introduced two carbon price systems. The UK was already part of the EU ETS, but went even further in 2013 when the country implemented the ‘carbon price floor’: [a top-up carbon tax](https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor) to the European system. In the decade before the tax was introduced one third of electricity in the UK came from coal, [the worst of power sources](https://ourworldindata.org/safest-sources-of-energy). Since then the carbon tax “has led to an unprecedented reduction in coal generation” according to the research of Castagneto et al (2019).{ref}G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) – [The value of international electricity trading](https://www.ucl.ac.uk/bartlett/sustainable/sites/bartlett/files/ucl_report_ofgem_20102019_final.pdf). UCL and University of Cambridge. See also: Marion Leroutier (2021) – Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK. In Journal of Environmental Economics and Management.{/ref} In the years following the policy change, the share of electricity generated from coal declined to just 2%.{ref}These days it is common that the UK runs for [months without any coal electricity](https://www.theguardian.com/environment/ng-interactive/2019/may/25/the-power-switch-tracking-britains-record-coal-free-run) at all, and like many countries that have a carbon price the UK has also [achieved](https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest) an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.{/ref} As the share of electricity from fossil fuel sources declined, the carbon intensity of electricity production [more than halved](https://ourworldindata.org/grapher/carbon-intensity-electricity?tab=chart&time=2000..latest&country=~GBR) and carbon emissions from power generation have [fallen _by two-thirds_](https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972583/2020_Provisional_emissions_statistics_report.pdf) in the UK! The Law of Demand – if the price of something goes up, consumption goes down – also holds in this case. Places that have implemented a substantial carbon price are achieving the intended effect, the consumption of carbon-intensive products declines and emissions fall. <Chart url="https://ourworldindata.org/grapher/electricity-mix-uk?country=~GBR"/> ### Shrink emissions, not the economy If you want to understand why it is possible to reduce emissions while growing the economy, see this Our World in Data guest post by Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova that answers this question. https://ourworldindata.org/shrink-emissions-not-the-economy ## Conclusion What’s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have. The reason our societies are powered by fossil fuels is that they provided energy at the cheapest monetary price. If we want to transition away from fossil fuels and build a world that is powered by their alternatives we can rely on the price mechanism as well. What makes carbon pricing so powerful is that it is a policy that changes the entire system. No decision about any carbon-intensive activity escapes its influence: it changes the choices of consumers, producers, investors, entrepreneurs and innovators in all relevant sectors at once. I want to make clear that I do not believe that carbon pricing can be the one policy change that will end climate change.{ref}On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) – [Carbon Pricing and the Elasticity of CO2 Emissions](https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions). INET Working Paper.{/ref} But the theory and evidence is clear that carbon prices work as intended and if we are able to end climate change in this century I would be surprised if we achieve this without putting a price on carbon. In other words, I don’t think this is sufficient, but I do think it would be a key step towards a better future. Our challenge is big. We need to build a new world that still solves the problems that fossil fuels solve today. Carbon-intensive goods and services are often in high demand today, because they are important for people. They have the unfortunate by-product of carbon emissions, but they solve other problems for us and everyone around us. Key to making the transition to a low-carbon future will be to innovate and scale-up alternatives. Carbon prices are useful for this transition because they give _everyone_ an incentive to get there, especially in [those sectors where alternatives _do_ exist](https://ourworldindata.org/cheap-renewables-growth). And in those areas where low-carbon alternatives do not yet exist, support for research and development will be key. Because these two policies are working towards the same goal they _complement_ each other, a higher price on carbon provides an incentive to increase R&D. We_ do_ have options, and understanding them is not exactly rocket science. Consumption goes down, when prices go up. If we want to reduce carbon emissions we should not be paying people to burn fossil-fuels. We should end subsidies. What is hard, is to win the necessary political support for pricing carbon. The article linked below draws the political lessons from places that were successful in establishing carbon prices. I believe that putting a price on carbon is one of the most important goals to fight for in our lifetime. The current world is not sustainable and it is just not right that the richest have the highest emissions, while those who emit the least – the poorest and those who come after us – pay the highest price. Carbon pricing addresses the current injustice where we are allowing the richest to privately enjoy the gains from fossil fuels, while they pass off the costs to everyone else. If we are serious about decarbonizing the global economy – and building the low-carbon future – we should make the fight for a monetary price on carbon central to our efforts over the years ahead. Acknowledgements: I would like to thank Hannah Ritchie, Marcel Gerber, Charlie Giattino, Esteban Ortiz-Ospina for reading drafts of this text and for their very helpful comments and ideas. Update: I updated the figure that shows the decoupling of emissions and economic growth on September 3, 2022. If you want to think through the counterarguments to pricing carbon, here is a list of references to get you started with: * One of the most widely discussed recent articles on the topic is [The Trouble with Carbon Pricing](https://bostonreview.net/science-nature-politics/leah-c-stokes-matto-mildenberger-trouble-carbon-pricing) authored by Leah Stokes and Matto Mildenberger. As I emphasized above, the authors’ main point is that while carbon prices make economic and environmental sense, it is difficult to get the political support that they need to be free of loopholes and to be high enough to make a difference. They also argue that it would be wrong to believe that no other policy is needed to bring emissions to zero. I largely agree with the authors. Carbon taxes cannot be the only solution – they emphasise clean energy standards, I’d emphasise public R&D – but I disagree that this means we should not make it our political goal to put a price on carbon. I think they should be part of a big package of successful climate policy tools – carbon prices are one tool in our hands and we shouldn’t weaken ourselves by throwing away solutions that we do have. * Ramez Naam wrote [this very good Twitter thread](https://twitter.com/ramez/status/1094380540394795008) on why carbon taxes are a good policy, but why he believes that subsidies for specific technologies can be even better in some cases. * Rosenbloom et al (2020) discuss the weaknesses of carbon pricing and offer their own alternative, which they call “sustainability transition policy”, a “mix of contextually and politically sensitive policies that simultaneously drive low-carbon innovation and the decline of fossil fuels”. * Goulder et al. (2016) argue that implementing a closely related policy – a clean energy standard (CES) – can be more cost-effective than a carbon price. * Lawrence H. Goulder, Marc A. C. Hafstead, Roberton C. Williams III (2016) – General Equilibrium Impacts of a Federal Clean Energy Standard. In the American Economic Journal: Economic Policy. VOL. 8, NO. 2, MAY 2016. (pp. 186-218). * Three more pointers: _Continue reading on Our World in Data:_ ### Why is carbon pricing in some countries more successful than in others? In some countries the public is very supportive of carbon taxes. In other countries they are largely against them. https://ourworldindata.org/carbon-pricing-popular	{ "id": 43232, "date": "2021-06-01T11:30:00", "guid": { "rendered": "https://owid.cloud/?p=43232" }, "link": "https://owid.cloud/carbon-price", "meta": { "owid_publication_context_meta_field": { "latest": true, "homepage": true, "immediate_newsletter": true } }, "slug": "carbon-price", "tags": [], "type": "post", "title": { "rendered": "The argument for a carbon price" }, "_links": { "self": [ { "href": "https://owid.cloud/wp-json/wp/v2/posts/43232" } ], "about": [ { "href": "https://owid.cloud/wp-json/wp/v2/types/post" } ], "author": [ { "href": "https://owid.cloud/wp-json/wp/v2/users/2", "embeddable": true } ], "curies": [ { "href": "https://api.w.org/{rel}", "name": "wp", "templated": true } ], "replies": [ { "href": "https://owid.cloud/wp-json/wp/v2/comments?post=43232", "embeddable": true } ], "wp:term": [ { "href": "https://owid.cloud/wp-json/wp/v2/categories?post=43232", "taxonomy": "category", "embeddable": true }, { "href": "https://owid.cloud/wp-json/wp/v2/tags?post=43232", "taxonomy": "post_tag", "embeddable": true } ], "collection": [ { "href": "https://owid.cloud/wp-json/wp/v2/posts" } ], "wp:attachment": [ { "href": "https://owid.cloud/wp-json/wp/v2/media?parent=43232" } ], "version-history": [ { "href": "https://owid.cloud/wp-json/wp/v2/posts/43232/revisions", "count": 25 } ], "wp:featuredmedia": [ { "href": "https://owid.cloud/wp-json/wp/v2/media/43248", "embeddable": true } ], "predecessor-version": [ { "id": 52674, "href": "https://owid.cloud/wp-json/wp/v2/posts/43232/revisions/52674" } ] }, "author": 2, "format": "standard", "status": "publish", "sticky": false, "content": { "rendered": "\n<div class=\"blog-info\">\n<p>Our World in Data presents the data and research to make progress against the world\u2019s largest problems.<br>This post draws on data and research discussed in our entry on <strong><a href=\"https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions\" target=\"_blank\" rel=\"noopener noreferrer\">Greenhouse Gas Emissions</a></strong>. Some changes and updates were made after the text was first published.</p>\n</div>\n\n\n\t<div class=\"wp-block-owid-summary\">\n\t\t<h2>Summary</h2>\n\t\t\n\n<p>It is a mistake to believe that we are not paying for emitting greenhouse gases. Even if we do not pay a <em>monetary</em> price for carbon emissions we do pay a very large price, the consequences of climate change.</p>\n\n\n\n<p>Without a monetary carbon price it is those who have the smallest emissions that suffer the largest costs from climate change. A carbon price, in contrast, means that those who cause the emissions also pay for them.</p>\n\n\n\n<p>A key reason why voters are not in favour of carbon pricing is that many believe it won\u2019t actually reduce emissions, but empirical research and theory show that this is wrong: pricing carbon emissions \u2013 either via a carbon tax or a \u2018cap and trade\u2019-system \u2013 is effective. It shifts production and consumption from carbon-intensive goods and services to low-carbon alternatives and does reduce emissions.</p>\n\n\n\n<p>Many are deeply concerned about climate change yet feel hopeless that anything can be done to meet this challenge. Increasing the understanding that carbon pricing works, correcting common misconceptions, and showing that there <em>is</em> a way forward are key steps for a successful fight against climate change.</p>\n\n\n\n<p>I believe a carbon price should be complemented by other policies and in this article I make the case that it is one of the most important policy options we have to achieve a better future.</p>\n\n\n\t</div>\n\n\n<p>We are paying a price for burning fossil fuels and emitting greenhouse gases.</p>\n\n\n\n<p>Some of the consequences of climate change are already visible today, but the most severe consequences will hit us in the years and decades to come:{ref}See IPCC (2014) \u2013 <a href=\"https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf\">Climate Change 2014: Synthesis Report</a>. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.</p>\n\n\n\n<ul><li>Box 2.2: \u201cIt is <em>very likely</em> that <strong>heat waves</strong> will occur more often and last longer, and that <strong>extreme precipitation</strong> events will become more intense and frequent in many regions. The ocean will <strong>continue to warm and acidify</strong>, and <strong>global mean sea level to rise</strong>.\u201d</li><li>Box 2.3: \u201cRisks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development.\u201d</li></ul>\n\n\n\n<p>On the risk to biodiversity see Urban, Mark C. (2015). <a href=\"https://science.sciencemag.org/content/348/6234/571\">“Accelerating extinction risk from climate change”</a>. In Science. 348 (6234): 571\u2013573.</p>\n\n\n\n<p>For a larger overview see Wikipedia\u2019s pages on the <a href=\"https://en.wikipedia.org/wiki/Effects_of_climate_change\">Effects of Climate Change</a> and <a href=\"https://en.wikipedia.org/wiki/Climate_change#Effects\">the relevant section on their page on climate change</a>.{/ref}</p>\n\n\n\n<p>These consequences include the negative economic impacts of climate change through its effects on people\u2019s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for <a href=\"https://owid.cloud/extreme-poverty\" data-type=\"page\" data-id=\"1701\">the world\u2019s poorest people</a> they pose a threat to their lives, as they increase the risk of hunger and food insecurity.</p>\n\n\n\n<p>Climate change isn\u2019t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in <a href=\"https://ourworldindata.org/grapher/pollution-deaths-from-fossil-fuels?stackMode=absolute&region=World\">countries around the world</a> every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.{ref}In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels. </p>\n\n\n\n<p>Lelieveld, J., Klingm\u00fcller, K., Pozzer, A., Burnett, R. T., Haines, A., & Ramanathan, V. (2019). <a href=\"https://www.pnas.org/content/116/15/7192/\">Effects of fossil fuel and total anthropogenic emission removal on public health and climate</a>. Proceedings of the National Academy of Sciences, 116(15), 7192-7197<br><br>The death toll of the three counts of violence for 2017 <a href=\"https://ourworldindata.org/grapher/annual-number-of-deaths-by-cause\">according to the IHME</a> is 561,511.<br>\u2022 Homicides: 405,346 deaths<br>\u2022 War battles: 129,720 deaths<br>\u2022 Terrorism: 26,445 deaths<br><br>The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study \u2013 Vohra et al (2021) \u2013  estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels.<br>Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., & Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. <em>Environmental Research</em>, <em>195</em>, 110754.<a href=\"https://doi.org/10.1016/j.envres.2021.110754\"> https://doi.org/10.1016/j.envres.2021.110754</a>.{/ref}</p>\n\n\n\n<p><em>This</em> is the price we are <em>already</em> paying for burning fossil fuels.</p>\n\n\n\n<p>The International Monetary Fund (IMF) estimates the sum of these costs in a major study that they update regularly. The title of the study is <em>\u2018How Large Are Global Fossil Fuel Subsidies?\u2019</em> and in the study\u2019s latest issue the researchers estimate them to amount to US-$ 5.2 trillion.{ref}The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) \u2013 How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. <a href=\"https://doi.org/10.1016/j.worlddev.2016.10.004\">https://doi.org/10.1016/j.worlddev.2016.10.004</a><br><br>In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) \u2013 <a href=\"https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=doi.org%2F10.5089%2F9781484393178.001&btnG=\">Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates</a>. Published as an IMF Working Paper. </p>\n\n\n\n<p>In my text I am citing the latest figures of the authors.<br><br>By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent).<br>Coal: $5,200 billion * 0.44 = $2,288 billion<br>Oil: $5,200 billion * 0.41 = $2,132 billion<br>Natural gas: $5,200 billion * 0.1 = $520 billion</p>\n\n\n\n<p>Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that  \u201cthe subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.\u201d, This data is according to the <a href=\"https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Energy_subsidies_2020.pdf\">International Renewable Energy Agency (2020) \u2013 Energy subsidies</a> Unfortunately this source does not break down the subsidies to renewables by source of energy.</p>\n\n\n\n<p>The <a href=\"https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&time=earliest..latest\">energy production from these sources</a> in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455).<br><br>This means the subsidy per TWh of energy is:<br>Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh<br>Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh<br>Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh<br>Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh<br>Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh</p>\n\n\n\n<p>These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies.<br><br>What I am calling explicit subsidies is called \u201cpre-tax subsidies\u201d by these authors. What I am calling implicit subsidies is called \u201cpost-tax subsidies\u201d by these authors. {/ref} This is equivalent to 6.5% of global GDP.</p>\n\n\n\n<p>As the study\u2019s title makes clear, the IMF sees the sum of damage done by fossil fuels as a <em>subsidy</em>. That might be surprising at first, but it makes sense if you think about it. A good is subsidized when consumers and producers of that good do not have to pay the full cost for it. This can either be an <em>explicit subsidy</em>, for example when governments pay for the school education of the country\u2019s children, or it can be an <em>implicit subsidy</em>, when producers and consumers cause damage, but do not have to pay a monetary price for it.{ref}One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost.<br><br>An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.{/ref}</p>\n\n\n\n<p>You find examples of both types of subsidies in your own life. If you pay for you and your neighbour\u2019s dinner then you are <em>explicitly </em>subsidizing them. If your neighbour crashes into your car and you do not charge him for the damage he caused, you are <em>implicitly </em>subsidizing them.</p>\n\n\n\n<p>Fossil fuels are subsidized in both ways. They are <a href=\"https://ourworldindata.org/grapher/fossil-fuel-subsidies-per-capita?time=2015\">explicitly subsidized in many places</a>, and they are implicitly subsidized <em>everywhere</em>, as the consumers and producers of fossil fuels do not have to pay the monetary cost for the damage they cause.</p>\n\n\n\n<p>Ending the subsidies to fossil fuels would mean to put a monetary price on them that corresponds to the damage they do. Since the alternatives to fossil fuels are both <a href=\"https://ourworldindata.org/safest-sources-of-energy\">cleaner and safer</a> this would allow the world to make massive progress according to the IMF study: Ending these subsidies and pricing them into the cost that producers and consumers have to pay for fossil fuels would substantially decrease global carbon emissions and save the lives of people who would otherwise be killed by air pollution.{ref}The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it’s undeniable that the costs are very large.{/ref}</p>\n\n\n\n<p>The damage caused by burning fossil fuels is a textbook example of what economists call an externality: Putting a monetary price on carbon emissions makes it possible to internalize the costs of the negative impact on our health, the environment, and future generations.{ref}The <a href=\"https://www.core-econ.org/the-economy/book/text/12.html\">free online textbook CORE ECON</a> provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.{/ref}</p>\n\n\n\n<h4>This means that we do not have the option to not pay a price</h4>\n\n\n\n<p>It is a mistake to think that it is possible to not pay for emitting carbon. As we have just seen, <em>we </em><strong><em>are</em></strong><em> already paying a price</em>. </p>\n\n\n\n<p>This is the economists\u2019 argument for putting an explicit monetary price on carbon emissions.</p>\n\n\n\n<h5>What would change if we put a monetary price on carbon?</h5>\n\n\n\n<p>There are two ways in which a carbon price can be implemented: a carbon tax or a \u2018cap and trade\u2019 system:{ref}Some alternatives to carbon taxes and cap and trade \u2013 such as clean energy standards or regulations \u2013 can be viewed as implicit prices on carbon emissions.</p>\n\n\n\n<p>It’s a core result in resource economics  that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON <a href=\"https://www.core-econ.org/the-economy/book/text/20.html\">here</a>.{/ref} </p>\n\n\n\n<ul><li>In a \u2018cap and trade\u2019 system the carbon price changes over time. A maximum level of pollution (a \u2018cap\u2019) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap. </li><li>A carbon tax is simply a levy that is applied to all goods and services which lead to carbon emissions in their production.</li></ul>\n\n\n\n<p>In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive.</p>\n\n\n\n<p>This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they\u2019re not available yet producers will be incentivised to develop low-carbon alternatives.</p>\n\n\n\n<p>Carbon pricing changes the relative prices between carbon-intensive and low-carbon products and this changes consumption choices towards a low-carbon lifestyle: Carbon prices make it more likely that we rely on low-carbon electricity rather than fossil fuels; that we take the bicycle rather than the car; that we buy the smaller car rather than the bigger one; that we buy electric vehicles rather than gas-powered ones; that we eat <a href=\"https://ourworldindata.org/food-choice-vs-eating-local\">chicken rather than beef</a>; or that we organize a video conference rather than an event that is a flight away. </p>\n\n\n\n<p>Both of the intended consequences \u2013 transition to and innovation of alternative low-carbon technologies \u2013 increase with the carbon price. The incentive for consumers and entrepreneurs is to reduce their emissions whenever doing so costs them less than paying the carbon price. </p>\n\n\n\n<p>Because access to energy often constitutes a large share of the budget of poorer families, successful carbon pricing policies include support for those households to offset the increased cost of energy.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 <a href=\"https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics\">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669\u2013677.{/ref}</p>\n\n\n\n<p>In the case of a carbon tax, the government revenue can be used to finance this support for poorer households and it can also be used to pay for additional measures that slow down climate change and support environmental regeneration: including <a href=\"https://ourworldindata.org/afforestation\">reforestation</a>, more walkable and cyclable cities, or research and development for renewable energy and low-carbon technologies. </p>\n\n\n\n<p>With a carbon price one can establish a mechanism that ensures that those who are causing emissions are those who pay for the countermeasures that benefit society and the environment.</p>\n\n\n\n<h4>A carbon price allows us to make two decisions</h4>\n\n\n\n<p>Levying a monetary price on emissions allows us to choose our answer to two important questions: <em>Who</em> should pay the price for carbon emissions? <em>How much</em> do we want them to pay for emitting greenhouse gases?</p>\n\n\n\n<h5><em>Who</em> should pay the price for emitting greenhouse gases?</h5>\n\n\n\n<p>At the most fundamental level the argument for carbon pricing is the hard truth that we have to pay a price for carbon emissions. What we can decide is who pays for them.</p>\n\n\n\n<p>The status quo in a society without carbon pricing could not be more brutal:</p>\n\n\n\n<ul><li>The people who live in high-income countries \u2013 those who enjoy the best living conditions in human history \u2013 are those who will be least affected by climate change, yet they are <a href=\"https://ourworldindata.org/worlds-energy-problem\">the ones with the highest emissions</a>.</li><li>The people who will be most affected by the negative consequences of a hotter planet are those that have contributed the least to climate change: the poorest people in the world \u2013 who are at risk of increasing food insecurity and do not have the resources to adapt to changes as rapidly \u2013 and the generations that come after us.</li></ul>\n\n\n\n<p>Without a monetary price on carbon it is those who have the lowest emissions that pay the most. </p>\n\n\n\n<p>With carbon pricing we make sure that those who cause emissions also pay for them.</p>\n\n\n\n<p>Because emissions rise with income, a carbon price ensures that it will be the rich who pay most.{ref}That they pay the most is a statement about absolute spending. As explained below, the <em>relative</em> spending on energy is often highest for poorer households.{/ref} For the very rich it is the case that a few consumption choices \u2013 flights, large cars, meat \u2013 are responsible for the bulk of their emissions.{ref}Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1\u201312. <a href=\"https://doi.org/10.1017/sus.2020.12\">https://doi.org/10.1017/sus.2020.12</a>.{/ref} Carbon pricing is a policy targeted to address these consumption choices, it makes carbon-intensive goods less affordable and \u2018degrows\u2019 the consumption of those goods.</p>\n\n\n\n<h5><em>How much</em> do we make people pay for emitting greenhouse gases? </h5>\n\n\n\n<p>The second decision that we can influence with a price on carbon is: <em>How much</em> do we want to pay for fossil fuels? </p>\n\n\n\n<p>If we continue emitting high volumes of greenhouse gases we will cause severe climate change and eventually have to pay a high price from the damages. Several studies find that if we don\u2019t achieve a reduction in emissions now, economic growth would be much lower in the decades ahead (and that surely wouldn\u2019t be our main concern in such a future).{ref}On the relation between future warming and growth see:<br>Pretis, F., Schwarz, M., Tang, K., Haustein, K., & Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5\u00b0C or 2\u00b0C warming. <em>Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences</em>, <em>376</em>(2119), 20160460.<a href=\"https://doi.org/10.1098/rsta.2016.0460\"> https://doi.org/10.1098/rsta.2016.0460<br></a></p>\n\n\n\n<p>Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. <em>Nature</em>, <em>527</em>(7577), 235\u2013239.<a href=\"https://doi.org/10.1038/nature15725\"> https://doi.org/10.1038/nature15725</a> {/ref} </p>\n\n\n\n<p>Levying a fee on carbon emissions can be a key policy to bring down emissions quickly so that we avoid large costs in the future.</p>\n\n\n\n<p>In the past many macroeconomists considered the need to cut emissions as a drag on the economy that lowers economic growth. This idea, that decarbonisation of our economies conflicts with economic growth, is still shared by many.{ref}In <a href=\"https://ourworldindata.org/shrink-emissions-not-the-economy\">a guest post for Our World in Data</a> Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this:<br><em>\u201cIronically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed \u201cdegrowth\u201d). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.\u201d</em>{/ref}</p>\n\n\n\n<p>But this is no longer the mainstream view. The latest annual IMF report estimates that policies, including carbon pricing, that mitigate climate change actually <em>increase</em> economic growth over the coming decades.{ref}<a href=\"https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020\">World Economic Outlook, October 2020: A Long and Difficult Ascent</a>. In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.{/ref} This means that there is no trade-off between fighting climate change and economic growth. Fighting climate change is a way to achieve <em>more growth</em>.{ref}Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2\u00b0C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, <em>relative to a baseline growth of 1.6% to 3%</em>. </p>\n\n\n\n<p>In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today\u2019s economy. With measures in place to limit warming to 2\u00b0C, growth would be 0.06% smaller \u2013 i.e. 1.54% per year. The world economy would then \u2018only’ be 461% of the size of today.<br><br>In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today\u2019s economy. With measures to limit warming to 2\u00b0C, growth would be 0.06% smaller \u2013 i.e. 2.94% per year. The economy would then \u2018only’ be 1813% the size of today.</p>\n\n\n\n<p>This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2\u00b0C.<br><br>The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions.<br><br>See:<br>Edenhofer et al. (2014). <a href=\"https://www.ipcc.ch/report/ar5/wg3/\">IPCC, 2014: Summary for Policymakers</a>. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.<br><br>See also: IPCC (2014) \u2013 <a href=\"https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf\">Climate Change 2014: Synthesis Report</a>. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.<br><br><a href=\"https://www.sciencedirect.com/science/article/pii/S0095069617308707\">https://www.sciencedirect.com/science/article/pii/S0095069617308707</a><br>{/ref} </p>\n\n\n\n<p>From the responses to my recent writing on <a href=\"https://ourworldindata.org/poverty-minimum-growth-needed\">the need of growth for ending poverty</a> I saw that some people have not caught up with this. Fighting climate change is not just compatible with fighting poverty, the two goals \u2014 to reduce emissions and to increase economic growth \u2014 actually <em>strengthen</em> each other.</p>\n\n\n\n<p>It is very good news that fighting climate change is expected to increase growth over the coming decades, but the benefits to climate mitigation are larger than just additional growth: it also means a modernisation of key infrastructure, faster innovation, the protection of the biosphere on our planet, and the major health benefits of reduced air pollution caused by burning fossil fuels, including millions of lives saved. </p>\n\n\n\n<p>Taking both the costs and benefits into account makes a very clear argument for climate action now. Putting a price on carbon to build a low-carbon world is an investment for a much better future.</p>\n\n\n\n<h4>For once even economists agree</h4>\n\n\n\n<p>Economists are not known for agreeing much with one another. But regarding the challenge of how to reduce greenhouse gas emissions there is more agreement among economists than in perhaps any other big policy question. </p>\n\n\n\n<p>What is particularly encouraging is that this is a policy that is supported by both left- and right-leaning economists. That left-leaning economists are in favour of a tax that will mostly be paid for by richer people is not surprising. It is perhaps more surprising that many right-leaning economists \u2013 who are generally in favor of a small state with only minimal taxes \u2013 are also in favor. Economists on the conservative side of the spectrum, such as Greg Mankiw, <a href=\"https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf\">advocate strongly for a carbon tax</a> and widespread support for carbon taxes of economists across the political spectrum is documented in many relevant surveys.{ref}The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly <a href=\"https://www.igmchicago.org/?s=carbon+tax\">asked them about their opinion on a carbon tax</a> and invariably finds large support for such a tax.</p>\n\n\n\n<p>See also the survey of 365 economists who have published papers related to climate change \u201cin a highly ranked, peer-reviewed economics or environmental economics journal\u201d conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published <a href=\"https://policyintegrity.org/files/publications/ExpertConsensusReport.pdf\">here</a>. (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now \u2013 see Figure 2a.)</p>\n\n\n\n<p>In a 2006 survey of the American Economic Association, 65% agreed that \u201cthe US should increase energy taxes\u201d.<br>Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists\u2019 Voice, 3(9).</p>\n\n\n\n<p>The Wall Street Journal asked business economists in 2007, \u2018\u2018What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?\u2019\u2019 54 percent advocated for \u2018\u2018taxes that raise the cost of purchasing fossil fuels\u2019\u2019.<br>Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007.</p>\n\n\n\n<p>Keohane, M. N. O., & Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington.<br>Last year over 3,500 economists, including twenty-seven Nobel laureates, signed <a href=\"https://clcouncil.org/economists-statement/\">this letter supporting carbon pricing</a>.{/ref} </p>\n\n\n\n<p>An alternative to a carbon price that many governments pursue is to rely on specific guidelines, but doing this well is an incredibly difficult task. A government with the goal to reduce emissions can try to regulate each specific sector and decide which types of production and consumption should be reduced or forbidden. But the planner who is tasked with doing this needs to have an enormous knowledge of all kinds of technologies, their carbon footprint, their cost, the possible alternatives, and their future potential. The carbon price is such an effective alternative to the central planner, because it doesn\u2019t require a central authority to have enormous knowledge. Instead it incentivizes everyone to reduce carbon emissions \u2013 since they are incentivized to save money \u2013 and thereby distributes the task of reducing emissions to <em>everyone</em> \u2013 every producer, every investor, every consumer. Instead of one central agency, it incentivizes billions of people to search for ways to reduce their costs and thereby to find millions of solutions to reduce their emissions.</p>\n\n\n\n<p>Another aspect that is convincing even to those who favour a small state is that if you want to have <em>any public spending at all</em> \u2013 and very few want a state that is so small that neither roads nor the police are publicly funded \u2013 you have to raise state revenue <em>somewhere</em>. The argument then is that if you have to have some taxes, it\u2019s better to tax something that harms people rather than something that we want to encourage, like work. There are big losers from a carbon price \u2013 the fossil fuel industry \u2013 but for citizens, the overall taxes do not have to increase: the carbon price is government revenue so that it can reduce taxes elsewhere. It is actually the other way around: the implicit subsidies to fossil fuels are costly and thereby increase taxes for everyone \u2013 as we have seen, the IMF estimates that the lack of carbon pricing means that governments lose 3.8% of GDP and this loss either means greater public debt or it has to be made up by all of us paying higher taxes.</p>\n\n\n\n<p>Poorer households spend a larger share of their income on energy so that a carbon price would hit these households hardest. It is possible to avoid this consequence by making the poorest households benefit from the spending that the carbon tax allows. The famous call for a carbon tax signed by a large number of leading economists at <a href=\"https://www.econstatement.org/\">econstatement.org</a> has this goal. “To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in \u2018carbon dividends\u2019 than they pay in increased energy prices.”</p>\n\n\n\n<h4>What is stopping us?</h4>\n\n\n\n<p>The world did make a start on carbon pricing. 78 different jurisdictions have implemented a carbon price and this year (2021) a price will be paid on 22% of the world\u2019s carbon emissions.{ref}All data points and references here refer to the 2020 issue: World Bank (2020) \u2013 <a href=\"https://openknowledge.worldbank.org/handle/10986/33809\">State and Trends of Carbon Pricing 2020</a>. Washington, DC: World Bank. \u00a9 World Bank. License: CC BY 3.0 IGO.{/ref} 17 years ago a price was paid on much less than 1% of all emissions.</p>\n\n\n\n<p>But the carbon price is low in many places and the figures just cited mean that there is no monetary price on three-quarters of emissions.</p>\n\n\n\n<p>Given all the arguments above, why is effective carbon pricing not implemented in many more places? </p>\n\n\n\n<p>A big reason is of course that those that will lose out from carbon pricing \u2013 the fossil fuel industry \u2013 rally against them. </p>\n\n\n\n<p>But it is also the case that carbon pricing is not very popular among voters. Study after study finds that a key reason for this is that <em>many do not believe that a price on carbon is actually effective in reducing emissions</em>.{ref}See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Fr\u00e9d\u00e9ric Varone, and Frank V\u00f6hringer (2017) \u2013 \u201cGreen Taxes in a Post-Paris World: Are Millions of Nays Inevitable?\u201d Environ Resource Econ 68, 97\u2013128 (2017). <a href=\"https://doi.org/10.1007/s10640-017-0133-8.%7B/ref\">https://doi.org/10.1007/s10640-017-0133-8</a><br><br>Baranzini A, Carattini S (2017) \u2013 Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197\u2013227</p>\n\n\n\n<p>and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 <a href=\"https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics\">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669\u2013677. {/ref} While it is the effectiveness of carbon prices that makes them popular among experts, it is the perceived ineffectiveness that makes them unpopular among non-experts. </p>\n\n\n\n<p>But it is also the case that people change their mind about carbon prices when they learn that they do actually work.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 <a href=\"https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics\">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669\u2013677. {/ref} After the Swiss population rejected a carbon price in a referendum, a group of researchers \u2013 Carattini et al (2017){ref}Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Fr\u00e9d\u00e9ric Varone, and Frank V\u00f6hringer (2017) \u2013 \u201cGreen Taxes in a Post-Paris World: Are Millions of Nays Inevitable?\u201d Environ Resource Econ 68, 97\u2013128 (2017). <a href=\"https://doi.org/10.1007/s10640-017-0133-8.%7B/ref\">https://doi.org/10.1007/s10640-017-0133-8</a> {/ref} \u2013 ran a study to investigate what could have made the proposal more popular. They found that \u201cthe effectiveness of energy taxes is not an established fact for the general public\u201d and their study showed that the most important successful argument in favour of the tax is information on the expected effectiveness in reducing emissions.</p>\n\n\n\n<p>It shouldn\u2019t be surprising that the communication of successful strategies is of such great importance. Many of us care a lot about climate change \u2013 people around the world <a href=\"https://www.pewresearch.org/global/2020/09/09/despite-pandemic-many-europeans-still-see-climate-change-as-greatest-threat-to-their-countries/\">consistently view</a> it as one of the largest challenges that humanity faces \u2013 and at the same time many feel hopeless that we can actually do anything about it. Showing that there <em>is</em> a way forward is key for the successful fight against climate change.</p>\n\n\n\n<h4>Empirical evidence: Does a price on carbon reduce carbon emissions?</h4>\n\n\n\n<p>Back in 1991 Sweden was one of the first countries in the world to implement a carbon tax. Over time the carbon tax was gradually increased, but it still mainly affects the transport sector (around 90 percent of the revenues from the carbon tax come from the consumption of gasoline and motor diesel).{ref}The transport sector is of significant importance for Sweden\u2019s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden\u2019s total annual CO<sub>2</sub> emissions.{/ref}</p>\n\n\n\n<p>The researcher Julius Andersson studied whether the carbon price worked as intended by studying its impact on emissions from the transport sector.{ref}Julius J. Andersson (2019) \u2013 <a href=\"https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144\">Carbon Taxes and CO2 Emissions: Sweden as a Case Study</a>. American Economic Journal: Economic Policy. 11 (4): 1\u201330. doi:10.1257/pol.20170144. ISSN 1945-7731.{/ref} </p>\n\n\n\n<p>He finds that \u201cCO<sub>2</sub> emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone.\u201d A very strong effect.</p>\n\n\n\n<p>How did prosperity and emissions change in Sweden over this period? Average incomes in Sweden \u2013 GDP per capita \u2013 increased by 52% since the year before the tax was introduced, and emissions declined by 29%.{ref}In <a href=\"https://ourworldindata.org/grapher/consumption-co2-per-capita-vs-gdppc?endpointsOnly=1&time=2017..latest\">this scatterplot of CO2 emissions vs GDP per capita</a> you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.{/ref} </p>\n\n\n\n<p>Sweden\u2019s emissions are still far from where they need to be, but the direction of change \u2013 growing prosperity, but declining emissions \u2013 is right.</p>\n\n\n\n<p>And Sweden is not the only country that reduced emissions while growing the economy, as the chart shows.{ref}<a href=\"https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest&country=~SWE\">In the interactive version of this chart</a> you can view this data for many more countries.{/ref} Shown in the chart are consumption-based CO<sub>2</sub> emissions, which means that they account for the carbon emissions caused by products that were consumed within the country but which were produced elsewhere.</p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" width=\"2175\" height=\"2565\" src=\"https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all.png\" alt=\"\" class=\"wp-image-52668\" srcset=\"https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all.png 2175w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-339x400.png 339w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-466x550.png 466w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-127x150.png 127w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-768x906.png 768w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-1302x1536.png 1302w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-1737x2048.png 1737w\" sizes=\"(max-width: 2175px) 100vw, 2175px\" /></figure>\n\n\n\n<p>Carbon pricing is not the only reason emissions are falling in these countries. As we just saw, the paper on Sweden attributes about half of the decline to the carbon tax. Other reasons include technological progress (such as rising efficiency and <a href=\"https://ourworldindata.org/cheap-renewables-growth\">cheaper renewables</a>), declining demand for energy, and other regulations (for example, on air pollution). </p>\n\n\n\n<p>Like all policies that are based on a price mechanism, the level of the price matters. If it is too low it won\u2019t have much of an effect. This is what Felix Pretis (2020) has found for the carbon tax in British Columbia.{ref}The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because \u201cexisting carbon taxes (and prices) are too low to be effective in the time frame since their introduction.\u201d</p>\n\n\n\n<p>Felix Pretis (2020) \u2013 Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria & Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.{/ref}</p>\n\n\n\n<p>But in places that have a substantial carbon price, they can play an important role in reducing emissions, as a number of studies have shown.</p>\n\n\n\n<p>In a recent global study, researchers Best, Burke, and Jotzo (2020) analysed 142 countries and found that those that have a carbon price do, as one would expect, have lower CO<sub>2</sub> emissions than those who do not.{ref}Best, R., Burke, P.J. & Jotzo, F. (2020) \u2013 Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69\u201394. <a href=\"https://doi.org/10.1007/s10640-020-00436-x\">https://doi.org/10.1007/s10640-020-00436-x</a> {/ref}</p>\n\n\n\n<p>Germany too reduced emissions while becoming richer. The research by Petrick and Wagner (2014) showed how EU-wide carbon pricing contributed to this achievement.{ref}Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. <a href=\"https://econpapers.repec.org/RePEc:zbw:ifwkwp:1912\">https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912</a>}{/ref} </p>\n\n\n\n<p>Countries in the European Union have established a cap-and-trade system called the <a href=\"https://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme\">EU Emission Trading Scheme</a> (EU ETS). Recent research by Bayer and Akin showed that this system of carbon pricing has been effective in reducing emissions.{ref} Bayer, Patrick; Aklin, Micha\u00ebl (2020) \u2013 The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117{/ref} </p>\n\n\n\n<p>Lastly, let\u2019s look at the motherland of fossil-fuel-powered industrialization: the chart shows the sources of power production in the UK over the last century. </p>\n\n\n\n<p>Electricity production in the UK has been dominated by coal since its early days; as soon as the light bulb was invented, the UK had its first coal power plant, the Holborn Viaduct power station in London. But this changed in recent decades, and especially rapidly after the UK introduced two carbon price systems. </p>\n\n\n\n<p>The UK was already part of the EU ETS, but went even further in 2013 when the country implemented the \u2018carbon price floor\u2019: <a href=\"https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor\">a top-up carbon tax</a> to the European system. </p>\n\n\n\n<p>In the decade before the tax was introduced one third of electricity in the UK came from coal, <a href=\"https://ourworldindata.org/safest-sources-of-energy\">the worst of power sources</a>. Since then the carbon tax \u201chas led to an unprecedented reduction in coal generation\u201d according to the research of Castagneto et al (2019).{ref}G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) \u2013 <a href=\"https://www.ucl.ac.uk/bartlett/sustainable/sites/bartlett/files/ucl_report_ofgem_20102019_final.pdf\">The value of international electricity trading</a>. UCL and University of Cambridge. </p>\n\n\n\n<p>See also: Marion Leroutier (2021) \u2013 Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK. In Journal of Environmental Economics and Management.{/ref} In the years following the policy change, the share of electricity generated from coal declined to just 2%.{ref}These days it is common that the UK runs for <a href=\"https://www.theguardian.com/environment/ng-interactive/2019/may/25/the-power-switch-tracking-britains-record-coal-free-run\">months without any coal electricity</a> at all, and like many countries that have a carbon price the UK has also <a href=\"https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest\">achieved</a> an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.{/ref} </p>\n\n\n\n<p>As the share of electricity from fossil fuel sources declined, the carbon intensity of electricity production <a href=\"https://ourworldindata.org/grapher/carbon-intensity-electricity?tab=chart&time=2000..latest&country=~GBR\">more than halved</a> and carbon emissions from power generation have <a href=\"https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972583/2020_Provisional_emissions_statistics_report.pdf\">fallen <em>by two-thirds</em></a> in the UK!</p>\n\n\n\n<p>The Law of Demand \u2013 if the price of something goes up, consumption goes down \u2013 also holds in this case. Places that have implemented a substantial carbon price are achieving the intended effect, the consumption of carbon-intensive products declines and emissions fall.</p>\n\n\n\n<div class=\"wp-block-columns is-style-sticky-right\">\n<div class=\"wp-block-column\">\n<iframe src=\"https://ourworldindata.org/grapher/electricity-mix-uk?country=~GBR\" loading=\"lazy\" style=\"width: 100%; height: 600px; border: 0px none;\"></iframe>\n</div>\n\n\n\n<div class=\"wp-block-column\"></div>\n</div>\n\n\n <block type=\"prominent-link\" style=\"is-style-thin\">\n <link-url>https://ourworldindata.org/shrink-emissions-not-the-economy</link-url>\n <title>Shrink emissions, not the economy</title>\n <content>\n\n<p><em>If you want to understand why it is possible to reduce emissions while growing the economy, see this Our World in Data guest post by Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova that answers this question.</em></p>\n\n</content>\n <figure><img width=\"768\" height=\"542\" src=\"https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-768x542.png\" class=\"attachment-medium_large size-medium_large\" alt=\"\" loading=\"lazy\" srcset=\"https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-768x542.png 768w, https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-150x106.png 150w, https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-400x282.png 400w, https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-750x529.png 750w\" sizes=\"(max-width: 768px) 100vw, 768px\" /></figure>\n </block>\n\n\n<h4>Conclusion</h4>\n\n\n\n<p>What\u2019s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have. </p>\n\n\n\n<p>The reason our societies are powered by fossil fuels is that they provided energy at the cheapest monetary price. If we want to transition away from fossil fuels and build a world that is powered by their alternatives we can rely on the price mechanism as well.</p>\n\n\n\n<p>What makes carbon pricing so powerful is that it is a policy that changes the entire system. No decision about any carbon-intensive activity escapes its influence: it changes the choices of consumers, producers, investors, entrepreneurs and innovators in all relevant sectors at once. </p>\n\n\n\n<p>I want to make clear that I do not believe that carbon pricing can be the one policy change that will end climate change.{ref}On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) \u2013 <a href=\"https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions\">Carbon Pricing and the Elasticity of CO2 Emissions</a>. INET Working Paper.{/ref} But the theory and evidence is clear that carbon prices work as intended and if we are able to end climate change in this century I would be surprised if we achieve this without putting a price on carbon. In other words, I don\u2019t think this is sufficient, but I do think it would be a key step towards a better future.</p>\n\n\n\n<p>Our challenge is big. We need to build a new world that still solves the problems that fossil fuels solve today. Carbon-intensive goods and services are often in high demand today, because they are important for people. They have the unfortunate by-product of carbon emissions, but they solve other problems for us and everyone around us. Key to making the transition to a low-carbon future will be to innovate and scale-up alternatives. Carbon prices are useful for this transition because they give <em>everyone</em> an incentive to get there, especially in <a href=\"https://ourworldindata.org/cheap-renewables-growth\">those sectors where alternatives <em>do</em> exist</a>. </p>\n\n\n\n<p>And in those areas where low-carbon alternatives do not yet exist, support for research and development will be key. Because these two policies are working towards the same goal they <em>complement</em> each other, a higher price on carbon provides an incentive to increase R&D.</p>\n\n\n\n<p>We<em> do</em> have options, and understanding them is not exactly rocket science. Consumption goes down, when prices go up. If we want to reduce carbon emissions we should not be paying people to burn fossil-fuels. We should end subsidies.</p>\n\n\n\n<p>What is hard, is to win the necessary political support for pricing carbon. The article linked below draws the political lessons from places that were successful in establishing carbon prices.</p>\n\n\n\n<p>I believe that putting a price on carbon is one of the most important goals to fight for in our lifetime. The current world is not sustainable and it is just not right that the richest have the highest emissions, while those who emit the least \u2013 the poorest and those who come after us \u2013 pay the highest price. Carbon pricing addresses the current injustice where we are allowing the richest to privately enjoy the gains from fossil fuels, while they pass off the costs to everyone else.</p>\n\n\n\n<p>If we are serious about decarbonizing the global economy \u2013 and building the low-carbon future \u2013 we should make the fight for a monetary price on carbon central to our efforts over the years ahead.</p>\n\n\n\n<hr class=\"wp-block-separator\"/>\n\n\n\n<p><strong>Acknowledgements:</strong> I would like to thank Hannah Ritchie, Marcel Gerber, Charlie Giattino, Esteban Ortiz-Ospina for reading drafts of this text and for their very helpful comments and ideas.</p>\n\n\n\n<p><strong>Update:</strong> I updated the figure that shows the decoupling of emissions and economic growth on September 3, 2022.</p>\n\n\n\n<div style=\"height:144px\" aria-hidden=\"true\" class=\"wp-block-spacer\"></div>\n\n\n\n<hr class=\"wp-block-separator\"/>\n\n\n\n<p>If you want to think through the <strong>counterarguments to pricing carbon</strong>, here is a list of references to get you started with:</p>\n\n\n\n<ul><li>One of the most widely discussed recent articles on the topic is <a href=\"https://bostonreview.net/science-nature-politics/leah-c-stokes-matto-mildenberger-trouble-carbon-pricing\">The Trouble with Carbon Pricing</a> authored by Leah Stokes and Matto Mildenberger. As I emphasized above, the authors\u2019 main point is that while carbon prices make economic and environmental sense, it is difficult to get the political support that they need to be free of loopholes and to be high enough to make a difference. They also argue that it would be wrong to believe that no other policy is needed to bring emissions to zero. I largely agree with the authors. Carbon taxes cannot be the only solution \u2013 they emphasise clean energy standards, I\u2019d emphasise public R&D \u2013 but I disagree that this means we should not make it our political goal to put a price on carbon. I think they should be part of a big package of successful climate policy tools \u2013 carbon prices are one tool in our hands and we shouldn\u2019t weaken ourselves by throwing away solutions that we do have.</li><li>Ramez Naam wrote <a href=\"https://twitter.com/ramez/status/1094380540394795008\">this very good Twitter thread</a> on why carbon taxes are a good policy, but why he believes that subsidies for specific technologies can be even better in some cases.</li><li>Rosenbloom et al (2020) discuss the weaknesses of carbon pricing and offer their own alternative, which they call \u201csustainability transition policy\u201d,  a \u201cmix of contextually and politically sensitive policies that simultaneously drive low-carbon innovation and the decline of fossil fuels\u201d.<ul><li>Daniel Rosenbloom, Jochen Markard, Frank W. Geels, and Lea Fuenfschilling (2020) \u2013 <a href=\"https://www.pnas.org/content/117/16/8664.short\">Opinion: Why carbon pricing is not sufficient to mitigate climate change\u2014and how \u201csustainability transition policy\u201d can help</a>. In PNAS.</li></ul><ul><li>I am personally not impressed by the Rosenbloom et al (2020) critique and agree largely with the reply by Jeroen van den Berg and Wouter Botzen (2020) also published in PNAS.</li><li>Jeroen van den Berg and Wouter Botzen (2020) \u2013 <a href=\"https://www.pnas.org/content/117/38/23219\">Low-carbon transition is improbable without carbon pricing</a>, PNAS.</li></ul></li><li>Goulder et al. (2016) argue that implementing a closely related policy \u2013 a clean energy standard (CES) \u2013 can be more cost-effective than a carbon price.</li><li>Lawrence H. Goulder, Marc A. C. Hafstead, Roberton C. Williams III (2016) \u2013 General Equilibrium Impacts of a Federal Clean Energy Standard. In the American Economic Journal: Economic Policy. VOL. 8, NO. 2, MAY 2016. (pp. 186-218).</li><li>Three more pointers:<ul><li>Garth Heutel (2020) \u2013 <a href=\"https://econfip.org/policy-brief/in-defense-of-alternatives-to-pollution-pricing/#\">In Defense of Alternatives to Pollution Pricing</a></li><li>See <a href=\"https://marginalrevolution.com/marginalrevolution/2011/09/do-all-serious-economists-favor-a-carbon-tax.html\">this list of 10 arguments by Tyler Cowen</a>.</li><li>And finally I have also asked the question <a href=\"https://twitter.com/MaxCRoser/status/1326671354654023682\">\u2018What are the best papers or essays with arguments against a carbon price?</a>\u2019, publicly on Twitter. There are several helpful replies there.</li></ul></li></ul>\n\n\n\n<hr class=\"wp-block-separator\"/>\n\n\n\n<p></p>\n\n\n\n<p><em>Continue reading on Our World in Data:</em></p>\n\n\n <block type=\"prominent-link\" style=\"is-style-thin\">\n <link-url>https://ourworldindata.org/carbon-pricing-popular</link-url>\n <title>Why is carbon pricing in some countries more successful than in others?</title>\n <content>\n\n<p>In some countries the public is very supportive of carbon taxes. In other countries they are largely against them. </p>\n\n</content>\n <figure><img width=\"768\" height=\"431\" src=\"https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-768x431.png\" class=\"attachment-medium_large size-medium_large\" alt=\"\" loading=\"lazy\" srcset=\"https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-768x431.png 768w, https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-150x84.png 150w, https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-400x225.png 400w, https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-750x421.png 750w, https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust.png 922w\" sizes=\"(max-width: 768px) 100vw, 768px\" /></figure>\n </block>", "protected": false }, "excerpt": { "rendered": "We are paying a price for fossil fuels, but that price is not paid by those that burn the fossil fuels \u2013 we need to change that.", "protected": false }, "date_gmt": "2021-06-01T10:30:00", "modified": "2022-09-04T10:57:33", "template": "", "categories": [ 1 ], "ping_status": "closed", "authors_name": [ "Max Roser" ], "modified_gmt": "2022-09-04T09:57:33", "comment_status": "closed", "featured_media": 43248, "featured_media_paths": { "thumbnail": "/app/uploads/2021/05/Screen-Shot-2021-05-31-at-21.19.57-150x67.png", "medium_large": "/app/uploads/2021/05/Screen-Shot-2021-05-31-at-21.19.57-768x344.png" } }

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The argument for a carbon price

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<div class="blog-info"> Our World in Data presents the data and research to make progress against the world’s largest problems. This post draws on data and research discussed in our entry on <a href="https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions" target="_blank" rel="noopener noreferrer">Greenhouse Gas Emissions</a>. Some changes and updates were made after the text was first published. </div>    It is a mistake to believe that we are not paying for emitting greenhouse gases. Even if we do not pay a monetary price for carbon emissions we do pay a very large price, the consequences of climate change.   Without a monetary carbon price it is those who have the smallest emissions that suffer the largest costs from climate change. A carbon price, in contrast, means that those who cause the emissions also pay for them.   A key reason why voters are not in favour of carbon pricing is that many believe it won’t actually reduce emissions, but empirical research and theory show that this is wrong: pricing carbon emissions – either via a carbon tax or a ‘cap and trade’-system – is effective. It shifts production and consumption from carbon-intensive goods and services to low-carbon alternatives and does reduce emissions.   Many are deeply concerned about climate change yet feel hopeless that anything can be done to meet this challenge. Increasing the understanding that carbon pricing works, correcting common misconceptions, and showing that there is a way forward are key steps for a successful fight against climate change.   I believe a carbon price should be complemented by other policies and in this article I make the case that it is one of the most important policy options we have to achieve a better future.    We are paying a price for burning fossil fuels and emitting greenhouse gases.   Some of the consequences of climate change are already visible today, but the most severe consequences will hit us in the years and decades to come:{ref}See IPCC (2014) – <a href="https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf">Climate Change 2014: Synthesis Report</a>. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.   <ul><li>Box 2.2: “It is very likely that heat waves will occur more often and last longer, and that extreme precipitation events will become more intense and frequent in many regions. The ocean will continue to warm and acidify, and global mean sea level to rise.”</li><li>Box 2.3: “Risks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development.”</li></ul>   On the risk to biodiversity see Urban, Mark C. (2015). <a href="https://science.sciencemag.org/content/348/6234/571">"Accelerating extinction risk from climate change"</a>. In Science. 348 (6234): 571–573.   For a larger overview see Wikipedia’s pages on the <a href="https://en.wikipedia.org/wiki/Effects_of_climate_change">Effects of Climate Change</a> and <a href="https://en.wikipedia.org/wiki/Climate_change#Effects">the relevant section on their page on climate change</a>.{/ref}   These consequences include the negative economic impacts of climate change through its effects on people’s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for <a href="https://owid.cloud/extreme-poverty" data-type="page" data-id="1701">the world’s poorest people</a> they pose a threat to their lives, as they increase the risk of hunger and food insecurity.   Climate change isn’t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in <a href="https://ourworldindata.org/grapher/pollution-deaths-from-fossil-fuels?stackMode=absolute&region=World">countries around the world</a> every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.{ref}In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels.    Lelieveld, J., Klingmüller, K., Pozzer, A., Burnett, R. T., Haines, A., & Ramanathan, V. (2019). <a href="https://www.pnas.org/content/116/15/7192/">Effects of fossil fuel and total anthropogenic emission removal on public health and climate</a>. Proceedings of the National Academy of Sciences, 116(15), 7192-7197 The death toll of the three counts of violence for 2017 <a href="https://ourworldindata.org/grapher/annual-number-of-deaths-by-cause">according to the IHME</a> is 561,511. • Homicides: 405,346 deaths • War battles: 129,720 deaths • Terrorism: 26,445 deaths The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study – Vohra et al (2021) –  estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels. Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., & Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. Environmental Research, 195, 110754.<a href="https://doi.org/10.1016/j.envres.2021.110754"> https://doi.org/10.1016/j.envres.2021.110754</a>.{/ref}   This is the price we are already paying for burning fossil fuels.   The International Monetary Fund (IMF) estimates the sum of these costs in a major study that they update regularly. The title of the study is ‘How Large Are Global Fossil Fuel Subsidies?’ and in the study’s latest issue the researchers estimate them to amount to US-$ 5.2 trillion.{ref}The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) – How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. <a href="https://doi.org/10.1016/j.worlddev.2016.10.004">https://doi.org/10.1016/j.worlddev.2016.10.004</a> In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) – <a href="https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=doi.org%2F10.5089%2F9781484393178.001&btnG=">Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates</a>. Published as an IMF Working Paper.    In my text I am citing the latest figures of the authors. By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent). Coal: $5,200 billion * 0.44 = $2,288 billion Oil: $5,200 billion * 0.41 = $2,132 billion Natural gas: $5,200 billion * 0.1 = $520 billion   Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that  “the subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.”, This data is according to the <a href="https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Energy_subsidies_2020.pdf">International Renewable Energy Agency (2020) – Energy subsidies</a> Unfortunately this source does not break down the subsidies to renewables by source of energy.   The <a href="https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&time=earliest..latest">energy production from these sources</a> in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455). This means the subsidy per TWh of energy is: Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh   These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies. What I am calling explicit subsidies is called “pre-tax subsidies” by these authors. What I am calling implicit subsidies is called “post-tax subsidies” by these authors. {/ref} This is equivalent to 6.5% of global GDP.   As the study’s title makes clear, the IMF sees the sum of damage done by fossil fuels as a subsidy. That might be surprising at first, but it makes sense if you think about it. A good is subsidized when consumers and producers of that good do not have to pay the full cost for it. This can either be an explicit subsidy, for example when governments pay for the school education of the country’s children, or it can be an implicit subsidy, when producers and consumers cause damage, but do not have to pay a monetary price for it.{ref}One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost. An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.{/ref}   You find examples of both types of subsidies in your own life. If you pay for you and your neighbour’s dinner then you are explicitly subsidizing them. If your neighbour crashes into your car and you do not charge him for the damage he caused, you are implicitly subsidizing them.   Fossil fuels are subsidized in both ways. They are <a href="https://ourworldindata.org/grapher/fossil-fuel-subsidies-per-capita?time=2015">explicitly subsidized in many places</a>, and they are implicitly subsidized everywhere, as the consumers and producers of fossil fuels do not have to pay the monetary cost for the damage they cause.   Ending the subsidies to fossil fuels would mean to put a monetary price on them that corresponds to the damage they do. Since the alternatives to fossil fuels are both <a href="https://ourworldindata.org/safest-sources-of-energy">cleaner and safer</a> this would allow the world to make massive progress according to the IMF study: Ending these subsidies and pricing them into the cost that producers and consumers have to pay for fossil fuels would substantially decrease global carbon emissions and save the lives of people who would otherwise be killed by air pollution.{ref}The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it's undeniable that the costs are very large.{/ref}   The damage caused by burning fossil fuels is a textbook example of what economists call an externality: Putting a monetary price on carbon emissions makes it possible to internalize the costs of the negative impact on our health, the environment, and future generations.{ref}The <a href="https://www.core-econ.org/the-economy/book/text/12.html">free online textbook CORE ECON</a> provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.{/ref}   <h4>This means that we do not have the option to not pay a price</h4>   It is a mistake to think that it is possible to not pay for emitting carbon. As we have just seen, we are already paying a price.    This is the economists’ argument for putting an explicit monetary price on carbon emissions.   <h5>What would change if we put a monetary price on carbon?</h5>   There are two ways in which a carbon price can be implemented: a carbon tax or a ‘cap and trade’ system:{ref}Some alternatives to carbon taxes and cap and trade – such as clean energy standards or regulations – can be viewed as implicit prices on carbon emissions.   It's a core result in resource economics  that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON <a href="https://www.core-econ.org/the-economy/book/text/20.html">here</a>.{/ref}    <ul><li>In a ‘cap and trade’ system the carbon price changes over time. A maximum level of pollution (a ‘cap’) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap. </li><li>A carbon tax is simply a levy that is applied to all goods and services which lead to carbon emissions in their production.</li></ul>   In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive.   This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they’re not available yet producers will be incentivised to develop low-carbon alternatives.   Carbon pricing changes the relative prices between carbon-intensive and low-carbon products and this changes consumption choices towards a low-carbon lifestyle: Carbon prices make it more likely that we rely on low-carbon electricity rather than fossil fuels; that we take the bicycle rather than the car; that we buy the smaller car rather than the bigger one; that we buy electric vehicles rather than gas-powered ones; that we eat <a href="https://ourworldindata.org/food-choice-vs-eating-local">chicken rather than beef</a>; or that we organize a video conference rather than an event that is a flight away.    Both of the intended consequences – transition to and innovation of alternative low-carbon technologies – increase with the carbon price. The incentive for consumers and entrepreneurs is to reduce their emissions whenever doing so costs them less than paying the carbon price.    Because access to energy often constitutes a large share of the budget of poorer families, successful carbon pricing policies include support for those households to offset the increased cost of energy.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – <a href="https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669–677.{/ref}   In the case of a carbon tax, the government revenue can be used to finance this support for poorer households and it can also be used to pay for additional measures that slow down climate change and support environmental regeneration: including <a href="https://ourworldindata.org/afforestation">reforestation</a>, more walkable and cyclable cities, or research and development for renewable energy and low-carbon technologies.    With a carbon price one can establish a mechanism that ensures that those who are causing emissions are those who pay for the countermeasures that benefit society and the environment.   <h4>A carbon price allows us to make two decisions</h4>   Levying a monetary price on emissions allows us to choose our answer to two important questions: Who should pay the price for carbon emissions? How much do we want them to pay for emitting greenhouse gases?   <h5>Who should pay the price for emitting greenhouse gases?</h5>   At the most fundamental level the argument for carbon pricing is the hard truth that we have to pay a price for carbon emissions. What we can decide is who pays for them.   The status quo in a society without carbon pricing could not be more brutal:   <ul><li>The people who live in high-income countries – those who enjoy the best living conditions in human history – are those who will be least affected by climate change, yet they are <a href="https://ourworldindata.org/worlds-energy-problem">the ones with the highest emissions</a>.</li><li>The people who will be most affected by the negative consequences of a hotter planet are those that have contributed the least to climate change: the poorest people in the world – who are at risk of increasing food insecurity and do not have the resources to adapt to changes as rapidly – and the generations that come after us.</li></ul>   Without a monetary price on carbon it is those who have the lowest emissions that pay the most.    With carbon pricing we make sure that those who cause emissions also pay for them.   Because emissions rise with income, a carbon price ensures that it will be the rich who pay most.{ref}That they pay the most is a statement about absolute spending. As explained below, the relative spending on energy is often highest for poorer households.{/ref} For the very rich it is the case that a few consumption choices – flights, large cars, meat – are responsible for the bulk of their emissions.{ref}Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1–12. <a href="https://doi.org/10.1017/sus.2020.12">https://doi.org/10.1017/sus.2020.12</a>.{/ref} Carbon pricing is a policy targeted to address these consumption choices, it makes carbon-intensive goods less affordable and ‘degrows’ the consumption of those goods.   <h5>How much do we make people pay for emitting greenhouse gases? </h5>   The second decision that we can influence with a price on carbon is: How much do we want to pay for fossil fuels?    If we continue emitting high volumes of greenhouse gases we will cause severe climate change and eventually have to pay a high price from the damages. Several studies find that if we don’t achieve a reduction in emissions now, economic growth would be much lower in the decades ahead (and that surely wouldn’t be our main concern in such a future).{ref}On the relation between future warming and growth see: Pretis, F., Schwarz, M., Tang, K., Haustein, K., & Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5°C or 2°C warming. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 376(2119), 20160460.<a href="https://doi.org/10.1098/rsta.2016.0460"> https://doi.org/10.1098/rsta.2016.0460 </a>   Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. Nature, 527(7577), 235–239.<a href="https://doi.org/10.1038/nature15725"> https://doi.org/10.1038/nature15725</a> {/ref}    Levying a fee on carbon emissions can be a key policy to bring down emissions quickly so that we avoid large costs in the future.   In the past many macroeconomists considered the need to cut emissions as a drag on the economy that lowers economic growth. This idea, that decarbonisation of our economies conflicts with economic growth, is still shared by many.{ref}In <a href="https://ourworldindata.org/shrink-emissions-not-the-economy">a guest post for Our World in Data</a> Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this: “Ironically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed “degrowth”). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.”{/ref}   But this is no longer the mainstream view. The latest annual IMF report estimates that policies, including carbon pricing, that mitigate climate change actually increase economic growth over the coming decades.{ref}<a href="https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020">World Economic Outlook, October 2020: A Long and Difficult Ascent</a>. In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.{/ref} This means that there is no trade-off between fighting climate change and economic growth. Fighting climate change is a way to achieve more growth.{ref}Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2°C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, relative to a baseline growth of 1.6% to 3%.    In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today’s economy. With measures in place to limit warming to 2°C, growth would be 0.06% smaller – i.e. 1.54% per year. The world economy would then ‘only' be 461% of the size of today. In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today’s economy. With measures to limit warming to 2°C, growth would be 0.06% smaller – i.e. 2.94% per year. The economy would then ‘only' be 1813% the size of today.   This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2°C. The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions. See: Edenhofer et al. (2014). <a href="https://www.ipcc.ch/report/ar5/wg3/">IPCC, 2014: Summary for Policymakers</a>. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. See also: IPCC (2014) – <a href="https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf">Climate Change 2014: Synthesis Report</a>. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp. <a href="https://www.sciencedirect.com/science/article/pii/S0095069617308707">https://www.sciencedirect.com/science/article/pii/S0095069617308707</a> {/ref}    From the responses to my recent writing on <a href="https://ourworldindata.org/poverty-minimum-growth-needed">the need of growth for ending poverty</a> I saw that some people have not caught up with this. Fighting climate change is not just compatible with fighting poverty, the two goals — to reduce emissions and to increase economic growth — actually strengthen each other.   It is very good news that fighting climate change is expected to increase growth over the coming decades, but the benefits to climate mitigation are larger than just additional growth: it also means a modernisation of key infrastructure, faster innovation, the protection of the biosphere on our planet, and the major health benefits of reduced air pollution caused by burning fossil fuels, including millions of lives saved.    Taking both the costs and benefits into account makes a very clear argument for climate action now. Putting a price on carbon to build a low-carbon world is an investment for a much better future.   <h4>For once even economists agree</h4>   Economists are not known for agreeing much with one another. But regarding the challenge of how to reduce greenhouse gas emissions there is more agreement among economists than in perhaps any other big policy question.    What is particularly encouraging is that this is a policy that is supported by both left- and right-leaning economists. That left-leaning economists are in favour of a tax that will mostly be paid for by richer people is not surprising. It is perhaps more surprising that many right-leaning economists – who are generally in favor of a small state with only minimal taxes – are also in favor. Economists on the conservative side of the spectrum, such as Greg Mankiw, <a href="https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf">advocate strongly for a carbon tax</a> and widespread support for carbon taxes of economists across the political spectrum is documented in many relevant surveys.{ref}The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly <a href="https://www.igmchicago.org/?s=carbon+tax">asked them about their opinion on a carbon tax</a> and invariably finds large support for such a tax.   See also the survey of 365 economists who have published papers related to climate change “in a highly ranked, peer-reviewed economics or environmental economics journal” conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published <a href="https://policyintegrity.org/files/publications/ExpertConsensusReport.pdf">here</a>. (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now – see Figure 2a.)   In a 2006 survey of the American Economic Association, 65% agreed that “the US should increase energy taxes”. Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists’ Voice, 3(9).   The Wall Street Journal asked business economists in 2007, ‘‘What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?’’ 54 percent advocated for ‘‘taxes that raise the cost of purchasing fossil fuels’’. Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007.   Keohane, M. N. O., & Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington. Last year over 3,500 economists, including twenty-seven Nobel laureates, signed <a href="https://clcouncil.org/economists-statement/">this letter supporting carbon pricing</a>.{/ref}    An alternative to a carbon price that many governments pursue is to rely on specific guidelines, but doing this well is an incredibly difficult task. A government with the goal to reduce emissions can try to regulate each specific sector and decide which types of production and consumption should be reduced or forbidden. But the planner who is tasked with doing this needs to have an enormous knowledge of all kinds of technologies, their carbon footprint, their cost, the possible alternatives, and their future potential. The carbon price is such an effective alternative to the central planner, because it doesn’t require a central authority to have enormous knowledge. Instead it incentivizes everyone to reduce carbon emissions – since they are incentivized to save money – and thereby distributes the task of reducing emissions to everyone – every producer, every investor, every consumer. Instead of one central agency, it incentivizes billions of people to search for ways to reduce their costs and thereby to find millions of solutions to reduce their emissions.   Another aspect that is convincing even to those who favour a small state is that if you want to have any public spending at all – and very few want a state that is so small that neither roads nor the police are publicly funded – you have to raise state revenue somewhere. The argument then is that if you have to have some taxes, it’s better to tax something that harms people rather than something that we want to encourage, like work. There are big losers from a carbon price – the fossil fuel industry – but for citizens, the overall taxes do not have to increase: the carbon price is government revenue so that it can reduce taxes elsewhere. It is actually the other way around: the implicit subsidies to fossil fuels are costly and thereby increase taxes for everyone – as we have seen, the IMF estimates that the lack of carbon pricing means that governments lose 3.8% of GDP and this loss either means greater public debt or it has to be made up by all of us paying higher taxes.   Poorer households spend a larger share of their income on energy so that a carbon price would hit these households hardest. It is possible to avoid this consequence by making the poorest households benefit from the spending that the carbon tax allows. The famous call for a carbon tax signed by a large number of leading economists at <a href="https://www.econstatement.org/">econstatement.org</a> has this goal. "To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in ‘carbon dividends’ than they pay in increased energy prices."   <h4>What is stopping us?</h4>   The world did make a start on carbon pricing. 78 different jurisdictions have implemented a carbon price and this year (2021) a price will be paid on 22% of the world’s carbon emissions.{ref}All data points and references here refer to the 2020 issue: World Bank (2020) – <a href="https://openknowledge.worldbank.org/handle/10986/33809">State and Trends of Carbon Pricing 2020</a>. Washington, DC: World Bank. © World Bank. License: CC BY 3.0 IGO.{/ref} 17 years ago a price was paid on much less than 1% of all emissions.   But the carbon price is low in many places and the figures just cited mean that there is no monetary price on three-quarters of emissions.   Given all the arguments above, why is effective carbon pricing not implemented in many more places?    A big reason is of course that those that will lose out from carbon pricing – the fossil fuel industry – rally against them.    But it is also the case that carbon pricing is not very popular among voters. Study after study finds that a key reason for this is that many do not believe that a price on carbon is actually effective in reducing emissions.{ref}See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). <a href="https://doi.org/10.1007/s10640-017-0133-8.%7B/ref">https://doi.org/10.1007/s10640-017-0133-8</a> Baranzini A, Carattini S (2017) – Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197–227   and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – <a href="https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669–677. {/ref} While it is the effectiveness of carbon prices that makes them popular among experts, it is the perceived ineffectiveness that makes them unpopular among non-experts.    But it is also the case that people change their mind about carbon prices when they learn that they do actually work.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – <a href="https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669–677. {/ref} After the Swiss population rejected a carbon price in a referendum, a group of researchers – Carattini et al (2017){ref}Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). <a href="https://doi.org/10.1007/s10640-017-0133-8.%7B/ref">https://doi.org/10.1007/s10640-017-0133-8</a> {/ref} – ran a study to investigate what could have made the proposal more popular. They found that “the effectiveness of energy taxes is not an established fact for the general public” and their study showed that the most important successful argument in favour of the tax is information on the expected effectiveness in reducing emissions.   It shouldn’t be surprising that the communication of successful strategies is of such great importance. Many of us care a lot about climate change – people around the world <a href="https://www.pewresearch.org/global/2020/09/09/despite-pandemic-many-europeans-still-see-climate-change-as-greatest-threat-to-their-countries/">consistently view</a> it as one of the largest challenges that humanity faces – and at the same time many feel hopeless that we can actually do anything about it. Showing that there is a way forward is key for the successful fight against climate change.   <h4>Empirical evidence: Does a price on carbon reduce carbon emissions?</h4>   Back in 1991 Sweden was one of the first countries in the world to implement a carbon tax. Over time the carbon tax was gradually increased, but it still mainly affects the transport sector (around 90 percent of the revenues from the carbon tax come from the consumption of gasoline and motor diesel).{ref}The transport sector is of significant importance for Sweden’s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden’s total annual CO2 emissions.{/ref}   The researcher Julius Andersson studied whether the carbon price worked as intended by studying its impact on emissions from the transport sector.{ref}Julius J. Andersson (2019) – <a href="https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144">Carbon Taxes and CO2 Emissions: Sweden as a Case Study</a>. American Economic Journal: Economic Policy. 11 (4): 1–30. doi:10.1257/pol.20170144. ISSN 1945-7731.{/ref}    He finds that “CO2 emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone.” A very strong effect.   How did prosperity and emissions change in Sweden over this period? Average incomes in Sweden – GDP per capita – increased by 52% since the year before the tax was introduced, and emissions declined by 29%.{ref}In <a href="https://ourworldindata.org/grapher/consumption-co2-per-capita-vs-gdppc?endpointsOnly=1&time=2017..latest">this scatterplot of CO2 emissions vs GDP per capita</a> you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.{/ref}    Sweden’s emissions are still far from where they need to be, but the direction of change – growing prosperity, but declining emissions – is right.   And Sweden is not the only country that reduced emissions while growing the economy, as the chart shows.{ref}<a href="https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest&country=~SWE">In the interactive version of this chart</a> you can view this data for many more countries.{/ref} Shown in the chart are consumption-based CO2 emissions, which means that they account for the carbon emissions caused by products that were consumed within the country but which were produced elsewhere.   <figure class="wp-block-image size-full"><img src="https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all.png" alt="" class="wp-image-52668"/></figure>   Carbon pricing is not the only reason emissions are falling in these countries. As we just saw, the paper on Sweden attributes about half of the decline to the carbon tax. Other reasons include technological progress (such as rising efficiency and <a href="https://ourworldindata.org/cheap-renewables-growth">cheaper renewables</a>), declining demand for energy, and other regulations (for example, on air pollution).    Like all policies that are based on a price mechanism, the level of the price matters. If it is too low it won’t have much of an effect. This is what Felix Pretis (2020) has found for the carbon tax in British Columbia.{ref}The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because “existing carbon taxes (and prices) are too low to be effective in the time frame since their introduction.”   Felix Pretis (2020) – Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria & Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.{/ref}   But in places that have a substantial carbon price, they can play an important role in reducing emissions, as a number of studies have shown.   In a recent global study, researchers Best, Burke, and Jotzo (2020) analysed 142 countries and found that those that have a carbon price do, as one would expect, have lower CO2 emissions than those who do not.{ref}Best, R., Burke, P.J. & Jotzo, F. (2020) – Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69–94. <a href="https://doi.org/10.1007/s10640-020-00436-x">https://doi.org/10.1007/s10640-020-00436-x</a> {/ref}   Germany too reduced emissions while becoming richer. The research by Petrick and Wagner (2014) showed how EU-wide carbon pricing contributed to this achievement.{ref}Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. <a href="https://econpapers.repec.org/RePEc:zbw:ifwkwp:1912">https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912</a>}{/ref}    Countries in the European Union have established a cap-and-trade system called the <a href="https://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme">EU Emission Trading Scheme</a> (EU ETS). Recent research by Bayer and Akin showed that this system of carbon pricing has been effective in reducing emissions.{ref} Bayer, Patrick; Aklin, Michaël (2020) – The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117{/ref}    Lastly, let’s look at the motherland of fossil-fuel-powered industrialization: the chart shows the sources of power production in the UK over the last century.    Electricity production in the UK has been dominated by coal since its early days; as soon as the light bulb was invented, the UK had its first coal power plant, the Holborn Viaduct power station in London. But this changed in recent decades, and especially rapidly after the UK introduced two carbon price systems.    The UK was already part of the EU ETS, but went even further in 2013 when the country implemented the ‘carbon price floor’: <a href="https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor">a top-up carbon tax</a> to the European system.    In the decade before the tax was introduced one third of electricity in the UK came from coal, <a href="https://ourworldindata.org/safest-sources-of-energy">the worst of power sources</a>. Since then the carbon tax “has led to an unprecedented reduction in coal generation” according to the research of Castagneto et al (2019).{ref}G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) – <a href="https://www.ucl.ac.uk/bartlett/sustainable/sites/bartlett/files/ucl_report_ofgem_20102019_final.pdf">The value of international electricity trading</a>. UCL and University of Cambridge.   See also: Marion Leroutier (2021) – Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK. In Journal of Environmental Economics and Management.{/ref} In the years following the policy change, the share of electricity generated from coal declined to just 2%.{ref}These days it is common that the UK runs for <a href="https://www.theguardian.com/environment/ng-interactive/2019/may/25/the-power-switch-tracking-britains-record-coal-free-run">months without any coal electricity</a> at all, and like many countries that have a carbon price the UK has also <a href="https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest">achieved</a> an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.{/ref}    As the share of electricity from fossil fuel sources declined, the carbon intensity of electricity production <a href="https://ourworldindata.org/grapher/carbon-intensity-electricity?tab=chart&time=2000..latest&country=~GBR">more than halved</a> and carbon emissions from power generation have <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972583/2020_Provisional_emissions_statistics_report.pdf">fallen by two-thirds</a> in the UK!   The Law of Demand – if the price of something goes up, consumption goes down – also holds in this case. Places that have implemented a substantial carbon price are achieving the intended effect, the consumption of carbon-intensive products declines and emissions fall.   <div class="wp-block-columns is-style-sticky-right"> <div class="wp-block-column"> <iframe src="https://ourworldindata.org/grapher/electricity-mix-uk?country=~GBR" loading="lazy" style="width: 100%; height: 600px; border: 0px none;"></iframe> </div>   <div class="wp-block-column"></div> </div>    If you want to understand why it is possible to reduce emissions while growing the economy, see this Our World in Data guest post by Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova that answers this question.    <h4>Conclusion</h4>   What’s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have.    The reason our societies are powered by fossil fuels is that they provided energy at the cheapest monetary price. If we want to transition away from fossil fuels and build a world that is powered by their alternatives we can rely on the price mechanism as well.   What makes carbon pricing so powerful is that it is a policy that changes the entire system. No decision about any carbon-intensive activity escapes its influence: it changes the choices of consumers, producers, investors, entrepreneurs and innovators in all relevant sectors at once.    I want to make clear that I do not believe that carbon pricing can be the one policy change that will end climate change.{ref}On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) – <a href="https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions">Carbon Pricing and the Elasticity of CO2 Emissions</a>. INET Working Paper.{/ref} But the theory and evidence is clear that carbon prices work as intended and if we are able to end climate change in this century I would be surprised if we achieve this without putting a price on carbon. In other words, I don’t think this is sufficient, but I do think it would be a key step towards a better future.   Our challenge is big. We need to build a new world that still solves the problems that fossil fuels solve today. Carbon-intensive goods and services are often in high demand today, because they are important for people. They have the unfortunate by-product of carbon emissions, but they solve other problems for us and everyone around us. Key to making the transition to a low-carbon future will be to innovate and scale-up alternatives. Carbon prices are useful for this transition because they give everyone an incentive to get there, especially in <a href="https://ourworldindata.org/cheap-renewables-growth">those sectors where alternatives do exist</a>.    And in those areas where low-carbon alternatives do not yet exist, support for research and development will be key. Because these two policies are working towards the same goal they complement each other, a higher price on carbon provides an incentive to increase R&D.   We do have options, and understanding them is not exactly rocket science. Consumption goes down, when prices go up. If we want to reduce carbon emissions we should not be paying people to burn fossil-fuels. We should end subsidies.   What is hard, is to win the necessary political support for pricing carbon. The article linked below draws the political lessons from places that were successful in establishing carbon prices.   I believe that putting a price on carbon is one of the most important goals to fight for in our lifetime. The current world is not sustainable and it is just not right that the richest have the highest emissions, while those who emit the least – the poorest and those who come after us – pay the highest price. Carbon pricing addresses the current injustice where we are allowing the richest to privately enjoy the gains from fossil fuels, while they pass off the costs to everyone else.   If we are serious about decarbonizing the global economy – and building the low-carbon future – we should make the fight for a monetary price on carbon central to our efforts over the years ahead.   <hr class="wp-block-separator"/>   Acknowledgements: I would like to thank Hannah Ritchie, Marcel Gerber, Charlie Giattino, Esteban Ortiz-Ospina for reading drafts of this text and for their very helpful comments and ideas.   Update: I updated the figure that shows the decoupling of emissions and economic growth on September 3, 2022.   <div style="height:144px" aria-hidden="true" class="wp-block-spacer"></div>   <hr class="wp-block-separator"/>   If you want to think through the counterarguments to pricing carbon, here is a list of references to get you started with:   <ul><li>One of the most widely discussed recent articles on the topic is <a href="https://bostonreview.net/science-nature-politics/leah-c-stokes-matto-mildenberger-trouble-carbon-pricing">The Trouble with Carbon Pricing</a> authored by Leah Stokes and Matto Mildenberger. As I emphasized above, the authors’ main point is that while carbon prices make economic and environmental sense, it is difficult to get the political support that they need to be free of loopholes and to be high enough to make a difference. They also argue that it would be wrong to believe that no other policy is needed to bring emissions to zero. I largely agree with the authors. Carbon taxes cannot be the only solution – they emphasise clean energy standards, I’d emphasise public R&D – but I disagree that this means we should not make it our political goal to put a price on carbon. I think they should be part of a big package of successful climate policy tools – carbon prices are one tool in our hands and we shouldn’t weaken ourselves by throwing away solutions that we do have.</li><li>Ramez Naam wrote <a href="https://twitter.com/ramez/status/1094380540394795008">this very good Twitter thread</a> on why carbon taxes are a good policy, but why he believes that subsidies for specific technologies can be even better in some cases.</li><li>Rosenbloom et al (2020) discuss the weaknesses of carbon pricing and offer their own alternative, which they call “sustainability transition policy”,  a “mix of contextually and politically sensitive policies that simultaneously drive low-carbon innovation and the decline of fossil fuels”.<ul><li>Daniel Rosenbloom, Jochen Markard, Frank W. Geels, and Lea Fuenfschilling (2020) – <a href="https://www.pnas.org/content/117/16/8664.short">Opinion: Why carbon pricing is not sufficient to mitigate climate change—and how “sustainability transition policy” can help</a>. In PNAS.</li></ul><ul><li>I am personally not impressed by the Rosenbloom et al (2020) critique and agree largely with the reply by Jeroen van den Berg and Wouter Botzen (2020) also published in PNAS.</li><li>Jeroen van den Berg and Wouter Botzen (2020) – <a href="https://www.pnas.org/content/117/38/23219">Low-carbon transition is improbable without carbon pricing</a>, PNAS.</li></ul></li><li>Goulder et al. (2016) argue that implementing a closely related policy – a clean energy standard (CES) – can be more cost-effective than a carbon price.</li><li>Lawrence H. Goulder, Marc A. C. Hafstead, Roberton C. Williams III (2016) – General Equilibrium Impacts of a Federal Clean Energy Standard. In the American Economic Journal: Economic Policy. VOL. 8, NO. 2, MAY 2016. (pp. 186-218).</li><li>Three more pointers:<ul><li>Garth Heutel (2020) – <a href="https://econfip.org/policy-brief/in-defense-of-alternatives-to-pollution-pricing/#">In Defense of Alternatives to Pollution Pricing</a></li><li>See <a href="https://marginalrevolution.com/marginalrevolution/2011/09/do-all-serious-economists-favor-a-carbon-tax.html">this list of 10 arguments by Tyler Cowen</a>.</li><li>And finally I have also asked the question <a href="https://twitter.com/MaxCRoser/status/1326671354654023682">‘What are the best papers or essays with arguments against a carbon price?</a>’, publicly on Twitter. There are several helpful replies there.</li></ul></li></ul>   <hr class="wp-block-separator"/>     Continue reading on Our World in Data:    In some countries the public is very supportive of carbon taxes. In other countries they are largely against them.

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                                "text": "It is a mistake to believe that we are not paying for emitting greenhouse gases. Even if we do not pay a ",
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                                "text": "Without a monetary carbon price it is those who have the smallest emissions that suffer the largest costs from climate change. A carbon price, in contrast, means that those who cause the emissions also pay for them.",
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                                "text": "A key reason why voters are not in favour of carbon pricing is that many believe it won\u2019t actually reduce emissions, but empirical research and theory show that this is wrong: pricing carbon emissions \u2013 either via a carbon tax or a \u2018cap and trade\u2019-system \u2013 is effective. It shifts production and consumption from carbon-intensive goods and services to low-carbon alternatives and does reduce emissions.",
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                                "text": "Many are deeply concerned about climate change yet feel hopeless that anything can be done to meet this challenge. Increasing the understanding that carbon pricing works, correcting common misconceptions, and showing that there ",
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                        "text": ". Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.",
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                        "text": "These consequences include the negative economic impacts of climate change through its effects on people\u2019s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for ",
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                                "text": "the world\u2019s poorest people",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " they pose a threat to their lives, as they increase the risk of hunger and food insecurity.",
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                        "text": "Climate change isn\u2019t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in ",
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                    },
                    {
                        "url": "https://ourworldindata.org/grapher/pollution-deaths-from-fossil-fuels?stackMode=absolute&region=World",
                        "children": [
                            {
                                "text": "countries around the world",
                                "spanType": "span-simple-text"
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                        "spanType": "span-link"
                    },
                    {
                        "text": " every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.{ref}In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels.\u00a0",
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                        "text": "Lelieveld, J., Klingm\u00fcller, K., Pozzer, A., Burnett, R. T., Haines, A., & Ramanathan, V. (2019). ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.pnas.org/content/116/15/7192/",
                        "children": [
                            {
                                "text": "Effects of fossil fuel and total anthropogenic emission removal on public health and climate",
                                "spanType": "span-simple-text"
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                    },
                    {
                        "text": ". Proceedings of the National Academy of Sciences, 116(15), 7192-7197",
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                    },
                    {
                        "spanType": "span-newline"
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                        "text": "The death toll of the three counts of violence for 2017 ",
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                        "url": "https://ourworldindata.org/grapher/annual-number-of-deaths-by-cause",
                        "children": [
                            {
                                "text": "according to the IHME",
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                        ],
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                        "text": " is 561,511.",
                        "spanType": "span-simple-text"
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                        "spanType": "span-newline"
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                    {
                        "text": "\u2022 Homicides: 405,346 deaths",
                        "spanType": "span-simple-text"
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                    {
                        "text": "\u2022 War battles: 129,720 deaths",
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                        "text": "\u2022 Terrorism: 26,445 deaths",
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                        "text": "The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study \u2013 Vohra et al (2021) \u2013\u00a0 estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels.",
                        "spanType": "span-simple-text"
                    },
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                        "spanType": "span-newline"
                    },
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                        "text": "Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., & Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. ",
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                        "children": [
                            {
                                "text": "Environmental Research",
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                        "text": ", ",
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                        "children": [
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                                "text": "195",
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                        "text": ", 110754.",
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                    {
                        "url": "https://doi.org/10.1016/j.envres.2021.110754",
                        "children": [
                            {
                                "text": " https://doi.org/10.1016/j.envres.2021.110754",
                                "spanType": "span-simple-text"
                            }
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                        "text": ".{/ref}",
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                "value": [
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                        "children": [
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                                "text": "This",
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                        ],
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                        "text": " is the price we are ",
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                        "children": [
                            {
                                "text": "already",
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                        "text": " paying for burning fossil fuels.",
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                "value": [
                    {
                        "text": "The International Monetary Fund (IMF) estimates the sum of these costs in a major study that they update regularly. The title of the study is ",
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                    },
                    {
                        "children": [
                            {
                                "text": "\u2018How Large Are Global Fossil Fuel Subsidies?\u2019",
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                            }
                        ],
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                    },
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                        "text": " and in the study\u2019s latest issue the researchers estimate them to amount to US-$ 5.2 trillion.{ref}The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) \u2013 How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://doi.org/10.1016/j.worlddev.2016.10.004",
                        "children": [
                            {
                                "text": "https://doi.org/10.1016/j.worlddev.2016.10.004",
                                "spanType": "span-simple-text"
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                        "text": "In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) \u2013 ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=doi.org%2F10.5089%2F9781484393178.001&btnG=",
                        "children": [
                            {
                                "text": "Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates",
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                    {
                        "text": ". Published as an IMF Working Paper.\u00a0",
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                        "text": "In my text I am citing the latest figures of the authors.",
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                        "text": "By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent).",
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                        "text": "Coal: $5,200 billion * 0.44 = $2,288 billion",
                        "spanType": "span-simple-text"
                    },
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                        "spanType": "span-newline"
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                    {
                        "text": "Oil: $5,200 billion * 0.41 = $2,132 billion",
                        "spanType": "span-simple-text"
                    },
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                        "spanType": "span-newline"
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                    {
                        "text": "Natural gas: $5,200 billion * 0.1 = $520 billion",
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                "value": [
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                        "text": "Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that\u00a0 \u201cthe subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.\u201d, This data is according to the ",
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                        "url": "https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Energy_subsidies_2020.pdf",
                        "children": [
                            {
                                "text": "International Renewable Energy Agency (2020) \u2013 Energy subsidies",
                                "spanType": "span-simple-text"
                            }
                        ],
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                        "text": " Unfortunately this source does not break down the subsidies to renewables by source of energy.",
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                "type": "text",
                "value": [
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                        "text": "The ",
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                        "url": "https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&time=earliest..latest",
                        "children": [
                            {
                                "text": "energy production from these sources",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455).",
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                        "text": "This means the subsidy per TWh of energy is:",
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                        "text": "Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh",
                        "spanType": "span-simple-text"
                    },
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                        "spanType": "span-newline"
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                        "text": "Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
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                        "text": "Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
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                        "text": "Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
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                        "text": "Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh",
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                        "text": "These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies.",
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                        "text": "What I am calling explicit subsidies is called \u201cpre-tax subsidies\u201d by these authors. What I am calling implicit subsidies is called \u201cpost-tax subsidies\u201d by these authors. {/ref} This is equivalent to 6.5% of global GDP.",
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                        "text": "As the study\u2019s title makes clear, the IMF sees the sum of damage done by fossil fuels as a ",
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                                "text": "subsidy",
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                        "text": ". That might be surprising at first, but it makes sense if you think about it. A good is subsidized when consumers and producers of that good do not have to pay the full cost for it. This can either be an ",
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                                "text": "explicit subsidy",
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                        "text": ", for example when governments pay for the school education of the country\u2019s children, or it can be an ",
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                                "text": "implicit subsidy",
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                        "text": ", when producers and consumers cause damage, but do not have to pay a monetary price for it.{ref}One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost.",
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                        "text": "An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.{/ref}",
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                        "text": "You find examples of both types of subsidies in your own life. If you pay for you and your neighbour\u2019s dinner then you are ",
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                        "children": [
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                                "text": "explicitly ",
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                        "text": "subsidizing them. If your neighbour crashes into your car and you do not charge him for the damage he caused, you are ",
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                                "text": "implicitly ",
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                        "text": "subsidizing them.",
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                        "text": "Fossil fuels are subsidized in both ways. They are ",
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                        "url": "https://ourworldindata.org/grapher/fossil-fuel-subsidies-per-capita?time=2015",
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                                "text": "explicitly subsidized in many places",
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                        "text": ", and they are implicitly subsidized ",
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                                "text": "everywhere",
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                        "text": ", as the consumers and producers of fossil fuels do not have to pay the monetary cost for the damage they cause.",
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                        "text": "Ending the subsidies to fossil fuels would mean to put a monetary price on them that corresponds to the damage they do. Since the alternatives to fossil fuels are both ",
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                    {
                        "url": "https://ourworldindata.org/safest-sources-of-energy",
                        "children": [
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                                "text": "cleaner and safer",
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                        "text": " this would allow the world to make massive progress according to the IMF study: Ending these subsidies and pricing them into the cost that producers and consumers have to pay for fossil fuels would substantially decrease global carbon emissions and save the lives of people who would otherwise be killed by air pollution.{ref}The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it's undeniable that the costs are very large.{/ref}",
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                        "text": "The damage caused by burning fossil fuels is a textbook example of what economists call an externality: Putting a monetary price on carbon emissions makes it possible to internalize the costs of the negative impact on our health, the environment, and future generations.{ref}The ",
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                        "url": "https://www.core-econ.org/the-economy/book/text/12.html",
                        "children": [
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                                "text": "free online textbook CORE ECON",
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                        "text": " provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.{/ref}",
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                        "text": "This means that we do not have the option to not pay a price",
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                        "text": "It is a mistake to think that it is possible to not pay for emitting carbon. As we have just seen, ",
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                        "children": [
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                                "text": "we ",
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                                "text": " already paying a price",
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                        "text": ".\u00a0",
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                        "text": "This is the economists\u2019 argument for putting an explicit monetary price on carbon emissions.",
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                "text": [
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                        "text": "What would change if we put a monetary price on carbon?",
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                        "text": "There are two ways in which a carbon price can be implemented: a carbon tax or a \u2018cap and trade\u2019 system:{ref}Some alternatives to carbon taxes and cap and trade \u2013 such as clean energy standards or regulations \u2013 can be viewed as implicit prices on carbon emissions.",
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                        "text": "It's a core result in resource economics\u00a0 that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON ",
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                        "url": "https://www.core-econ.org/the-economy/book/text/20.html",
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                        "text": ".{/ref}\u00a0",
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                                "text": "In a \u2018cap and trade\u2019 system the carbon price changes over time. A maximum level of pollution (a \u2018cap\u2019) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap.\u00a0",
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                                "text": "A carbon tax is simply a levy that is applied to all goods and services which lead to carbon emissions in their production.",
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                        "text": "In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive.",
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                        "text": "This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they\u2019re not available yet producers will be incentivised to develop low-carbon alternatives.",
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                        "text": "Carbon pricing changes the relative prices between carbon-intensive and low-carbon products and this changes consumption choices towards a low-carbon lifestyle: Carbon prices make it more likely that we rely on low-carbon electricity rather than fossil fuels; that we take the bicycle rather than the car; that we buy the smaller car rather than the bigger one; that we buy electric vehicles rather than gas-powered ones; that we eat ",
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                                "text": "chicken rather than beef",
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                    {
                        "text": "; or that we organize a video conference rather than an event that is a flight away.\u00a0",
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                "value": [
                    {
                        "text": "Both of the intended consequences \u2013 transition to and innovation of alternative low-carbon technologies \u2013 increase with the carbon price. The incentive for consumers and entrepreneurs is to reduce their emissions whenever doing so costs them less than paying the carbon price.\u00a0",
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                "value": [
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                        "text": "Because access to energy often constitutes a large share of the budget of poorer families, successful carbon pricing policies include support for those households to offset the increased cost of energy.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics",
                        "children": [
                            {
                                "text": "Making Carbon Pricing Work for Citizens",
                                "spanType": "span-simple-text"
                            }
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                        "spanType": "span-link"
                    },
                    {
                        "text": ". In Nature Climate Change 8, 669\u2013677.{/ref}",
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                        "text": "In the case of a carbon tax, the government revenue can be used to finance this support for poorer households and it can also be used to pay for additional measures that slow down climate change and support environmental regeneration: including ",
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                    {
                        "url": "https://ourworldindata.org/afforestation",
                        "children": [
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                                "text": "reforestation",
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                    {
                        "text": ", more walkable and cyclable cities, or research and development for renewable energy and low-carbon technologies.\u00a0",
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                        "text": "With a carbon price one can establish a mechanism that ensures that those who are causing emissions are those who pay for the countermeasures that benefit society and the environment.",
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                "text": [
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                        "text": "A carbon price allows us to make two decisions",
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                        "text": "Levying a monetary price on emissions allows us to choose our answer to two important questions: ",
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                        "children": [
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                                "text": "Who",
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                        "text": " should pay the price for carbon emissions? ",
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                        "children": [
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                                "text": "How much",
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                        "text": " do we want them to pay for emitting greenhouse gases?",
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                "text": [
                    {
                        "children": [
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                                "text": "Who",
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                        "text": " should pay the price for emitting greenhouse gases?",
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                        "text": "At the most fundamental level the argument for carbon pricing is the hard truth that we have to pay a price for carbon emissions. What we can decide is who pays for them.",
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                        "text": "The status quo in a society without carbon pricing could not be more brutal:",
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                                "text": "The people who live in high-income countries \u2013 those who enjoy the best living conditions in human history \u2013 are those who will be least affected by climate change, yet they are ",
                                "spanType": "span-simple-text"
                            },
                            {
                                "url": "https://ourworldindata.org/worlds-energy-problem",
                                "children": [
                                    {
                                        "text": "the ones with the highest emissions",
                                        "spanType": "span-simple-text"
                                    }
                                ],
                                "spanType": "span-link"
                            },
                            {
                                "text": ".",
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                        "type": "text",
                        "value": [
                            {
                                "text": "The people who will be most affected by the negative consequences of a hotter planet are those that have contributed the least to climate change: the poorest people in the world \u2013 who are at risk of increasing food insecurity and do not have the resources to adapt to changes as rapidly \u2013 and the generations that come after us.",
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                "value": [
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                        "text": "Without a monetary price on carbon it is those who have the lowest emissions that pay the most.\u00a0",
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            {
                "type": "text",
                "value": [
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                        "text": "With carbon pricing we make sure that those who cause emissions also pay for them.",
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                "type": "text",
                "value": [
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                        "text": "Because emissions rise with income, a carbon price ensures that it will be the rich who pay most.{ref}That they pay the most is a statement about absolute spending. As explained below, the ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "relative",
                                "spanType": "span-simple-text"
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                    {
                        "text": " spending on energy is often highest for poorer households.{/ref} For the very rich it is the case that a few consumption choices \u2013 flights, large cars, meat \u2013 are responsible for the bulk of their emissions.{ref}Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1\u201312. ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://doi.org/10.1017/sus.2020.12",
                        "children": [
                            {
                                "text": "https://doi.org/10.1017/sus.2020.12",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ".{/ref} Carbon pricing is a policy targeted to address these consumption choices, it makes carbon-intensive goods less affordable and \u2018degrows\u2019 the consumption of those goods.",
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                ],
                "parseErrors": []
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            {
                "text": [
                    {
                        "children": [
                            {
                                "text": "How much",
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                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": " do we make people pay for emitting greenhouse gases?\u00a0",
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                        "text": "The second decision that we can influence with a price on carbon is: ",
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                        "children": [
                            {
                                "text": "How much",
                                "spanType": "span-simple-text"
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                    {
                        "text": " do we want to pay for fossil fuels?\u00a0",
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                "type": "text",
                "value": [
                    {
                        "text": "If we continue emitting high volumes of greenhouse gases we will cause severe climate change and eventually have to pay a high price from the damages. Several studies find that if we don\u2019t achieve a reduction in emissions now, economic growth would be much lower in the decades ahead (and that surely wouldn\u2019t be our main concern in such a future).{ref}On the relation between future warming and growth see:",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
                    },
                    {
                        "text": "Pretis, F., Schwarz, M., Tang, K., Haustein, K., & Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5\u00b0C or 2\u00b0C warming. ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": ", ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "376",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": "(2119), 20160460.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://doi.org/10.1098/rsta.2016.0460",
                        "children": [
                            {
                                "text": " https://doi.org/10.1098/rsta.2016.0460",
                                "spanType": "span-simple-text"
                            },
                            {
                                "spanType": "span-newline"
                            }
                        ],
                        "spanType": "span-link"
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                ],
                "parseErrors": []
            },
            {
                "type": "text",
                "value": [
                    {
                        "text": "Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "Nature",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": ", ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "527",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": "(7577), 235\u2013239.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://doi.org/10.1038/nature15725",
                        "children": [
                            {
                                "text": " https://doi.org/10.1038/nature15725",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " {/ref}\u00a0",
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                    }
                ],
                "parseErrors": []
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            {
                "type": "text",
                "value": [
                    {
                        "text": "Levying a fee on carbon emissions can be a key policy to bring down emissions quickly so that we avoid large costs in the future.",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
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            {
                "type": "text",
                "value": [
                    {
                        "text": "In the past many macroeconomists considered the need to cut emissions as a drag on the economy that lowers economic growth. This idea, that decarbonisation of our economies conflicts with economic growth, is still shared by many.{ref}In ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://ourworldindata.org/shrink-emissions-not-the-economy",
                        "children": [
                            {
                                "text": "a guest post for Our World in Data",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this:",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
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                    {
                        "children": [
                            {
                                "text": "\u201cIronically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed \u201cdegrowth\u201d). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.\u201d",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": "{/ref}",
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                "type": "text",
                "value": [
                    {
                        "text": "But this is no longer the mainstream view. The latest annual IMF report estimates that policies, including carbon pricing, that mitigate climate change actually ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "increase",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": " economic growth over the coming decades.{ref}",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020",
                        "children": [
                            {
                                "text": "World Economic Outlook, October 2020: A Long and Difficult Ascent",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ". In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.{/ref} This means that there is no trade-off between fighting climate change and economic growth. Fighting climate change is a way to achieve ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "more growth",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": ".{ref}Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2\u00b0C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "relative to a baseline growth of 1.6% to 3%",
                                "spanType": "span-simple-text"
                            }
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                        "spanType": "span-italic"
                    },
                    {
                        "text": ".\u00a0",
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                "value": [
                    {
                        "text": "In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today\u2019s economy. With measures in place to limit warming to 2\u00b0C, growth would be 0.06% smaller \u2013 i.e. 1.54% per year. The world economy would then \u2018only' be 461% of the size of today.",
                        "spanType": "span-simple-text"
                    },
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                        "spanType": "span-newline"
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                    {
                        "spanType": "span-newline"
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                    {
                        "text": "In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today\u2019s economy. With measures to limit warming to 2\u00b0C, growth would be 0.06% smaller \u2013 i.e. 2.94% per year. The economy would then \u2018only' be 1813% the size of today.",
                        "spanType": "span-simple-text"
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                "type": "text",
                "value": [
                    {
                        "text": "This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2\u00b0C.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
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                    {
                        "spanType": "span-newline"
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                    {
                        "text": "The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
                    },
                    {
                        "spanType": "span-newline"
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                    {
                        "text": "See:",
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                    },
                    {
                        "spanType": "span-newline"
                    },
                    {
                        "text": "Edenhofer et al. (2014). ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.ipcc.ch/report/ar5/wg3/",
                        "children": [
                            {
                                "text": "IPCC, 2014: Summary for Policymakers",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ". In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
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                    {
                        "spanType": "span-newline"
                    },
                    {
                        "text": "See also: IPCC (2014) \u2013 ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf",
                        "children": [
                            {
                                "text": "Climate Change 2014: Synthesis Report",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ". Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
                    },
                    {
                        "spanType": "span-newline"
                    },
                    {
                        "url": "https://www.sciencedirect.com/science/article/pii/S0095069617308707",
                        "children": [
                            {
                                "text": "https://www.sciencedirect.com/science/article/pii/S0095069617308707",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
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                        "spanType": "span-newline"
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                    {
                        "text": "{/ref}\u00a0",
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                "type": "text",
                "value": [
                    {
                        "text": "From the responses to my recent writing on ",
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                    },
                    {
                        "url": "https://ourworldindata.org/poverty-minimum-growth-needed",
                        "children": [
                            {
                                "text": "the need of growth for ending poverty",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " I saw that some people have not caught up with this. Fighting climate change is not just compatible with fighting poverty, the two goals \u2014 to reduce emissions and to increase economic growth \u2014 actually ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "strengthen",
                                "spanType": "span-simple-text"
                            }
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                        "spanType": "span-italic"
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                    {
                        "text": " each other.",
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                        "text": "It is very good news that fighting climate change is expected to increase growth over the coming decades, but the benefits to climate mitigation are larger than just additional growth: it also means a modernisation of key infrastructure, faster innovation, the protection of the biosphere on our planet, and the major health benefits of reduced air pollution caused by burning fossil fuels, including millions of lives saved.\u00a0",
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                "type": "text",
                "value": [
                    {
                        "text": "Taking both the costs and benefits into account makes a very clear argument for climate action now. Putting a price on carbon to build a low-carbon world is an investment for a much better future.",
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                ],
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            {
                "text": [
                    {
                        "text": "For once even economists agree",
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                "type": "heading",
                "level": 2,
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                        "text": "Economists are not known for agreeing much with one another. But regarding the challenge of how to reduce greenhouse gas emissions there is more agreement among economists than in perhaps any other big policy question.\u00a0",
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                        "text": "What is particularly encouraging is that this is a policy that is supported by both left- and right-leaning economists. That left-leaning economists are in favour of a tax that will mostly be paid for by richer people is not surprising. It is perhaps more surprising that many right-leaning economists \u2013 who are generally in favor of a small state with only minimal taxes \u2013 are also in favor. Economists on the conservative side of the spectrum, such as Greg Mankiw, ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf",
                        "children": [
                            {
                                "text": "advocate strongly for a carbon tax",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " and widespread support for carbon taxes of economists across the political spectrum is documented in many relevant surveys.{ref}The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.igmchicago.org/?s=carbon+tax",
                        "children": [
                            {
                                "text": "asked them about their opinion on a carbon tax",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " and invariably finds large support for such a tax.",
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                        "text": "See also the survey of 365 economists who have published papers related to climate change \u201cin a highly ranked, peer-reviewed economics or environmental economics journal\u201d conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://policyintegrity.org/files/publications/ExpertConsensusReport.pdf",
                        "children": [
                            {
                                "text": "here",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ". (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now \u2013 see Figure 2a.)",
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                    }
                ],
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            },
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                "type": "text",
                "value": [
                    {
                        "text": "In a 2006 survey of the American Economic Association, 65% agreed that \u201cthe US should increase energy taxes\u201d.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
                    },
                    {
                        "text": "Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists\u2019 Voice, 3(9).",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
            },
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                "type": "text",
                "value": [
                    {
                        "text": "The Wall Street Journal asked business economists in 2007, \u2018\u2018What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?\u2019\u2019 54 percent advocated for \u2018\u2018taxes that raise the cost of purchasing fossil fuels\u2019\u2019.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
                    },
                    {
                        "text": "Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007.",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
            },
            {
                "type": "text",
                "value": [
                    {
                        "text": "Keohane, M. N. O., & Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington.",
                        "spanType": "span-simple-text"
                    },
                    {
                        "spanType": "span-newline"
                    },
                    {
                        "text": "Last year over 3,500 economists, including twenty-seven Nobel laureates, signed ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://clcouncil.org/economists-statement/",
                        "children": [
                            {
                                "text": "this letter supporting carbon pricing",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ".{/ref}\u00a0",
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                ],
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                "type": "text",
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                        "text": "An alternative to a carbon price that many governments pursue is to rely on specific guidelines, but doing this well is an incredibly difficult task. A government with the goal to reduce emissions can try to regulate each specific sector and decide which types of production and consumption should be reduced or forbidden. But the planner who is tasked with doing this needs to have an enormous knowledge of all kinds of technologies, their carbon footprint, their cost, the possible alternatives, and their future potential. The carbon price is such an effective alternative to the central planner, because it doesn\u2019t require a central authority to have enormous knowledge. Instead it incentivizes everyone to reduce carbon emissions \u2013 since they are incentivized to save money \u2013 and thereby distributes the task of reducing emissions to ",
                        "spanType": "span-simple-text"
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                        "children": [
                            {
                                "text": "everyone",
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                    {
                        "text": " \u2013 every producer, every investor, every consumer. Instead of one central agency, it incentivizes billions of people to search for ways to reduce their costs and thereby to find millions of solutions to reduce their emissions.",
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                    }
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                "type": "text",
                "value": [
                    {
                        "text": "Another aspect that is convincing even to those who favour a small state is that if you want to have ",
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                        "children": [
                            {
                                "text": "any public spending at all",
                                "spanType": "span-simple-text"
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                    {
                        "text": " \u2013 and very few want a state that is so small that neither roads nor the police are publicly funded \u2013\u00a0you have to raise state revenue ",
                        "spanType": "span-simple-text"
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                    {
                        "children": [
                            {
                                "text": "somewhere",
                                "spanType": "span-simple-text"
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                        "spanType": "span-italic"
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                    {
                        "text": ". The argument then is that if you have to have some taxes, it\u2019s better to tax something that harms people rather than something that we want to encourage, like work. There are big losers from a carbon price \u2013 the fossil fuel industry \u2013 but for citizens, the overall taxes do not have to increase: the carbon price is government revenue so that it can reduce taxes elsewhere. It is actually the other way around: the implicit subsidies to fossil fuels are costly and thereby increase taxes for everyone \u2013 as we have seen, the IMF estimates that the lack of carbon pricing means that governments lose 3.8% of GDP and this loss either means greater public debt or it has to be made up by all of us paying higher taxes.",
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                "value": [
                    {
                        "text": "Poorer households spend a larger share of their income on energy so that a carbon price would hit these households hardest. It is possible to avoid this consequence by making the poorest households benefit from the spending that the carbon tax allows. The famous call for a carbon tax signed by a large number of leading economists at ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.econstatement.org/",
                        "children": [
                            {
                                "text": "econstatement.org",
                                "spanType": "span-simple-text"
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                        "spanType": "span-link"
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                        "text": " has this goal. \"To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in \u2018carbon dividends\u2019 than they pay in increased energy prices.\"",
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                "text": [
                    {
                        "text": "What is stopping us?",
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                "level": 2,
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                        "text": "The world did make a start on carbon pricing. 78 different jurisdictions have implemented a carbon price and this year (2021) a price will be paid on 22% of the world\u2019s carbon emissions.{ref}All data points and references here refer to the 2020 issue: World Bank (2020) \u2013 ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://openknowledge.worldbank.org/handle/10986/33809",
                        "children": [
                            {
                                "text": "State and Trends of Carbon Pricing 2020",
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                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ". Washington, DC: World Bank. \u00a9 World Bank. License: CC BY 3.0 IGO.{/ref} 17 years ago a price was paid on much less than 1% of all emissions.",
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                "type": "text",
                "value": [
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                        "text": "But the carbon price is low in many places and the figures just cited mean that there is no monetary price on three-quarters of emissions.",
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                        "text": "Given all the arguments above, why is effective carbon pricing not implemented in many more places?\u00a0",
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                        "text": "A big reason is of course that those that will lose out from carbon pricing \u2013 the fossil fuel industry \u2013 rally against them.\u00a0",
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                ],
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                "type": "text",
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                        "text": "But it is also the case that carbon pricing is not very popular among voters. Study after study finds that a key reason for this is that ",
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                    {
                        "children": [
                            {
                                "text": "many do not believe that a price on carbon is actually effective in reducing emissions",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-italic"
                    },
                    {
                        "text": ".{ref}See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Fr\u00e9d\u00e9ric Varone, and Frank V\u00f6hringer (2017) \u2013 \u201cGreen Taxes in a Post-Paris World: Are Millions of Nays Inevitable?\u201d Environ Resource Econ 68, 97\u2013128 (2017). ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://doi.org/10.1007/s10640-017-0133-8.%7B/ref",
                        "children": [
                            {
                                "text": "https://doi.org/10.1007/s10640-017-0133-8",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
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                        "spanType": "span-newline"
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                        "spanType": "span-newline"
                    },
                    {
                        "text": "Baranzini A, Carattini S (2017) \u2013 Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197\u2013227",
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                ],
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                "type": "text",
                "value": [
                    {
                        "text": "and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics",
                        "children": [
                            {
                                "text": "Making Carbon Pricing Work for Citizens",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ". In Nature Climate Change 8, 669\u2013677. {/ref} While it is the effectiveness of carbon prices that makes them popular among experts, it is the perceived ineffectiveness that makes them unpopular among non-experts.\u00a0",
                        "spanType": "span-simple-text"
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                ],
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                "type": "text",
                "value": [
                    {
                        "text": "But it is also the case that people change their mind about carbon prices when they learn that they do actually work.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics",
                        "children": [
                            {
                                "text": "Making Carbon Pricing Work for Citizens",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ". In Nature Climate Change 8, 669\u2013677. {/ref} After the Swiss population rejected a carbon price in a referendum, a group of researchers \u2013 Carattini et al (2017){ref}Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Fr\u00e9d\u00e9ric Varone, and Frank V\u00f6hringer (2017) \u2013 \u201cGreen Taxes in a Post-Paris World: Are Millions of Nays Inevitable?\u201d Environ Resource Econ 68, 97\u2013128 (2017). ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://doi.org/10.1007/s10640-017-0133-8.%7B/ref",
                        "children": [
                            {
                                "text": "https://doi.org/10.1007/s10640-017-0133-8",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " {/ref} \u2013 ran a study to investigate what could have made the proposal more popular. They found that \u201cthe effectiveness of energy taxes is not an established fact for the general public\u201d and their study showed that the most important successful argument in favour of the tax is information on the expected effectiveness in reducing emissions.",
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                "type": "text",
                "value": [
                    {
                        "text": "It shouldn\u2019t be surprising that the communication of successful strategies is of such great importance. Many of us care a lot about climate change \u2013 people around the world ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.pewresearch.org/global/2020/09/09/despite-pandemic-many-europeans-still-see-climate-change-as-greatest-threat-to-their-countries/",
                        "children": [
                            {
                                "text": "consistently view",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " it as one of the largest challenges that humanity faces \u2013 and at the same time many feel hopeless that we can actually do anything about it. Showing that there ",
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                    },
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                        "children": [
                            {
                                "text": "is",
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                    {
                        "text": " a way forward is key for the successful fight against climate change.",
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            {
                "text": [
                    {
                        "text": "Empirical evidence: Does a price on carbon reduce carbon emissions?",
                        "spanType": "span-simple-text"
                    }
                ],
                "type": "heading",
                "level": 2,
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                    {
                        "text": "Back in 1991 Sweden was one of the first countries in the world to implement a carbon tax. Over time the carbon tax was gradually increased, but it still mainly affects the transport sector (around 90 percent of the revenues from the carbon tax come from the consumption of gasoline and motor diesel).{ref}The transport sector is of significant importance for Sweden\u2019s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden\u2019s total annual CO",
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                    },
                    {
                        "children": [
                            {
                                "text": "2",
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                    {
                        "text": " emissions.{/ref}",
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                ],
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            {
                "type": "text",
                "value": [
                    {
                        "text": "The researcher Julius Andersson studied whether the carbon price worked as intended by studying its impact on emissions from the transport sector.{ref}Julius J. Andersson (2019) \u2013 ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144",
                        "children": [
                            {
                                "text": "Carbon Taxes and CO2 Emissions: Sweden as a Case Study",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": ". American Economic Journal: Economic Policy. 11 (4): 1\u201330. doi:10.1257/pol.20170144. ISSN 1945-7731.{/ref}\u00a0",
                        "spanType": "span-simple-text"
                    }
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                "type": "text",
                "value": [
                    {
                        "text": "He finds that \u201cCO",
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                        "children": [
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                                "text": "2",
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                    {
                        "text": " emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone.\u201d A very strong effect.",
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                ],
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                "type": "text",
                "value": [
                    {
                        "text": "How did prosperity and emissions change in Sweden over this period? Average incomes in Sweden \u2013\u00a0GDP per capita \u2013 increased by 52% since the year before the tax was introduced, and emissions declined by 29%.{ref}In ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://ourworldindata.org/grapher/consumption-co2-per-capita-vs-gdppc?endpointsOnly=1&time=2017..latest",
                        "children": [
                            {
                                "text": "this scatterplot of CO2 emissions vs GDP per capita",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.{/ref}\u00a0",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
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            {
                "type": "text",
                "value": [
                    {
                        "text": "Sweden\u2019s emissions are still far from where they need to be, but the direction of change \u2013 growing prosperity, but declining emissions \u2013 is right.",
                        "spanType": "span-simple-text"
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                ],
                "parseErrors": []
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                "type": "text",
                "value": [
                    {
                        "text": "And Sweden is not the only country that reduced emissions while growing the economy, as the chart shows.{ref}",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest&country=~SWE",
                        "children": [
                            {
                                "text": "In the interactive version of this chart",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " you can view this data for many more countries.{/ref} Shown in the chart are consumption-based CO",
                        "spanType": "span-simple-text"
                    },
                    {
                        "children": [
                            {
                                "text": "2",
                                "spanType": "span-simple-text"
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                        "spanType": "span-subscript"
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                    {
                        "text": " emissions, which means that they account for the carbon emissions caused by products that were consumed within the country but which were produced elsewhere.",
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                ],
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            {
                "alt": "",
                "size": "wide",
                "type": "image",
                "filename": "Absolute-decoupling-Growth-and-falling-emissions-all.png",
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                "type": "text",
                "value": [
                    {
                        "text": "Carbon pricing is not the only reason emissions are falling in these countries. As we just saw, the paper on Sweden attributes about half of the decline to the carbon tax. Other reasons include technological progress (such as rising efficiency and ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://ourworldindata.org/cheap-renewables-growth",
                        "children": [
                            {
                                "text": "cheaper renewables",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": "), declining demand for energy, and other regulations (for example, on air pollution).\u00a0",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
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            {
                "type": "text",
                "value": [
                    {
                        "text": "Like all policies that are based on a price mechanism, the level of the price matters. If it is too low it won\u2019t have much of an effect. This is what Felix Pretis (2020) has found for the carbon tax in British Columbia.{ref}The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because \u201cexisting carbon taxes (and prices) are too low to be effective in the time frame since their introduction.\u201d",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
            },
            {
                "type": "text",
                "value": [
                    {
                        "text": "Felix Pretis (2020) \u2013 Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria & Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.{/ref}",
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                ],
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            {
                "type": "text",
                "value": [
                    {
                        "text": "But in places that have a substantial carbon price, they can play an important role in reducing emissions, as a number of studies have shown.",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
            },
            {
                "type": "text",
                "value": [
                    {
                        "text": "In a recent global study, researchers Best, Burke, and Jotzo (2020) analysed 142 countries and found that those that have a carbon price do, as one would expect, have lower CO",
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                    },
                    {
                        "children": [
                            {
                                "text": "2",
                                "spanType": "span-simple-text"
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                    },
                    {
                        "text": " emissions than those who do not.{ref}Best, R., Burke, P.J. & Jotzo, F. (2020) \u2013 Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69\u201394. ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://doi.org/10.1007/s10640-020-00436-x",
                        "children": [
                            {
                                "text": "https://doi.org/10.1007/s10640-020-00436-x",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " {/ref}",
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                ],
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            {
                "type": "text",
                "value": [
                    {
                        "text": "Germany too reduced emissions while becoming richer. The research by Petrick and Wagner (2014) showed how EU-wide carbon pricing contributed to this achievement.{ref}Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://econpapers.repec.org/RePEc:zbw:ifwkwp:1912",
                        "children": [
                            {
                                "text": "https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": "}{/ref}\u00a0",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
            },
            {
                "type": "text",
                "value": [
                    {
                        "text": "Countries in the European Union have established a cap-and-trade system called the ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme",
                        "children": [
                            {
                                "text": "EU Emission Trading Scheme",
                                "spanType": "span-simple-text"
                            }
                        ],
                        "spanType": "span-link"
                    },
                    {
                        "text": " (EU ETS). Recent research by Bayer and Akin showed that this system of carbon pricing has been effective in reducing emissions.{ref} Bayer, Patrick; Aklin, Micha\u00ebl (2020) \u2013 The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117{/ref}\u00a0",
                        "spanType": "span-simple-text"
                    }
                ],
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                "type": "text",
                "value": [
                    {
                        "text": "Lastly, let\u2019s look at the motherland of fossil-fuel-powered industrialization: the chart shows the sources of power production in the UK over the last century.\u00a0",
                        "spanType": "span-simple-text"
                    }
                ],
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            {
                "type": "text",
                "value": [
                    {
                        "text": "Electricity production in the UK has been dominated by coal since its early days; as soon as the light bulb was invented, the UK had its first coal power plant, the Holborn Viaduct power station in London. But this changed in recent decades, and especially rapidly after the UK introduced two carbon price systems.\u00a0",
                        "spanType": "span-simple-text"
                    }
                ],
                "parseErrors": []
            },
            {
                "type": "text",
                "value": [
                    {
                        "text": "The UK was already part of the EU ETS, but went even further in 2013 when the country implemented the \u2018carbon price floor\u2019: ",
                        "spanType": "span-simple-text"
                    },
                    {
                        "url": "https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor",
                        "children": [
                            {
                                "text": "a top-up carbon tax",
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                        "text": " to the European system.\u00a0",
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                        "text": "In the decade before the tax was introduced one third of electricity in the UK came from coal, ",
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                                "text": "the worst of power sources",
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                        "text": ". Since then the carbon tax \u201chas led to an unprecedented reduction in coal generation\u201d according to the research of Castagneto et al (2019).{ref}G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) \u2013 ",
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                                "text": "The value of international electricity trading",
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                        "text": ". UCL and University of Cambridge. ",
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                        "text": "See also: Marion Leroutier (2021) \u2013 Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK. In Journal of Environmental Economics and Management.{/ref} In the years following the policy change, the share of electricity generated from coal declined to just 2%.{ref}These days it is common that the UK runs for ",
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                                "text": "months without any coal electricity",
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                    {
                        "text": " at all, and like many countries that have a carbon price the UK has also ",
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                        "url": "https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest",
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                                "text": "achieved",
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                        "text": " an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.{/ref}\u00a0",
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                                "text": "more than halved",
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                        "text": " and carbon emissions from power generation have ",
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                                "text": "fallen ",
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                                        "text": "by two-thirds",
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                        "text": "The Law of Demand \u2013 if the price of something goes up, consumption goes down \u2013 also holds in this case. Places that have implemented a substantial carbon price are achieving the intended effect, the consumption of carbon-intensive products declines and emissions fall.",
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                "description": "If you want to understand why it is possible to reduce emissions while growing the economy, see this Our World in Data guest post by Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova that answers this question.",
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                        "text": "What\u2019s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have.\u00a0",
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                        "text": "The reason our societies are powered by fossil fuels is that they provided energy at the cheapest monetary price. If we want to transition away from fossil fuels and build a world that is powered by their alternatives we can rely on the price mechanism as well.",
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                        "text": "What makes carbon pricing so powerful is that it is a policy that changes the entire system. No decision about any carbon-intensive activity escapes its influence: it changes the choices of consumers, producers, investors, entrepreneurs and innovators in all relevant sectors at once.\u00a0",
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                        "text": "I want to make clear that I do not believe that carbon pricing can be the one policy change that will end climate change.{ref}On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) \u2013 ",
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                        "url": "https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions",
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                                "text": "Carbon Pricing and the Elasticity of CO2 Emissions",
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                        "text": ". INET Working Paper.{/ref} But the theory and evidence is clear that carbon prices work as intended and if we are able to end climate change in this century I would be surprised if we achieve this without putting a price on carbon. In other words, I don\u2019t think this is sufficient, but I do think it would be a key step towards a better future.",
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                        "text": "Our challenge is big. We need to build a new world that still solves the problems that fossil fuels solve today. Carbon-intensive goods and services are often in high demand today, because they are important for people. They have the unfortunate by-product of carbon emissions, but they solve other problems for us and everyone around us. Key to making the transition to a low-carbon future will be to innovate and scale-up alternatives. Carbon prices are useful for this transition because they give ",
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                        "text": " an incentive to get there, especially in ",
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                                "text": "those sectors where alternatives ",
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                        "text": "And in those areas where low-carbon alternatives do not yet exist, support for research and development will be key. Because these two policies are working towards the same goal they ",
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                        "text": " each other, a higher price on carbon provides an incentive to increase R&D.",
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                        "text": " have options, and understanding them is not exactly rocket science. Consumption goes down, when prices go up. If we want to reduce carbon emissions we should not be paying people to burn fossil-fuels. We should end subsidies.",
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                        "text": "What is hard, is to win the necessary political support for pricing carbon. The article linked below draws the political lessons from places that were successful in establishing carbon prices.",
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                        "text": "I believe that putting a price on carbon is one of the most important goals to fight for in our lifetime. The current world is not sustainable and it is just not right that the richest have the highest emissions, while those who emit the least \u2013 the poorest and those who come after us \u2013 pay the highest price. Carbon pricing addresses the current injustice where we are allowing the richest to privately enjoy the gains from fossil fuels, while they pass off the costs to everyone else.",
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                        "text": "If we are serious about decarbonizing the global economy \u2013 and building the low-carbon future \u2013 we should make the fight for a monetary price on carbon central to our efforts over the years ahead.",
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                                "text": "Acknowledgements:",
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                        "text": " I would like to thank Hannah Ritchie, Marcel Gerber, Charlie Giattino, Esteban Ortiz-Ospina for reading drafts of this text and for their very helpful comments and ideas.",
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                                "text": "Update:",
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                        "text": " I updated the figure that shows the decoupling of emissions and economic growth on September 3, 2022.",
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                                "text": "counterarguments to pricing carbon",
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                        "text": ", here is a list of references to get you started with:",
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                                "text": "One of the most widely discussed recent articles on the topic is ",
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                                "text": " authored by Leah Stokes and Matto Mildenberger. As I emphasized above, the authors\u2019 main point is that while carbon prices make economic and environmental sense, it is difficult to get the political support that they need to be free of loopholes and to be high enough to make a difference. They also argue that it would be wrong to believe that no other policy is needed to bring emissions to zero. I largely agree with the authors. Carbon taxes cannot be the only solution \u2013 they emphasise clean energy standards, I\u2019d emphasise public R&D \u2013 but I disagree that this means we should not make it our political goal to put a price on carbon. I think they should be part of a big package of successful climate policy tools \u2013 carbon prices are one tool in our hands and we shouldn\u2019t weaken ourselves by throwing away solutions that we do have.",
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                                "text": " on why carbon taxes are a good policy, but why he believes that subsidies for specific technologies can be even better in some cases.",
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                                "text": "Rosenbloom et al (2020) discuss the weaknesses of carbon pricing and offer their own alternative, which they call \u201csustainability transition policy\u201d,\u00a0 a \u201cmix of contextually and politically sensitive policies that simultaneously drive low-carbon innovation and the decline of fossil fuels\u201d.",
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                                "text": "Goulder et al. (2016) argue that implementing a closely related policy \u2013 a clean energy standard (CES) \u2013 can be more cost-effective than a carbon price.",
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                                "text": "Lawrence H. Goulder, Marc A. C. Hafstead, Roberton C. Williams III (2016) \u2013 General Equilibrium Impacts of a Federal Clean Energy Standard. In the American Economic Journal: Economic Policy. VOL. 8, NO. 2, MAY 2016. (pp. 186-218).",
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2021-06-01 10:30:00

2024-02-16 14:22:51

1Ipzcq2jM8Puji3iatUcxr_C1M3CBTW2Kk0jg2-FssnU

[
    "Max Roser"
]

We are paying a price for fossil fuels, but that price is not paid by those that burn the fossil fuels – we need to change that.

2021-05-31 15:31:12

2022-09-04 09:57:33

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Our World in Data presents the data and research to make progress against the world’s largest problems. This post draws on data and research discussed in our entry on **[Greenhouse Gas Emissions](https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions)**. Some changes and updates were made after the text was first published. <Callout title="Summary"/> We are paying a price for burning fossil fuels and emitting greenhouse gases. Some of the consequences of climate change are already visible today, but the most severe consequences will hit us in the years and decades to come:{ref}See IPCC (2014) – [Climate Change 2014: Synthesis Report](https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf). Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp. * Box 2.2: “It is _very likely_ that **heat waves** will occur more often and last longer, and that **extreme precipitation** events will become more intense and frequent in many regions. The ocean will **continue to warm and acidify**, and **global mean sea level to rise**.” * Box 2.3: “Risks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development.” On the risk to biodiversity see Urban, Mark C. (2015). ["Accelerating extinction risk from climate change"](https://science.sciencemag.org/content/348/6234/571). In Science. 348 (6234): 571–573. For a larger overview see Wikipedia’s pages on the [Effects of Climate Change](https://en.wikipedia.org/wiki/Effects_of_climate_change) and [the relevant section on their page on climate change](https://en.wikipedia.org/wiki/Climate_change#Effects).{/ref} These consequences include the negative economic impacts of climate change through its effects on people’s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for [the world’s poorest people](https://owid.cloud/extreme-poverty) they pose a threat to their lives, as they increase the risk of hunger and food insecurity. Climate change isn’t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in [countries around the world](https://ourworldindata.org/grapher/pollution-deaths-from-fossil-fuels?stackMode=absolute&region=World) every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.{ref}In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels. Lelieveld, J., Klingmüller, K., Pozzer, A., Burnett, R. T., Haines, A., & Ramanathan, V. (2019). [Effects of fossil fuel and total anthropogenic emission removal on public health and climate](https://www.pnas.org/content/116/15/7192/). Proceedings of the National Academy of Sciences, 116(15), 7192-7197 The death toll of the three counts of violence for 2017 [according to the IHME](https://ourworldindata.org/grapher/annual-number-of-deaths-by-cause) is 561,511. • Homicides: 405,346 deaths • War battles: 129,720 deaths • Terrorism: 26,445 deaths The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study – Vohra et al (2021) – estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels. Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., & Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. _Environmental Research_, _195_, 110754.[ https://doi.org/10.1016/j.envres.2021.110754](https://doi.org/10.1016/j.envres.2021.110754).{/ref} _This_ is the price we are _already_ paying for burning fossil fuels. The International Monetary Fund (IMF) estimates the sum of these costs in a major study that they update regularly. The title of the study is _‘How Large Are Global Fossil Fuel Subsidies?’_ and in the study’s latest issue the researchers estimate them to amount to US-$ 5.2 trillion.{ref}The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) – How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. [https://doi.org/10.1016/j.worlddev.2016.10.004](https://doi.org/10.1016/j.worlddev.2016.10.004) In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) – [Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates](https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=doi.org%2F10.5089%2F9781484393178.001&btnG=). Published as an IMF Working Paper. In my text I am citing the latest figures of the authors. By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent). Coal: $5,200 billion * 0.44 = $2,288 billion Oil: $5,200 billion * 0.41 = $2,132 billion Natural gas: $5,200 billion * 0.1 = $520 billion Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that “the subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.”, This data is according to the [International Renewable Energy Agency (2020) – Energy subsidies](https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Energy_subsidies_2020.pdf) Unfortunately this source does not break down the subsidies to renewables by source of energy. The [energy production from these sources](https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&time=earliest..latest) in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455). This means the subsidy per TWh of energy is: Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies. What I am calling explicit subsidies is called “pre-tax subsidies” by these authors. What I am calling implicit subsidies is called “post-tax subsidies” by these authors. {/ref} This is equivalent to 6.5% of global GDP. As the study’s title makes clear, the IMF sees the sum of damage done by fossil fuels as a _subsidy_. That might be surprising at first, but it makes sense if you think about it. A good is subsidized when consumers and producers of that good do not have to pay the full cost for it. This can either be an _explicit subsidy_, for example when governments pay for the school education of the country’s children, or it can be an _implicit subsidy_, when producers and consumers cause damage, but do not have to pay a monetary price for it.{ref}One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost. An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.{/ref} You find examples of both types of subsidies in your own life. If you pay for you and your neighbour’s dinner then you are _explicitly _subsidizing them. If your neighbour crashes into your car and you do not charge him for the damage he caused, you are _implicitly _subsidizing them. Fossil fuels are subsidized in both ways. They are [explicitly subsidized in many places](https://ourworldindata.org/grapher/fossil-fuel-subsidies-per-capita?time=2015), and they are implicitly subsidized _everywhere_, as the consumers and producers of fossil fuels do not have to pay the monetary cost for the damage they cause. Ending the subsidies to fossil fuels would mean to put a monetary price on them that corresponds to the damage they do. Since the alternatives to fossil fuels are both [cleaner and safer](https://ourworldindata.org/safest-sources-of-energy) this would allow the world to make massive progress according to the IMF study: Ending these subsidies and pricing them into the cost that producers and consumers have to pay for fossil fuels would substantially decrease global carbon emissions and save the lives of people who would otherwise be killed by air pollution.{ref}The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it's undeniable that the costs are very large.{/ref} The damage caused by burning fossil fuels is a textbook example of what economists call an externality: Putting a monetary price on carbon emissions makes it possible to internalize the costs of the negative impact on our health, the environment, and future generations.{ref}The [free online textbook CORE ECON](https://www.core-econ.org/the-economy/book/text/12.html) provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.{/ref} ## This means that we do not have the option to not pay a price It is a mistake to think that it is possible to not pay for emitting carbon. As we have just seen, _we _**_are_**_ already paying a price_. This is the economists’ argument for putting an explicit monetary price on carbon emissions. ### What would change if we put a monetary price on carbon? There are two ways in which a carbon price can be implemented: a carbon tax or a ‘cap and trade’ system:{ref}Some alternatives to carbon taxes and cap and trade – such as clean energy standards or regulations – can be viewed as implicit prices on carbon emissions. It's a core result in resource economics that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON [here](https://www.core-econ.org/the-economy/book/text/20.html).{/ref} * In a ‘cap and trade’ system the carbon price changes over time. A maximum level of pollution (a ‘cap’) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap. * A carbon tax is simply a levy that is applied to all goods and services which lead to carbon emissions in their production. In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive. This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they’re not available yet producers will be incentivised to develop low-carbon alternatives. Carbon pricing changes the relative prices between carbon-intensive and low-carbon products and this changes consumption choices towards a low-carbon lifestyle: Carbon prices make it more likely that we rely on low-carbon electricity rather than fossil fuels; that we take the bicycle rather than the car; that we buy the smaller car rather than the bigger one; that we buy electric vehicles rather than gas-powered ones; that we eat [chicken rather than beef](https://ourworldindata.org/food-choice-vs-eating-local); or that we organize a video conference rather than an event that is a flight away. Both of the intended consequences – transition to and innovation of alternative low-carbon technologies – increase with the carbon price. The incentive for consumers and entrepreneurs is to reduce their emissions whenever doing so costs them less than paying the carbon price. Because access to energy often constitutes a large share of the budget of poorer families, successful carbon pricing policies include support for those households to offset the increased cost of energy.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – [Making Carbon Pricing Work for Citizens](https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics). In Nature Climate Change 8, 669–677.{/ref} In the case of a carbon tax, the government revenue can be used to finance this support for poorer households and it can also be used to pay for additional measures that slow down climate change and support environmental regeneration: including [reforestation](https://ourworldindata.org/afforestation), more walkable and cyclable cities, or research and development for renewable energy and low-carbon technologies. With a carbon price one can establish a mechanism that ensures that those who are causing emissions are those who pay for the countermeasures that benefit society and the environment. ## A carbon price allows us to make two decisions Levying a monetary price on emissions allows us to choose our answer to two important questions: _Who_ should pay the price for carbon emissions? _How much_ do we want them to pay for emitting greenhouse gases? ### _Who_ should pay the price for emitting greenhouse gases? At the most fundamental level the argument for carbon pricing is the hard truth that we have to pay a price for carbon emissions. What we can decide is who pays for them. The status quo in a society without carbon pricing could not be more brutal: * The people who live in high-income countries – those who enjoy the best living conditions in human history – are those who will be least affected by climate change, yet they are [the ones with the highest emissions](https://ourworldindata.org/worlds-energy-problem). * The people who will be most affected by the negative consequences of a hotter planet are those that have contributed the least to climate change: the poorest people in the world – who are at risk of increasing food insecurity and do not have the resources to adapt to changes as rapidly – and the generations that come after us. Without a monetary price on carbon it is those who have the lowest emissions that pay the most. With carbon pricing we make sure that those who cause emissions also pay for them. Because emissions rise with income, a carbon price ensures that it will be the rich who pay most.{ref}That they pay the most is a statement about absolute spending. As explained below, the _relative_ spending on energy is often highest for poorer households.{/ref} For the very rich it is the case that a few consumption choices – flights, large cars, meat – are responsible for the bulk of their emissions.{ref}Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1–12. [https://doi.org/10.1017/sus.2020.12](https://doi.org/10.1017/sus.2020.12).{/ref} Carbon pricing is a policy targeted to address these consumption choices, it makes carbon-intensive goods less affordable and ‘degrows’ the consumption of those goods. ### _How much_ do we make people pay for emitting greenhouse gases? The second decision that we can influence with a price on carbon is: _How much_ do we want to pay for fossil fuels? If we continue emitting high volumes of greenhouse gases we will cause severe climate change and eventually have to pay a high price from the damages. Several studies find that if we don’t achieve a reduction in emissions now, economic growth would be much lower in the decades ahead (and that surely wouldn’t be our main concern in such a future).{ref}On the relation between future warming and growth see: Pretis, F., Schwarz, M., Tang, K., Haustein, K., & Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5°C or 2°C warming. _Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences_, _376_(2119), 20160460.[ https://doi.org/10.1098/rsta.2016.0460 ](https://doi.org/10.1098/rsta.2016.0460) Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. _Nature_, _527_(7577), 235–239.[ https://doi.org/10.1038/nature15725](https://doi.org/10.1038/nature15725) {/ref} Levying a fee on carbon emissions can be a key policy to bring down emissions quickly so that we avoid large costs in the future. In the past many macroeconomists considered the need to cut emissions as a drag on the economy that lowers economic growth. This idea, that decarbonisation of our economies conflicts with economic growth, is still shared by many.{ref}In [a guest post for Our World in Data](https://ourworldindata.org/shrink-emissions-not-the-economy) Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this: _“Ironically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed “degrowth”). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.”_{/ref} But this is no longer the mainstream view. The latest annual IMF report estimates that policies, including carbon pricing, that mitigate climate change actually _increase_ economic growth over the coming decades.{ref}[World Economic Outlook, October 2020: A Long and Difficult Ascent](https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020). In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.{/ref} This means that there is no trade-off between fighting climate change and economic growth. Fighting climate change is a way to achieve _more growth_.{ref}Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2°C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, _relative to a baseline growth of 1.6% to 3%_. In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today’s economy. With measures in place to limit warming to 2°C, growth would be 0.06% smaller – i.e. 1.54% per year. The world economy would then ‘only' be 461% of the size of today. In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today’s economy. With measures to limit warming to 2°C, growth would be 0.06% smaller – i.e. 2.94% per year. The economy would then ‘only' be 1813% the size of today. This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2°C. The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions. See: Edenhofer et al. (2014). [IPCC, 2014: Summary for Policymakers](https://www.ipcc.ch/report/ar5/wg3/). In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change. See also: IPCC (2014) – [Climate Change 2014: Synthesis Report](https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf). Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp. [https://www.sciencedirect.com/science/article/pii/S0095069617308707](https://www.sciencedirect.com/science/article/pii/S0095069617308707) {/ref} From the responses to my recent writing on [the need of growth for ending poverty](https://ourworldindata.org/poverty-minimum-growth-needed) I saw that some people have not caught up with this. Fighting climate change is not just compatible with fighting poverty, the two goals — to reduce emissions and to increase economic growth — actually _strengthen_ each other. It is very good news that fighting climate change is expected to increase growth over the coming decades, but the benefits to climate mitigation are larger than just additional growth: it also means a modernisation of key infrastructure, faster innovation, the protection of the biosphere on our planet, and the major health benefits of reduced air pollution caused by burning fossil fuels, including millions of lives saved. Taking both the costs and benefits into account makes a very clear argument for climate action now. Putting a price on carbon to build a low-carbon world is an investment for a much better future. ## For once even economists agree Economists are not known for agreeing much with one another. But regarding the challenge of how to reduce greenhouse gas emissions there is more agreement among economists than in perhaps any other big policy question. What is particularly encouraging is that this is a policy that is supported by both left- and right-leaning economists. That left-leaning economists are in favour of a tax that will mostly be paid for by richer people is not surprising. It is perhaps more surprising that many right-leaning economists – who are generally in favor of a small state with only minimal taxes – are also in favor. Economists on the conservative side of the spectrum, such as Greg Mankiw, [advocate strongly for a carbon tax](https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf) and widespread support for carbon taxes of economists across the political spectrum is documented in many relevant surveys.{ref}The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly [asked them about their opinion on a carbon tax](https://www.igmchicago.org/?s=carbon+tax) and invariably finds large support for such a tax. See also the survey of 365 economists who have published papers related to climate change “in a highly ranked, peer-reviewed economics or environmental economics journal” conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published [here](https://policyintegrity.org/files/publications/ExpertConsensusReport.pdf). (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now – see Figure 2a.) In a 2006 survey of the American Economic Association, 65% agreed that “the US should increase energy taxes”. Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists’ Voice, 3(9). The Wall Street Journal asked business economists in 2007, ‘‘What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?’’ 54 percent advocated for ‘‘taxes that raise the cost of purchasing fossil fuels’’. Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007. Keohane, M. N. O., & Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington. Last year over 3,500 economists, including twenty-seven Nobel laureates, signed [this letter supporting carbon pricing](https://clcouncil.org/economists-statement/).{/ref} An alternative to a carbon price that many governments pursue is to rely on specific guidelines, but doing this well is an incredibly difficult task. A government with the goal to reduce emissions can try to regulate each specific sector and decide which types of production and consumption should be reduced or forbidden. But the planner who is tasked with doing this needs to have an enormous knowledge of all kinds of technologies, their carbon footprint, their cost, the possible alternatives, and their future potential. The carbon price is such an effective alternative to the central planner, because it doesn’t require a central authority to have enormous knowledge. Instead it incentivizes everyone to reduce carbon emissions – since they are incentivized to save money – and thereby distributes the task of reducing emissions to _everyone_ – every producer, every investor, every consumer. Instead of one central agency, it incentivizes billions of people to search for ways to reduce their costs and thereby to find millions of solutions to reduce their emissions. Another aspect that is convincing even to those who favour a small state is that if you want to have _any public spending at all_ – and very few want a state that is so small that neither roads nor the police are publicly funded – you have to raise state revenue _somewhere_. The argument then is that if you have to have some taxes, it’s better to tax something that harms people rather than something that we want to encourage, like work. There are big losers from a carbon price – the fossil fuel industry – but for citizens, the overall taxes do not have to increase: the carbon price is government revenue so that it can reduce taxes elsewhere. It is actually the other way around: the implicit subsidies to fossil fuels are costly and thereby increase taxes for everyone – as we have seen, the IMF estimates that the lack of carbon pricing means that governments lose 3.8% of GDP and this loss either means greater public debt or it has to be made up by all of us paying higher taxes. Poorer households spend a larger share of their income on energy so that a carbon price would hit these households hardest. It is possible to avoid this consequence by making the poorest households benefit from the spending that the carbon tax allows. The famous call for a carbon tax signed by a large number of leading economists at [econstatement.org](https://www.econstatement.org/) has this goal. "To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in ‘carbon dividends’ than they pay in increased energy prices." ## What is stopping us? The world did make a start on carbon pricing. 78 different jurisdictions have implemented a carbon price and this year (2021) a price will be paid on 22% of the world’s carbon emissions.{ref}All data points and references here refer to the 2020 issue: World Bank (2020) – [State and Trends of Carbon Pricing 2020](https://openknowledge.worldbank.org/handle/10986/33809). Washington, DC: World Bank. © World Bank. License: CC BY 3.0 IGO.{/ref} 17 years ago a price was paid on much less than 1% of all emissions. But the carbon price is low in many places and the figures just cited mean that there is no monetary price on three-quarters of emissions. Given all the arguments above, why is effective carbon pricing not implemented in many more places? A big reason is of course that those that will lose out from carbon pricing – the fossil fuel industry – rally against them. But it is also the case that carbon pricing is not very popular among voters. Study after study finds that a key reason for this is that _many do not believe that a price on carbon is actually effective in reducing emissions_.{ref}See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). [https://doi.org/10.1007/s10640-017-0133-8](https://doi.org/10.1007/s10640-017-0133-8.%7B/ref) Baranzini A, Carattini S (2017) – Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197–227 and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – [Making Carbon Pricing Work for Citizens](https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics). In Nature Climate Change 8, 669–677. {/ref} While it is the effectiveness of carbon prices that makes them popular among experts, it is the perceived ineffectiveness that makes them unpopular among non-experts. But it is also the case that people change their mind about carbon prices when they learn that they do actually work.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) – [Making Carbon Pricing Work for Citizens](https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics). In Nature Climate Change 8, 669–677. {/ref} After the Swiss population rejected a carbon price in a referendum, a group of researchers – Carattini et al (2017){ref}Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Frédéric Varone, and Frank Vöhringer (2017) – “Green Taxes in a Post-Paris World: Are Millions of Nays Inevitable?” Environ Resource Econ 68, 97–128 (2017). [https://doi.org/10.1007/s10640-017-0133-8](https://doi.org/10.1007/s10640-017-0133-8.%7B/ref) {/ref} – ran a study to investigate what could have made the proposal more popular. They found that “the effectiveness of energy taxes is not an established fact for the general public” and their study showed that the most important successful argument in favour of the tax is information on the expected effectiveness in reducing emissions. It shouldn’t be surprising that the communication of successful strategies is of such great importance. Many of us care a lot about climate change – people around the world [consistently view](https://www.pewresearch.org/global/2020/09/09/despite-pandemic-many-europeans-still-see-climate-change-as-greatest-threat-to-their-countries/) it as one of the largest challenges that humanity faces – and at the same time many feel hopeless that we can actually do anything about it. Showing that there _is_ a way forward is key for the successful fight against climate change. ## Empirical evidence: Does a price on carbon reduce carbon emissions? Back in 1991 Sweden was one of the first countries in the world to implement a carbon tax. Over time the carbon tax was gradually increased, but it still mainly affects the transport sector (around 90 percent of the revenues from the carbon tax come from the consumption of gasoline and motor diesel).{ref}The transport sector is of significant importance for Sweden’s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden’s total annual CO2 emissions.{/ref} The researcher Julius Andersson studied whether the carbon price worked as intended by studying its impact on emissions from the transport sector.{ref}Julius J. Andersson (2019) – [Carbon Taxes and CO2 Emissions: Sweden as a Case Study](https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144). American Economic Journal: Economic Policy. 11 (4): 1–30. doi:10.1257/pol.20170144. ISSN 1945-7731.{/ref} He finds that “CO2 emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone.” A very strong effect. How did prosperity and emissions change in Sweden over this period? Average incomes in Sweden – GDP per capita – increased by 52% since the year before the tax was introduced, and emissions declined by 29%.{ref}In [this scatterplot of CO2 emissions vs GDP per capita](https://ourworldindata.org/grapher/consumption-co2-per-capita-vs-gdppc?endpointsOnly=1&time=2017..latest) you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.{/ref} Sweden’s emissions are still far from where they need to be, but the direction of change – growing prosperity, but declining emissions – is right. And Sweden is not the only country that reduced emissions while growing the economy, as the chart shows.{ref}[In the interactive version of this chart](https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest&country=~SWE) you can view this data for many more countries.{/ref} Shown in the chart are consumption-based CO2 emissions, which means that they account for the carbon emissions caused by products that were consumed within the country but which were produced elsewhere. <Image filename="Absolute-decoupling-Growth-and-falling-emissions-all.png" alt=""/> Carbon pricing is not the only reason emissions are falling in these countries. As we just saw, the paper on Sweden attributes about half of the decline to the carbon tax. Other reasons include technological progress (such as rising efficiency and [cheaper renewables](https://ourworldindata.org/cheap-renewables-growth)), declining demand for energy, and other regulations (for example, on air pollution). Like all policies that are based on a price mechanism, the level of the price matters. If it is too low it won’t have much of an effect. This is what Felix Pretis (2020) has found for the carbon tax in British Columbia.{ref}The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because “existing carbon taxes (and prices) are too low to be effective in the time frame since their introduction.” Felix Pretis (2020) – Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria & Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.{/ref} But in places that have a substantial carbon price, they can play an important role in reducing emissions, as a number of studies have shown. In a recent global study, researchers Best, Burke, and Jotzo (2020) analysed 142 countries and found that those that have a carbon price do, as one would expect, have lower CO2 emissions than those who do not.{ref}Best, R., Burke, P.J. & Jotzo, F. (2020) – Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69–94. [https://doi.org/10.1007/s10640-020-00436-x](https://doi.org/10.1007/s10640-020-00436-x) {/ref} Germany too reduced emissions while becoming richer. The research by Petrick and Wagner (2014) showed how EU-wide carbon pricing contributed to this achievement.{ref}Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. [https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912](https://econpapers.repec.org/RePEc:zbw:ifwkwp:1912)}{/ref} Countries in the European Union have established a cap-and-trade system called the [EU Emission Trading Scheme](https://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme) (EU ETS). Recent research by Bayer and Akin showed that this system of carbon pricing has been effective in reducing emissions.{ref} Bayer, Patrick; Aklin, Michaël (2020) – The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117{/ref} Lastly, let’s look at the motherland of fossil-fuel-powered industrialization: the chart shows the sources of power production in the UK over the last century. Electricity production in the UK has been dominated by coal since its early days; as soon as the light bulb was invented, the UK had its first coal power plant, the Holborn Viaduct power station in London. But this changed in recent decades, and especially rapidly after the UK introduced two carbon price systems. The UK was already part of the EU ETS, but went even further in 2013 when the country implemented the ‘carbon price floor’: [a top-up carbon tax](https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor) to the European system. In the decade before the tax was introduced one third of electricity in the UK came from coal, [the worst of power sources](https://ourworldindata.org/safest-sources-of-energy). Since then the carbon tax “has led to an unprecedented reduction in coal generation” according to the research of Castagneto et al (2019).{ref}G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) – [The value of international electricity trading](https://www.ucl.ac.uk/bartlett/sustainable/sites/bartlett/files/ucl_report_ofgem_20102019_final.pdf). UCL and University of Cambridge. See also: Marion Leroutier (2021) – Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK. In Journal of Environmental Economics and Management.{/ref} In the years following the policy change, the share of electricity generated from coal declined to just 2%.{ref}These days it is common that the UK runs for [months without any coal electricity](https://www.theguardian.com/environment/ng-interactive/2019/may/25/the-power-switch-tracking-britains-record-coal-free-run) at all, and like many countries that have a carbon price the UK has also [achieved](https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest) an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.{/ref} As the share of electricity from fossil fuel sources declined, the carbon intensity of electricity production [more than halved](https://ourworldindata.org/grapher/carbon-intensity-electricity?tab=chart&time=2000..latest&country=~GBR) and carbon emissions from power generation have [fallen _by two-thirds_](https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972583/2020_Provisional_emissions_statistics_report.pdf) in the UK! The Law of Demand – if the price of something goes up, consumption goes down – also holds in this case. Places that have implemented a substantial carbon price are achieving the intended effect, the consumption of carbon-intensive products declines and emissions fall. <Chart url="https://ourworldindata.org/grapher/electricity-mix-uk?country=~GBR"/> ### Shrink emissions, not the economy If you want to understand why it is possible to reduce emissions while growing the economy, see this Our World in Data guest post by Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova that answers this question. https://ourworldindata.org/shrink-emissions-not-the-economy ## Conclusion What’s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have. The reason our societies are powered by fossil fuels is that they provided energy at the cheapest monetary price. If we want to transition away from fossil fuels and build a world that is powered by their alternatives we can rely on the price mechanism as well. What makes carbon pricing so powerful is that it is a policy that changes the entire system. No decision about any carbon-intensive activity escapes its influence: it changes the choices of consumers, producers, investors, entrepreneurs and innovators in all relevant sectors at once. I want to make clear that I do not believe that carbon pricing can be the one policy change that will end climate change.{ref}On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) – [Carbon Pricing and the Elasticity of CO2 Emissions](https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions). INET Working Paper.{/ref} But the theory and evidence is clear that carbon prices work as intended and if we are able to end climate change in this century I would be surprised if we achieve this without putting a price on carbon. In other words, I don’t think this is sufficient, but I do think it would be a key step towards a better future. Our challenge is big. We need to build a new world that still solves the problems that fossil fuels solve today. Carbon-intensive goods and services are often in high demand today, because they are important for people. They have the unfortunate by-product of carbon emissions, but they solve other problems for us and everyone around us. Key to making the transition to a low-carbon future will be to innovate and scale-up alternatives. Carbon prices are useful for this transition because they give _everyone_ an incentive to get there, especially in [those sectors where alternatives _do_ exist](https://ourworldindata.org/cheap-renewables-growth). And in those areas where low-carbon alternatives do not yet exist, support for research and development will be key. Because these two policies are working towards the same goal they _complement_ each other, a higher price on carbon provides an incentive to increase R&D. We_ do_ have options, and understanding them is not exactly rocket science. Consumption goes down, when prices go up. If we want to reduce carbon emissions we should not be paying people to burn fossil-fuels. We should end subsidies. What is hard, is to win the necessary political support for pricing carbon. The article linked below draws the political lessons from places that were successful in establishing carbon prices. I believe that putting a price on carbon is one of the most important goals to fight for in our lifetime. The current world is not sustainable and it is just not right that the richest have the highest emissions, while those who emit the least – the poorest and those who come after us – pay the highest price. Carbon pricing addresses the current injustice where we are allowing the richest to privately enjoy the gains from fossil fuels, while they pass off the costs to everyone else. If we are serious about decarbonizing the global economy – and building the low-carbon future – we should make the fight for a monetary price on carbon central to our efforts over the years ahead. **Acknowledgements:** I would like to thank Hannah Ritchie, Marcel Gerber, Charlie Giattino, Esteban Ortiz-Ospina for reading drafts of this text and for their very helpful comments and ideas. **Update:** I updated the figure that shows the decoupling of emissions and economic growth on September 3, 2022. If you want to think through the **counterarguments to pricing carbon**, here is a list of references to get you started with: * One of the most widely discussed recent articles on the topic is [The Trouble with Carbon Pricing](https://bostonreview.net/science-nature-politics/leah-c-stokes-matto-mildenberger-trouble-carbon-pricing) authored by Leah Stokes and Matto Mildenberger. As I emphasized above, the authors’ main point is that while carbon prices make economic and environmental sense, it is difficult to get the political support that they need to be free of loopholes and to be high enough to make a difference. They also argue that it would be wrong to believe that no other policy is needed to bring emissions to zero. I largely agree with the authors. Carbon taxes cannot be the only solution – they emphasise clean energy standards, I’d emphasise public R&D – but I disagree that this means we should not make it our political goal to put a price on carbon. I think they should be part of a big package of successful climate policy tools – carbon prices are one tool in our hands and we shouldn’t weaken ourselves by throwing away solutions that we do have. * Ramez Naam wrote [this very good Twitter thread](https://twitter.com/ramez/status/1094380540394795008) on why carbon taxes are a good policy, but why he believes that subsidies for specific technologies can be even better in some cases. * Rosenbloom et al (2020) discuss the weaknesses of carbon pricing and offer their own alternative, which they call “sustainability transition policy”, a “mix of contextually and politically sensitive policies that simultaneously drive low-carbon innovation and the decline of fossil fuels”. * Goulder et al. (2016) argue that implementing a closely related policy – a clean energy standard (CES) – can be more cost-effective than a carbon price. * Lawrence H. Goulder, Marc A. C. Hafstead, Roberton C. Williams III (2016) – General Equilibrium Impacts of a Federal Clean Energy Standard. In the American Economic Journal: Economic Policy. VOL. 8, NO. 2, MAY 2016. (pp. 186-218). * Three more pointers: _Continue reading on Our World in Data:_ ### Why is carbon pricing in some countries more successful than in others? In some countries the public is very supportive of carbon taxes. In other countries they are largely against them. https://ourworldindata.org/carbon-pricing-popular

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        "rendered": "\n<div class=\"blog-info\">\n<p>Our World in Data presents the data and research to make progress against the world\u2019s largest problems.<br>This post draws on data and research discussed in our entry on <strong><a href=\"https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions\" target=\"_blank\" rel=\"noopener noreferrer\">Greenhouse Gas Emissions</a></strong>. Some changes and updates were made after the text was first published.</p>\n</div>\n\n\n\t<div class=\"wp-block-owid-summary\">\n\t\t<h2>Summary</h2>\n\t\t\n\n<p>It is a mistake to believe that we are not paying for emitting greenhouse gases. Even if we do not pay a <em>monetary</em> price for carbon emissions we do pay a very large price, the consequences of climate change.</p>\n\n\n\n<p>Without a monetary carbon price it is those who have the smallest emissions that suffer the largest costs from climate change. A carbon price, in contrast, means that those who cause the emissions also pay for them.</p>\n\n\n\n<p>A key reason why voters are not in favour of carbon pricing is that many believe it won\u2019t actually reduce emissions, but empirical research and theory show that this is wrong: pricing carbon emissions \u2013 either via a carbon tax or a \u2018cap and trade\u2019-system \u2013 is effective. It shifts production and consumption from carbon-intensive goods and services to low-carbon alternatives and does reduce emissions.</p>\n\n\n\n<p>Many are deeply concerned about climate change yet feel hopeless that anything can be done to meet this challenge. Increasing the understanding that carbon pricing works, correcting common misconceptions, and showing that there <em>is</em> a way forward are key steps for a successful fight against climate change.</p>\n\n\n\n<p>I believe a carbon price should be complemented by other policies and in this article I make the case that it is one of the most important policy options we have to achieve a better future.</p>\n\n\n\t</div>\n\n\n<p>We are paying a price for burning fossil fuels and emitting greenhouse gases.</p>\n\n\n\n<p>Some of the consequences of climate change are already visible today, but the most severe consequences will hit us in the years and decades to come:{ref}See IPCC (2014) \u2013 <a href=\"https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf\">Climate Change 2014: Synthesis Report</a>. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.</p>\n\n\n\n<ul><li>Box 2.2: \u201cIt is <em>very likely</em> that <strong>heat waves</strong> will occur more often and last longer, and that <strong>extreme precipitation</strong> events will become more intense and frequent in many regions. The ocean will <strong>continue to warm and acidify</strong>, and <strong>global mean sea level to rise</strong>.\u201d</li><li>Box 2.3: \u201cRisks are unevenly distributed and are generally greater for disadvantaged people and communities in countries at all levels of development.\u201d</li></ul>\n\n\n\n<p>On the risk to biodiversity see Urban, Mark C. (2015). <a href=\"https://science.sciencemag.org/content/348/6234/571\">&#8220;Accelerating extinction risk from climate change&#8221;</a>. In Science. 348 (6234): 571\u2013573.</p>\n\n\n\n<p>For a larger overview see Wikipedia\u2019s pages on the <a href=\"https://en.wikipedia.org/wiki/Effects_of_climate_change\">Effects of Climate Change</a> and <a href=\"https://en.wikipedia.org/wiki/Climate_change#Effects\">the relevant section on their page on climate change</a>.{/ref}</p>\n\n\n\n<p>These consequences include the negative economic impacts of climate change through its effects on people\u2019s livelihoods, and the damage to infrastructure through rising sea levels, thawing permafrost, and extreme weather events. They pose a large threat to the life of animals and ecosystems on our planet and include the destruction of coral reefs, forest fires, the loss of ice shields, and the expansion of deserts. They include an increase in extreme weather events, like heat waves, droughts, floods, and storms. And especially for <a href=\"https://owid.cloud/extreme-poverty\" data-type=\"page\" data-id=\"1701\">the world\u2019s poorest people</a> they pose a threat to their lives, as they increase the risk of hunger and food insecurity.</p>\n\n\n\n<p>Climate change isn\u2019t the only negative consequence of burning fossil fuels. The air pollution that is caused by burning fossil fuels kills an estimated 3.6 million people in <a href=\"https://ourworldindata.org/grapher/pollution-deaths-from-fossil-fuels?stackMode=absolute&amp;region=World\">countries around the world</a> every year; this is 6-times the annual death toll of all murders, war deaths, and terrorist attacks combined.{ref}In a study published in the Proceedings of the National Academy of Sciences, Jos Lelieveld et al. (2019) estimated that 5.6 million people died from anthropogenically caused air pollution. Of these 5.6 million, 3.6 million deaths were attributed to burning fossil fuels.&nbsp;</p>\n\n\n\n<p>Lelieveld, J., Klingm\u00fcller, K., Pozzer, A., Burnett, R. T., Haines, A., &amp; Ramanathan, V. (2019). <a href=\"https://www.pnas.org/content/116/15/7192/\">Effects of fossil fuel and total anthropogenic emission removal on public health and climate</a>. Proceedings of the National Academy of Sciences, 116(15), 7192-7197<br><br>The death toll of the three counts of violence for 2017 <a href=\"https://ourworldindata.org/grapher/annual-number-of-deaths-by-cause\">according to the IHME</a> is 561,511.<br>\u2022 Homicides: 405,346 deaths<br>\u2022 War battles: 129,720 deaths<br>\u2022 Terrorism: 26,445 deaths<br><br>The uncertainty of the death toll due to air pollution caused by burning fossil fuels is high. A very recent study \u2013 Vohra et al (2021) \u2013&nbsp; estimates that 8.7 million deaths globally are due to the air pollution caused by burning fossil fuels.<br>Vohra, K., Vodonos, A., Schwartz, J., Marais, E. A., Sulprizio, M. P., &amp; Mickley, L. J. (2021). Global mortality from outdoor fine particle pollution generated by fossil fuel combustion: Results from GEOS-Chem. <em>Environmental Research</em>, <em>195</em>, 110754.<a href=\"https://doi.org/10.1016/j.envres.2021.110754\"> https://doi.org/10.1016/j.envres.2021.110754</a>.{/ref}</p>\n\n\n\n<p><em>This</em> is the price we are <em>already</em> paying for burning fossil fuels.</p>\n\n\n\n<p>The International Monetary Fund (IMF) estimates the sum of these costs in a major study that they update regularly. The title of the study is <em>\u2018How Large Are Global Fossil Fuel Subsidies?\u2019</em> and in the study\u2019s latest issue the researchers estimate them to amount to US-$ 5.2 trillion.{ref}The published study is: David Coady, Ian Parry, Louis Sears, Baoping Shang (2017) \u2013 How Large Are Global Fossil Fuel Subsidies? In World Development. Volume 91, March 2017, Pages 11-27. <a href=\"https://doi.org/10.1016/j.worlddev.2016.10.004\">https://doi.org/10.1016/j.worlddev.2016.10.004</a><br><br>In 2019 the authors updated their previous research in David Coady, Ian Parry, Nghia-Piotr Le, and Baoping Shang (2019) \u2013 <a href=\"https://scholar.google.com/scholar?hl=en&amp;as_sdt=0%2C5&amp;q=doi.org%2F10.5089%2F9781484393178.001&amp;btnG=\">Global Fossil Fuel Subsidies Remain Large: An Update Based on Country-Level Estimates</a>. Published as an IMF Working Paper.&nbsp;</p>\n\n\n\n<p>In my text I am citing the latest figures of the authors.<br><br>By fuel the subsidies were as follows in 2015: coal (44 percent), petroleum (41 percent), and natural gas (10 percent).<br>Coal: $5,200 billion * 0.44 = $2,288 billion<br>Oil: $5,200 billion * 0.41 = $2,132 billion<br>Natural gas: $5,200 billion * 0.1 = $520 billion</p>\n\n\n\n<p>Subsidies to renewable power generation technologie amounts to US-$ 128 billion, biofuels to US-$ 38 billion and nuclear to at least US-$ 21 billion (the source notes that data on nuclear subsidies is lacking and states that&nbsp; \u201cthe subsidy value for nuclear in this analysis is a placeholder value, reflecting the lowest realistic level of subsidies for existing nuclear power generation.\u201d, This data is according to the <a href=\"https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2020/Apr/IRENA_Energy_subsidies_2020.pdf\">International Renewable Energy Agency (2020) \u2013 Energy subsidies</a> Unfortunately this source does not break down the subsidies to renewables by source of energy.</p>\n\n\n\n<p>The <a href=\"https://ourworldindata.org/grapher/energy-consumption-by-source-and-region?stackMode=absolute&amp;time=earliest..latest\">energy production from these sources</a> in 2019 is: Oil 53,260TWh, Coal 43,849TWh, Gas 39,292TWh, Nuclear 6923TWh, Renewables 18,504 TWh (1614+1102+1793+3540+10455).<br><br>This means the subsidy per TWh of energy is:<br>Coal: $2,288,000,000,000/43,849TWh = $ 52,179,069 per TWh<br>Oil: $2,132,000,000,000/53,260TWh = $40,030,041 per TWh<br>Gas: $520,000,000,000/39,292TWh = $13,234,246 per TWh<br>Renewables: $166,000,000,000/18,504TWh = $8,971,033 per TWh<br>Nuclear: $21,000,000,000/6923TWh = $3,033,367 per TWh</p>\n\n\n\n<p>These are only explicit subsidies and the fact that renewables and nuclear energy do cause deaths and environmental damage means that these sources too are implicitly subsidised (although much less than fossil fuels). On the other hand it is worth keeping in mind that reducing subsidies to fossil fuels would remove one of the key motivations for renewable energy subsidies.<br><br>What I am calling explicit subsidies is called \u201cpre-tax subsidies\u201d by these authors. What I am calling implicit subsidies is called \u201cpost-tax subsidies\u201d by these authors. {/ref} This is equivalent to 6.5% of global GDP.</p>\n\n\n\n<p>As the study\u2019s title makes clear, the IMF sees the sum of damage done by fossil fuels as a <em>subsidy</em>. That might be surprising at first, but it makes sense if you think about it. A good is subsidized when consumers and producers of that good do not have to pay the full cost for it. This can either be an <em>explicit subsidy</em>, for example when governments pay for the school education of the country\u2019s children, or it can be an <em>implicit subsidy</em>, when producers and consumers cause damage, but do not have to pay a monetary price for it.{ref}One way to think about the distinction between explicit and implicit subsidies is that for the former the government has to pay costs from the available budget, in the latter the prices are suppressed, it is the lack of charging that is the cost.<br><br>An alternative framing would be to rely on the concept of externalities. The negative impact on others as a result of the production or consumption of a product is called a negative externality. An implicit subsidy in this framing is any negative externality for which those who cause the externality do not have to pay for.{/ref}</p>\n\n\n\n<p>You find examples of both types of subsidies in your own life. If you pay for you and your neighbour\u2019s dinner then you are <em>explicitly </em>subsidizing them. If your neighbour crashes into your car and you do not charge him for the damage he caused, you are <em>implicitly </em>subsidizing them.</p>\n\n\n\n<p>Fossil fuels are subsidized in both ways. They are <a href=\"https://ourworldindata.org/grapher/fossil-fuel-subsidies-per-capita?time=2015\">explicitly subsidized in many places</a>, and they are implicitly subsidized <em>everywhere</em>, as the consumers and producers of fossil fuels do not have to pay the monetary cost for the damage they cause.</p>\n\n\n\n<p>Ending the subsidies to fossil fuels would mean to put a monetary price on them that corresponds to the damage they do. Since the alternatives to fossil fuels are both <a href=\"https://ourworldindata.org/safest-sources-of-energy\">cleaner and safer</a> this would allow the world to make massive progress according to the IMF study: Ending these subsidies and pricing them into the cost that producers and consumers have to pay for fossil fuels would substantially decrease global carbon emissions and save the lives of people who would otherwise be killed by air pollution.{ref}The IMF study estimates that pricing fossil fuel efficiently would lower global carbon emissions by 28 percent, fossil fuel air pollution deaths by 46 percent, and increase government revenue by 3.8 percent of GDP. But as with any such estimates the precise numbers depend strongly on the assumptions made. Placing a value on the benefits of reducing emissions is very hard (what is the value of saving a threatened species?). But the point is that whatever the precise values might be, it&#8217;s undeniable that the costs are very large.{/ref}</p>\n\n\n\n<p>The damage caused by burning fossil fuels is a textbook example of what economists call an externality: Putting a monetary price on carbon emissions makes it possible to internalize the costs of the negative impact on our health, the environment, and future generations.{ref}The <a href=\"https://www.core-econ.org/the-economy/book/text/12.html\">free online textbook CORE ECON</a> provides clear and complete definitions of externalities, as well as policy choices in the context of environmental problems.{/ref}</p>\n\n\n\n<h4>This means that we do not have the option to not pay a price</h4>\n\n\n\n<p>It is a mistake to think that it is possible to not pay for emitting carbon. As we have just seen, <em>we </em><strong><em>are</em></strong><em> already paying a price</em>.&nbsp;</p>\n\n\n\n<p>This is the economists\u2019 argument for putting an explicit monetary price on carbon emissions.</p>\n\n\n\n<h5>What would change if we put a monetary price on carbon?</h5>\n\n\n\n<p>There are two ways in which a carbon price can be implemented: a carbon tax or a \u2018cap and trade\u2019 system:{ref}Some alternatives to carbon taxes and cap and trade \u2013 such as clean energy standards or regulations \u2013 can be viewed as implicit prices on carbon emissions.</p>\n\n\n\n<p>It&#8217;s a core result in resource economics&nbsp; that both cap and trade and taxes can be designed to be equivalent. Much more information about both carbon pricing approaches can be found in CORE ECON <a href=\"https://www.core-econ.org/the-economy/book/text/20.html\">here</a>.{/ref}&nbsp;</p>\n\n\n\n<ul><li>In a \u2018cap and trade\u2019 system the carbon price changes over time. A maximum level of pollution (a \u2018cap\u2019) is defined and manufacturers need licenses to emit carbon. How expensive these licenses are is determined by a trading system. The price of a license increases as emissions approach the cap.&nbsp;</li><li>A carbon tax is simply a levy that is applied to all goods and services which lead to carbon emissions in their production.</li></ul>\n\n\n\n<p>In both systems the price of any product increases with the amount of carbon emitted in the production of it. The result is that products with a low carbon footprint (like taking the train or solar energy) do not get more expensive, while goods that do create a lot of emissions (like a flight or coal energy) do get more expensive.</p>\n\n\n\n<p>This helps us reduce emissions and pollution in two ways: it makes carbon-intensive goods much more expensive, meaning consumers will opt for cheaper low-carbon alternatives when they are available; and in markets where they\u2019re not available yet producers will be incentivised to develop low-carbon alternatives.</p>\n\n\n\n<p>Carbon pricing changes the relative prices between carbon-intensive and low-carbon products and this changes consumption choices towards a low-carbon lifestyle: Carbon prices make it more likely that we rely on low-carbon electricity rather than fossil fuels; that we take the bicycle rather than the car; that we buy the smaller car rather than the bigger one; that we buy electric vehicles rather than gas-powered ones; that we eat <a href=\"https://ourworldindata.org/food-choice-vs-eating-local\">chicken rather than beef</a>; or that we organize a video conference rather than an event that is a flight away.&nbsp;</p>\n\n\n\n<p>Both of the intended consequences \u2013 transition to and innovation of alternative low-carbon technologies \u2013 increase with the carbon price. The incentive for consumers and entrepreneurs is to reduce their emissions whenever doing so costs them less than paying the carbon price.&nbsp;</p>\n\n\n\n<p>Because access to energy often constitutes a large share of the budget of poorer families, successful carbon pricing policies include support for those households to offset the increased cost of energy.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 <a href=\"https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics\">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669\u2013677.{/ref}</p>\n\n\n\n<p>In the case of a carbon tax, the government revenue can be used to finance this support for poorer households and it can also be used to pay for additional measures that slow down climate change and support environmental regeneration: including <a href=\"https://ourworldindata.org/afforestation\">reforestation</a>, more walkable and cyclable cities, or research and development for renewable energy and low-carbon technologies.&nbsp;</p>\n\n\n\n<p>With a carbon price one can establish a mechanism that ensures that those who are causing emissions are those who pay for the countermeasures that benefit society and the environment.</p>\n\n\n\n<h4>A carbon price allows us to make two decisions</h4>\n\n\n\n<p>Levying a monetary price on emissions allows us to choose our answer to two important questions: <em>Who</em> should pay the price for carbon emissions? <em>How much</em> do we want them to pay for emitting greenhouse gases?</p>\n\n\n\n<h5><em>Who</em> should pay the price for emitting greenhouse gases?</h5>\n\n\n\n<p>At the most fundamental level the argument for carbon pricing is the hard truth that we have to pay a price for carbon emissions. What we can decide is who pays for them.</p>\n\n\n\n<p>The status quo in a society without carbon pricing could not be more brutal:</p>\n\n\n\n<ul><li>The people who live in high-income countries \u2013 those who enjoy the best living conditions in human history \u2013 are those who will be least affected by climate change, yet they are <a href=\"https://ourworldindata.org/worlds-energy-problem\">the ones with the highest emissions</a>.</li><li>The people who will be most affected by the negative consequences of a hotter planet are those that have contributed the least to climate change: the poorest people in the world \u2013 who are at risk of increasing food insecurity and do not have the resources to adapt to changes as rapidly \u2013 and the generations that come after us.</li></ul>\n\n\n\n<p>Without a monetary price on carbon it is those who have the lowest emissions that pay the most.&nbsp;</p>\n\n\n\n<p>With carbon pricing we make sure that those who cause emissions also pay for them.</p>\n\n\n\n<p>Because emissions rise with income, a carbon price ensures that it will be the rich who pay most.{ref}That they pay the most is a statement about absolute spending. As explained below, the <em>relative</em> spending on energy is often highest for poorer households.{/ref} For the very rich it is the case that a few consumption choices \u2013 flights, large cars, meat \u2013 are responsible for the bulk of their emissions.{ref}Ivanova D, Wood R (2020). The unequal distribution of household carbon footprints in Europe and its link to sustainability. Global Sustainability 3, e18, 1\u201312. <a href=\"https://doi.org/10.1017/sus.2020.12\">https://doi.org/10.1017/sus.2020.12</a>.{/ref} Carbon pricing is a policy targeted to address these consumption choices, it makes carbon-intensive goods less affordable and \u2018degrows\u2019 the consumption of those goods.</p>\n\n\n\n<h5><em>How much</em> do we make people pay for emitting greenhouse gases?&nbsp;</h5>\n\n\n\n<p>The second decision that we can influence with a price on carbon is: <em>How much</em> do we want to pay for fossil fuels?&nbsp;</p>\n\n\n\n<p>If we continue emitting high volumes of greenhouse gases we will cause severe climate change and eventually have to pay a high price from the damages. Several studies find that if we don\u2019t achieve a reduction in emissions now, economic growth would be much lower in the decades ahead (and that surely wouldn\u2019t be our main concern in such a future).{ref}On the relation between future warming and growth see:<br>Pretis, F., Schwarz, M., Tang, K., Haustein, K., &amp; Allen, M. R. (2018). Uncertain impacts on economic growth when stabilizing global temperatures at 1.5\u00b0C or 2\u00b0C warming. <em>Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences</em>, <em>376</em>(2119), 20160460.<a href=\"https://doi.org/10.1098/rsta.2016.0460\"> https://doi.org/10.1098/rsta.2016.0460<br></a></p>\n\n\n\n<p>Burke, M., Hsiang, S. M., &amp; Miguel, E. (2015). Global non-linear effect of temperature on economic production. <em>Nature</em>, <em>527</em>(7577), 235\u2013239.<a href=\"https://doi.org/10.1038/nature15725\"> https://doi.org/10.1038/nature15725</a> {/ref}&nbsp;</p>\n\n\n\n<p>Levying a fee on carbon emissions can be a key policy to bring down emissions quickly so that we avoid large costs in the future.</p>\n\n\n\n<p>In the past many macroeconomists considered the need to cut emissions as a drag on the economy that lowers economic growth. This idea, that decarbonisation of our economies conflicts with economic growth, is still shared by many.{ref}In <a href=\"https://ourworldindata.org/shrink-emissions-not-the-economy\">a guest post for Our World in Data</a> Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova put it like this:<br><em>\u201cIronically, the proponents of this claim come from two antagonistic camps. On the one hand, there are those who believe that addressing climate change must take priority and that this requires an organised diminution of economic output (termed \u201cdegrowth\u201d). On the other hand, there are those who believe that economic growth and the social stability that comes with it should be prioritised: concerning oneself with climate policy should not be a priority if it impacts competitiveness.\u201d</em>{/ref}</p>\n\n\n\n<p>But this is no longer the mainstream view. The latest annual IMF report estimates that policies, including carbon pricing, that mitigate climate change actually <em>increase</em> economic growth over the coming decades.{ref}<a href=\"https://www.imf.org/en/Publications/WEO/Issues/2020/09/30/world-economic-outlook-october-2020\">World Economic Outlook, October 2020: A Long and Difficult Ascent</a>. In October 2020. Their central point estimate is a boost of up to 13% of global GDP by 2100.{/ref} This means that there is no trade-off between fighting climate change and economic growth. Fighting climate change is a way to achieve <em>more growth</em>.{ref}Even the last IPCC report (published 6 years ago) did not suggest that the antagonism of growth vs climate is correct. The IPCC report lays out what the cost of limiting global warming to less than 2\u00b0C would be. The policy scenario for the 21st century that relies on carbon pricing and technological innovation corresponds to an annualized reduction of economic growth by 0.06%, <em>relative to a baseline growth of 1.6% to 3%</em>.&nbsp;</p>\n\n\n\n<p>In other words, if the world economy would grow at 1.6% per year, the world economy in 100 years would be 1.016^100=489% the size of today\u2019s economy. With measures in place to limit warming to 2\u00b0C, growth would be 0.06% smaller \u2013 i.e. 1.54% per year. The world economy would then \u2018only&#8217; be 461% of the size of today.<br><br>In case the world economy would grow 3% per year the world economy in 100 years would be 1.03^100=1922% the size of today\u2019s economy. With measures to limit warming to 2\u00b0C, growth would be 0.06% smaller \u2013 i.e. 2.94% per year. The economy would then \u2018only&#8217; be 1813% the size of today.</p>\n\n\n\n<p>This is to say that the IPCC report in 2014 found rapid economic growth compatible with limiting climate change to 2\u00b0C.<br><br>The opposite is of course not true. While more climate mitigation in the short-term raises growth over the mid-term, it is not the case that more growth necessarily leads to lower greenhouse gas emissions.<br><br>See:<br>Edenhofer et al. (2014). <a href=\"https://www.ipcc.ch/report/ar5/wg3/\">IPCC, 2014: Summary for Policymakers</a>. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change.<br><br>See also: IPCC (2014) \u2013 <a href=\"https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf\">Climate Change 2014: Synthesis Report</a>. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.<br><br><a href=\"https://www.sciencedirect.com/science/article/pii/S0095069617308707\">https://www.sciencedirect.com/science/article/pii/S0095069617308707</a><br>{/ref}&nbsp;</p>\n\n\n\n<p>From the responses to my recent writing on <a href=\"https://ourworldindata.org/poverty-minimum-growth-needed\">the need of growth for ending poverty</a> I saw that some people have not caught up with this. Fighting climate change is not just compatible with fighting poverty, the two goals \u2014 to reduce emissions and to increase economic growth \u2014 actually <em>strengthen</em> each other.</p>\n\n\n\n<p>It is very good news that fighting climate change is expected to increase growth over the coming decades, but the benefits to climate mitigation are larger than just additional growth: it also means a modernisation of key infrastructure, faster innovation, the protection of the biosphere on our planet, and the major health benefits of reduced air pollution caused by burning fossil fuels, including millions of lives saved.&nbsp;</p>\n\n\n\n<p>Taking both the costs and benefits into account makes a very clear argument for climate action now. Putting a price on carbon to build a low-carbon world is an investment for a much better future.</p>\n\n\n\n<h4>For once even economists agree</h4>\n\n\n\n<p>Economists are not known for agreeing much with one another. But regarding the challenge of how to reduce greenhouse gas emissions there is more agreement among economists than in perhaps any other big policy question.&nbsp;</p>\n\n\n\n<p>What is particularly encouraging is that this is a policy that is supported by both left- and right-leaning economists. That left-leaning economists are in favour of a tax that will mostly be paid for by richer people is not surprising. It is perhaps more surprising that many right-leaning economists \u2013 who are generally in favor of a small state with only minimal taxes \u2013 are also in favor. Economists on the conservative side of the spectrum, such as Greg Mankiw, <a href=\"https://scholar.harvard.edu/files/mankiw/files/smart_taxes.pdf\">advocate strongly for a carbon tax</a> and widespread support for carbon taxes of economists across the political spectrum is documented in many relevant surveys.{ref}The IGM economic experts panel at Chicago Booth, which surveys a large number of leading economists at US universities, has repeatedly <a href=\"https://www.igmchicago.org/?s=carbon+tax\">asked them about their opinion on a carbon tax</a> and invariably finds large support for such a tax.</p>\n\n\n\n<p>See also the survey of 365 economists who have published papers related to climate change \u201cin a highly ranked, peer-reviewed economics or environmental economics journal\u201d conducted by The Institute for Policy Integrity at the New York University (NYU) School of Law. Published <a href=\"https://policyintegrity.org/files/publications/ExpertConsensusReport.pdf\">here</a>. (Note also that, compared with the general public, a much larger share of economists believes that climate change is a very serious problem and that it is time to act now \u2013 see Figure 2a.)</p>\n\n\n\n<p>In a 2006 survey of the American Economic Association, 65% agreed that \u201cthe US should increase energy taxes\u201d.<br>Whaples, Robert. 2006. Do Economists Agree on Anything? Yes! The Economists\u2019 Voice, 3(9).</p>\n\n\n\n<p>The Wall Street Journal asked business economists in 2007, \u2018\u2018What is the most economically sound way for the government to encourage development of alternatives to fossil fuels?\u2019\u2019 54 percent advocated for \u2018\u2018taxes that raise the cost of purchasing fossil fuels\u2019\u2019.<br>Izzo, Phil. 2007. Is It time for a New Tax on Energy? Wall Street Journal, February 9, 2007.</p>\n\n\n\n<p>Keohane, M. N. O., &amp; Olmstead, S. M. (2016). Markets and the Environment. Island Press, Washington.<br>Last year over 3,500 economists, including twenty-seven Nobel laureates, signed <a href=\"https://clcouncil.org/economists-statement/\">this letter supporting carbon pricing</a>.{/ref}&nbsp;</p>\n\n\n\n<p>An alternative to a carbon price that many governments pursue is to rely on specific guidelines, but doing this well is an incredibly difficult task. A government with the goal to reduce emissions can try to regulate each specific sector and decide which types of production and consumption should be reduced or forbidden. But the planner who is tasked with doing this needs to have an enormous knowledge of all kinds of technologies, their carbon footprint, their cost, the possible alternatives, and their future potential. The carbon price is such an effective alternative to the central planner, because it doesn\u2019t require a central authority to have enormous knowledge. Instead it incentivizes everyone to reduce carbon emissions \u2013 since they are incentivized to save money \u2013 and thereby distributes the task of reducing emissions to <em>everyone</em> \u2013 every producer, every investor, every consumer. Instead of one central agency, it incentivizes billions of people to search for ways to reduce their costs and thereby to find millions of solutions to reduce their emissions.</p>\n\n\n\n<p>Another aspect that is convincing even to those who favour a small state is that if you want to have <em>any public spending at all</em> \u2013 and very few want a state that is so small that neither roads nor the police are publicly funded \u2013&nbsp;you have to raise state revenue <em>somewhere</em>. The argument then is that if you have to have some taxes, it\u2019s better to tax something that harms people rather than something that we want to encourage, like work. There are big losers from a carbon price \u2013 the fossil fuel industry \u2013 but for citizens, the overall taxes do not have to increase: the carbon price is government revenue so that it can reduce taxes elsewhere. It is actually the other way around: the implicit subsidies to fossil fuels are costly and thereby increase taxes for everyone \u2013 as we have seen, the IMF estimates that the lack of carbon pricing means that governments lose 3.8% of GDP and this loss either means greater public debt or it has to be made up by all of us paying higher taxes.</p>\n\n\n\n<p>Poorer households spend a larger share of their income on energy so that a carbon price would hit these households hardest. It is possible to avoid this consequence by making the poorest households benefit from the spending that the carbon tax allows. The famous call for a carbon tax signed by a large number of leading economists at <a href=\"https://www.econstatement.org/\">econstatement.org</a> has this goal. &#8220;To maximize the fairness and political viability of a rising carbon tax, all the revenue should be returned directly to U.S. citizens through equal lump-sum rebates. The majority of American families, including the most vulnerable, will benefit financially by receiving more in \u2018carbon dividends\u2019 than they pay in increased energy prices.&#8221;</p>\n\n\n\n<h4>What is stopping us?</h4>\n\n\n\n<p>The world did make a start on carbon pricing. 78 different jurisdictions have implemented a carbon price and this year (2021) a price will be paid on 22% of the world\u2019s carbon emissions.{ref}All data points and references here refer to the 2020 issue: World Bank (2020) \u2013 <a href=\"https://openknowledge.worldbank.org/handle/10986/33809\">State and Trends of Carbon Pricing 2020</a>. Washington, DC: World Bank. \u00a9 World Bank. License: CC BY 3.0 IGO.{/ref} 17 years ago a price was paid on much less than 1% of all emissions.</p>\n\n\n\n<p>But the carbon price is low in many places and the figures just cited mean that there is no monetary price on three-quarters of emissions.</p>\n\n\n\n<p>Given all the arguments above, why is effective carbon pricing not implemented in many more places?&nbsp;</p>\n\n\n\n<p>A big reason is of course that those that will lose out from carbon pricing \u2013 the fossil fuel industry \u2013 rally against them.&nbsp;</p>\n\n\n\n<p>But it is also the case that carbon pricing is not very popular among voters. Study after study finds that a key reason for this is that <em>many do not believe that a price on carbon is actually effective in reducing emissions</em>.{ref}See Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Fr\u00e9d\u00e9ric Varone, and Frank V\u00f6hringer (2017) \u2013 \u201cGreen Taxes in a Post-Paris World: Are Millions of Nays Inevitable?\u201d Environ Resource Econ 68, 97\u2013128 (2017). <a href=\"https://doi.org/10.1007/s10640-017-0133-8.%7B/ref\">https://doi.org/10.1007/s10640-017-0133-8</a><br><br>Baranzini A, Carattini S (2017) \u2013 Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environ Econ Policy Stud 19(1):197\u2013227</p>\n\n\n\n<p>and Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 <a href=\"https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics\">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669\u2013677. {/ref} While it is the effectiveness of carbon prices that makes them popular among experts, it is the perceived ineffectiveness that makes them unpopular among non-experts.&nbsp;</p>\n\n\n\n<p>But it is also the case that people change their mind about carbon prices when they learn that they do actually work.{ref}Klenert, D., Mattauch, L., Combet, E., Edenhofer, O., Hepburn, C., Rafaty, R., Stern, N. (2018) \u2013 <a href=\"https://www.nature.com/articles/s41558-018-0201-2?WT.feed_name=subjects_economics\">Making Carbon Pricing Work for Citizens</a>. In Nature Climate Change 8, 669\u2013677. {/ref} After the Swiss population rejected a carbon price in a referendum, a group of researchers \u2013 Carattini et al (2017){ref}Stefano Carattini, Andrea Baranzini, Philippe Thalmann, Fr\u00e9d\u00e9ric Varone, and Frank V\u00f6hringer (2017) \u2013 \u201cGreen Taxes in a Post-Paris World: Are Millions of Nays Inevitable?\u201d Environ Resource Econ 68, 97\u2013128 (2017). <a href=\"https://doi.org/10.1007/s10640-017-0133-8.%7B/ref\">https://doi.org/10.1007/s10640-017-0133-8</a> {/ref} \u2013 ran a study to investigate what could have made the proposal more popular. They found that \u201cthe effectiveness of energy taxes is not an established fact for the general public\u201d and their study showed that the most important successful argument in favour of the tax is information on the expected effectiveness in reducing emissions.</p>\n\n\n\n<p>It shouldn\u2019t be surprising that the communication of successful strategies is of such great importance. Many of us care a lot about climate change \u2013 people around the world <a href=\"https://www.pewresearch.org/global/2020/09/09/despite-pandemic-many-europeans-still-see-climate-change-as-greatest-threat-to-their-countries/\">consistently view</a> it as one of the largest challenges that humanity faces \u2013 and at the same time many feel hopeless that we can actually do anything about it. Showing that there <em>is</em> a way forward is key for the successful fight against climate change.</p>\n\n\n\n<h4>Empirical evidence: Does a price on carbon reduce carbon emissions?</h4>\n\n\n\n<p>Back in 1991 Sweden was one of the first countries in the world to implement a carbon tax. Over time the carbon tax was gradually increased, but it still mainly affects the transport sector (around 90 percent of the revenues from the carbon tax come from the consumption of gasoline and motor diesel).{ref}The transport sector is of significant importance for Sweden\u2019s carbon emissions: in the study period it was responsible for close to 40 percent of Sweden\u2019s total annual CO<sub>2</sub> emissions.{/ref}</p>\n\n\n\n<p>The researcher Julius Andersson studied whether the carbon price worked as intended by studying its impact on emissions from the transport sector.{ref}Julius J. Andersson (2019) \u2013 <a href=\"https://pubs.aeaweb.org/doi/pdfplus/10.1257/pol.20170144\">Carbon Taxes and CO2 Emissions: Sweden as a Case Study</a>. American Economic Journal: Economic Policy. 11 (4): 1\u201330. doi:10.1257/pol.20170144. ISSN 1945-7731.{/ref}&nbsp;</p>\n\n\n\n<p>He finds that \u201cCO<sub>2</sub> emissions from transport declined almost 11 percent in an average year, with 6 percent from the carbon tax alone.\u201d A very strong effect.</p>\n\n\n\n<p>How did prosperity and emissions change in Sweden over this period? Average incomes in Sweden \u2013&nbsp;GDP per capita \u2013 increased by 52% since the year before the tax was introduced, and emissions declined by 29%.{ref}In <a href=\"https://ourworldindata.org/grapher/consumption-co2-per-capita-vs-gdppc?endpointsOnly=1&amp;time=2017..latest\">this scatterplot of CO2 emissions vs GDP per capita</a> you can see Sweden in context. At annual emissions of 7.1 tonnes per capita the country is doing much better than other rich (and poor) countries.{/ref}&nbsp;</p>\n\n\n\n<p>Sweden\u2019s emissions are still far from where they need to be, but the direction of change \u2013 growing prosperity, but declining emissions \u2013 is right.</p>\n\n\n\n<p>And Sweden is not the only country that reduced emissions while growing the economy, as the chart shows.{ref}<a href=\"https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest&amp;country=~SWE\">In the interactive version of this chart</a> you can view this data for many more countries.{/ref} Shown in the chart are consumption-based CO<sub>2</sub> emissions, which means that they account for the carbon emissions caused by products that were consumed within the country but which were produced elsewhere.</p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" width=\"2175\" height=\"2565\" src=\"https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all.png\" alt=\"\" class=\"wp-image-52668\" srcset=\"https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all.png 2175w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-339x400.png 339w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-466x550.png 466w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-127x150.png 127w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-768x906.png 768w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-1302x1536.png 1302w, https://owid.cloud/app/uploads/2022/09/Absolute-decoupling-Growth-and-falling-emissions-all-1737x2048.png 1737w\" sizes=\"(max-width: 2175px) 100vw, 2175px\" /></figure>\n\n\n\n<p>Carbon pricing is not the only reason emissions are falling in these countries. As we just saw, the paper on Sweden attributes about half of the decline to the carbon tax. Other reasons include technological progress (such as rising efficiency and <a href=\"https://ourworldindata.org/cheap-renewables-growth\">cheaper renewables</a>), declining demand for energy, and other regulations (for example, on air pollution).&nbsp;</p>\n\n\n\n<p>Like all policies that are based on a price mechanism, the level of the price matters. If it is too low it won\u2019t have much of an effect. This is what Felix Pretis (2020) has found for the carbon tax in British Columbia.{ref}The recently introduced carbon price reduced emissions in the transport sector, but not on the wider economy. Pretis argues that this is because \u201cexisting carbon taxes (and prices) are too low to be effective in the time frame since their introduction.\u201d</p>\n\n\n\n<p>Felix Pretis (2020) \u2013 Does a carbon tax reduce CO2 emissions? Evidence from British Columbia. Working paper, published at the Department of Economics, University of Victoria &amp; Nuffield College, University of Oxford. First Manuscript Version: Feb. 8th, 2019; This Version: Feb. 4, 2020.{/ref}</p>\n\n\n\n<p>But in places that have a substantial carbon price, they can play an important role in reducing emissions, as a number of studies have shown.</p>\n\n\n\n<p>In a recent global study, researchers Best, Burke, and Jotzo (2020) analysed 142 countries and found that those that have a carbon price do, as one would expect, have lower CO<sub>2</sub> emissions than those who do not.{ref}Best, R., Burke, P.J. &amp; Jotzo, F. (2020) \u2013 Carbon Pricing Efficacy: Cross-Country Evidence. Environ Resource Econ 77, 69\u201394. <a href=\"https://doi.org/10.1007/s10640-020-00436-x\">https://doi.org/10.1007/s10640-020-00436-x</a> {/ref}</p>\n\n\n\n<p>Germany too reduced emissions while becoming richer. The research by Petrick and Wagner (2014) showed how EU-wide carbon pricing contributed to this achievement.{ref}Petrick, S., Wagner, U. J. (2014). The impact of carbon trading on industry: Evidence from German manufacturing firms, Kiel Working Paper, No. 1912, Kiel Institute for the World Economy (IfW), Kiel. <a href=\"https://econpapers.repec.org/RePEc:zbw:ifwkwp:1912\">https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1912</a>}{/ref}&nbsp;</p>\n\n\n\n<p>Countries in the European Union have established a cap-and-trade system called the <a href=\"https://en.wikipedia.org/wiki/European_Union_Emission_Trading_Scheme\">EU Emission Trading Scheme</a> (EU ETS). Recent research by Bayer and Akin showed that this system of carbon pricing has been effective in reducing emissions.{ref} Bayer, Patrick; Aklin, Micha\u00ebl (2020) \u2013 The European Union Emissions Trading System reduced CO2 emissions despite low prices. Proceedings of the National Academy of Sciences. doi:10.1073/pnas.1918128117{/ref}&nbsp;</p>\n\n\n\n<p>Lastly, let\u2019s look at the motherland of fossil-fuel-powered industrialization: the chart shows the sources of power production in the UK over the last century.&nbsp;</p>\n\n\n\n<p>Electricity production in the UK has been dominated by coal since its early days; as soon as the light bulb was invented, the UK had its first coal power plant, the Holborn Viaduct power station in London. But this changed in recent decades, and especially rapidly after the UK introduced two carbon price systems.&nbsp;</p>\n\n\n\n<p>The UK was already part of the EU ETS, but went even further in 2013 when the country implemented the \u2018carbon price floor\u2019: <a href=\"https://www.carbonbrief.org/unpopular-but-tenacious-a-guide-to-the-uk-carbon-price-floor\">a top-up carbon tax</a> to the European system.&nbsp;</p>\n\n\n\n<p>In the decade before the tax was introduced one third of electricity in the UK came from coal, <a href=\"https://ourworldindata.org/safest-sources-of-energy\">the worst of power sources</a>. Since then the carbon tax \u201chas led to an unprecedented reduction in coal generation\u201d according to the research of Castagneto et al (2019).{ref}G. Castagneto Gissey, B. Guo, D. Newbery, G. Lipman, L. Montoya, P. Dodds, M. Grubb, P. Ekins (2019) \u2013 <a href=\"https://www.ucl.ac.uk/bartlett/sustainable/sites/bartlett/files/ucl_report_ofgem_20102019_final.pdf\">The value of international electricity trading</a>. UCL and University of Cambridge. </p>\n\n\n\n<p>See also: Marion Leroutier (2021) \u2013 Carbon Pricing and Power Sector Decarbonisation: Evidence from the UK. In Journal of Environmental Economics and Management.{/ref} In the years following the policy change, the share of electricity generated from coal declined to just 2%.{ref}These days it is common that the UK runs for <a href=\"https://www.theguardian.com/environment/ng-interactive/2019/may/25/the-power-switch-tracking-britains-record-coal-free-run\">months without any coal electricity</a> at all, and like many countries that have a carbon price the UK has also <a href=\"https://ourworldindata.org/grapher/co2-emissions-and-gdp?time=1990..latest\">achieved</a> an absolute decoupling of growth and greenhouse gases: prosperity is up, emissions are down.{/ref}&nbsp;</p>\n\n\n\n<p>As the share of electricity from fossil fuel sources declined, the carbon intensity of electricity production <a href=\"https://ourworldindata.org/grapher/carbon-intensity-electricity?tab=chart&amp;time=2000..latest&amp;country=~GBR\">more than halved</a> and carbon emissions from power generation have <a href=\"https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/972583/2020_Provisional_emissions_statistics_report.pdf\">fallen <em>by two-thirds</em></a> in the UK!</p>\n\n\n\n<p>The Law of Demand \u2013 if the price of something goes up, consumption goes down \u2013 also holds in this case. Places that have implemented a substantial carbon price are achieving the intended effect, the consumption of carbon-intensive products declines and emissions fall.</p>\n\n\n\n<div class=\"wp-block-columns is-style-sticky-right\">\n<div class=\"wp-block-column\">\n<iframe src=\"https://ourworldindata.org/grapher/electricity-mix-uk?country=~GBR\" loading=\"lazy\" style=\"width: 100%; height: 600px; border: 0px none;\"></iframe>\n</div>\n\n\n\n<div class=\"wp-block-column\"></div>\n</div>\n\n\n    <block type=\"prominent-link\" style=\"is-style-thin\">\n        <link-url>https://ourworldindata.org/shrink-emissions-not-the-economy</link-url>\n        <title>Shrink emissions, not the economy</title>\n        <content>\n\n<p><em>If you want to understand why it is possible to reduce emissions while growing the economy, see this Our World in Data guest post by Linus Mattauch, Alexander Radebach, Jan Siegmeier, and Simona Sulikova that answers this question.</em></p>\n\n</content>\n        <figure><img width=\"768\" height=\"542\" src=\"https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-768x542.png\" class=\"attachment-medium_large size-medium_large\" alt=\"\" loading=\"lazy\" srcset=\"https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-768x542.png 768w, https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-150x106.png 150w, https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-400x282.png 400w, https://owid.cloud/app/uploads/2018/04/value-added-vs-share-of-emissions-usa-1-750x529.png 750w\" sizes=\"(max-width: 768px) 100vw, 768px\" /></figure>\n    </block>\n\n\n<h4>Conclusion</h4>\n\n\n\n<p>What\u2019s frustrating about the challenge of climate change is not that we have no options, but that we do not take the options we have.&nbsp;</p>\n\n\n\n<p>The reason our societies are powered by fossil fuels is that they provided energy at the cheapest monetary price. If we want to transition away from fossil fuels and build a world that is powered by their alternatives we can rely on the price mechanism as well.</p>\n\n\n\n<p>What makes carbon pricing so powerful is that it is a policy that changes the entire system. No decision about any carbon-intensive activity escapes its influence: it changes the choices of consumers, producers, investors, entrepreneurs and innovators in all relevant sectors at once.&nbsp;</p>\n\n\n\n<p>I want to make clear that I do not believe that carbon pricing can be the one policy change that will end climate change.{ref}On this see for example Ryan Rafaty, Geoffroy Dolphin, and Felix Pretis (2020) \u2013 <a href=\"https://www.ineteconomics.org/research/research-papers/carbon-pricing-and-the-elasticity-of-co2-emissions\">Carbon Pricing and the Elasticity of CO2 Emissions</a>. INET Working Paper.{/ref} But the theory and evidence is clear that carbon prices work as intended and if we are able to end climate change in this century I would be surprised if we achieve this without putting a price on carbon. In other words, I don\u2019t think this is sufficient, but I do think it would be a key step towards a better future.</p>\n\n\n\n<p>Our challenge is big. We need to build a new world that still solves the problems that fossil fuels solve today. Carbon-intensive goods and services are often in high demand today, because they are important for people. They have the unfortunate by-product of carbon emissions, but they solve other problems for us and everyone around us. Key to making the transition to a low-carbon future will be to innovate and scale-up alternatives. Carbon prices are useful for this transition because they give <em>everyone</em> an incentive to get there, especially in <a href=\"https://ourworldindata.org/cheap-renewables-growth\">those sectors where alternatives <em>do</em> exist</a>.&nbsp;</p>\n\n\n\n<p>And in those areas where low-carbon alternatives do not yet exist, support for research and development will be key. Because these two policies are working towards the same goal they <em>complement</em> each other, a higher price on carbon provides an incentive to increase R&amp;D.</p>\n\n\n\n<p>We<em> do</em> have options, and understanding them is not exactly rocket science. Consumption goes down, when prices go up. If we want to reduce carbon emissions we should not be paying people to burn fossil-fuels. We should end subsidies.</p>\n\n\n\n<p>What is hard, is to win the necessary political support for pricing carbon. The article linked below draws the political lessons from places that were successful in establishing carbon prices.</p>\n\n\n\n<p>I believe that putting a price on carbon is one of the most important goals to fight for in our lifetime. The current world is not sustainable and it is just not right that the richest have the highest emissions, while those who emit the least \u2013 the poorest and those who come after us \u2013 pay the highest price. Carbon pricing addresses the current injustice where we are allowing the richest to privately enjoy the gains from fossil fuels, while they pass off the costs to everyone else.</p>\n\n\n\n<p>If we are serious about decarbonizing the global economy \u2013 and building the low-carbon future \u2013 we should make the fight for a monetary price on carbon central to our efforts over the years ahead.</p>\n\n\n\n<hr class=\"wp-block-separator\"/>\n\n\n\n<p><strong>Acknowledgements:</strong> I would like to thank Hannah Ritchie, Marcel Gerber, Charlie Giattino, Esteban Ortiz-Ospina for reading drafts of this text and for their very helpful comments and ideas.</p>\n\n\n\n<p><strong>Update:</strong> I updated the figure that shows the decoupling of emissions and economic growth on September 3, 2022.</p>\n\n\n\n<div style=\"height:144px\" aria-hidden=\"true\" class=\"wp-block-spacer\"></div>\n\n\n\n<hr class=\"wp-block-separator\"/>\n\n\n\n<p>If you want to think through the <strong>counterarguments to pricing carbon</strong>, here is a list of references to get you started with:</p>\n\n\n\n<ul><li>One of the most widely discussed recent articles on the topic is <a href=\"https://bostonreview.net/science-nature-politics/leah-c-stokes-matto-mildenberger-trouble-carbon-pricing\">The Trouble with Carbon Pricing</a> authored by Leah Stokes and Matto Mildenberger. As I emphasized above, the authors\u2019 main point is that while carbon prices make economic and environmental sense, it is difficult to get the political support that they need to be free of loopholes and to be high enough to make a difference. They also argue that it would be wrong to believe that no other policy is needed to bring emissions to zero. I largely agree with the authors. Carbon taxes cannot be the only solution \u2013 they emphasise clean energy standards, I\u2019d emphasise public R&amp;D \u2013 but I disagree that this means we should not make it our political goal to put a price on carbon. I think they should be part of a big package of successful climate policy tools \u2013 carbon prices are one tool in our hands and we shouldn\u2019t weaken ourselves by throwing away solutions that we do have.</li><li>Ramez Naam wrote <a href=\"https://twitter.com/ramez/status/1094380540394795008\">this very good Twitter thread</a> on why carbon taxes are a good policy, but why he believes that subsidies for specific technologies can be even better in some cases.</li><li>Rosenbloom et al (2020) discuss the weaknesses of carbon pricing and offer their own alternative, which they call \u201csustainability transition policy\u201d,&nbsp; a \u201cmix of contextually and politically sensitive policies that simultaneously drive low-carbon innovation and the decline of fossil fuels\u201d.<ul><li>Daniel Rosenbloom, Jochen Markard, Frank W. Geels, and Lea Fuenfschilling (2020) \u2013 <a href=\"https://www.pnas.org/content/117/16/8664.short\">Opinion: Why carbon pricing is not sufficient to mitigate climate change\u2014and how \u201csustainability transition policy\u201d can help</a>. In PNAS.</li></ul><ul><li>I am personally not impressed by the Rosenbloom et al (2020) critique and agree largely with the reply by Jeroen van den Berg and Wouter Botzen (2020) also published in PNAS.</li><li>Jeroen van den Berg and Wouter Botzen (2020) \u2013 <a href=\"https://www.pnas.org/content/117/38/23219\">Low-carbon transition is improbable without carbon pricing</a>, PNAS.</li></ul></li><li>Goulder et al. (2016) argue that implementing a closely related policy \u2013 a clean energy standard (CES) \u2013 can be more cost-effective than a carbon price.</li><li>Lawrence H. Goulder, Marc A. C. Hafstead, Roberton C. Williams III (2016) \u2013 General Equilibrium Impacts of a Federal Clean Energy Standard. In the American Economic Journal: Economic Policy. VOL. 8, NO. 2, MAY 2016. (pp. 186-218).</li><li>Three more pointers:<ul><li>Garth Heutel (2020) \u2013 <a href=\"https://econfip.org/policy-brief/in-defense-of-alternatives-to-pollution-pricing/#\">In Defense of Alternatives to Pollution Pricing</a></li><li>See <a href=\"https://marginalrevolution.com/marginalrevolution/2011/09/do-all-serious-economists-favor-a-carbon-tax.html\">this list of 10 arguments by Tyler Cowen</a>.</li><li>And finally I have also asked the question <a href=\"https://twitter.com/MaxCRoser/status/1326671354654023682\">\u2018What are the best papers or essays with arguments against a carbon price?</a>\u2019, publicly on Twitter. There are several helpful replies there.</li></ul></li></ul>\n\n\n\n<hr class=\"wp-block-separator\"/>\n\n\n\n<p></p>\n\n\n\n<p><em>Continue reading on Our World in Data:</em></p>\n\n\n    <block type=\"prominent-link\" style=\"is-style-thin\">\n        <link-url>https://ourworldindata.org/carbon-pricing-popular</link-url>\n        <title>Why is carbon pricing in some countries more successful than in others?</title>\n        <content>\n\n<p>In some countries the public is very supportive of carbon taxes. In other countries they are largely against them.&nbsp;</p>\n\n</content>\n        <figure><img width=\"768\" height=\"431\" src=\"https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-768x431.png\" class=\"attachment-medium_large size-medium_large\" alt=\"\" loading=\"lazy\" srcset=\"https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-768x431.png 768w, https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-150x84.png 150w, https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-400x225.png 400w, https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust-750x421.png 750w, https://owid.cloud/app/uploads/2018/08/carbon-prices-public-trust.png 922w\" sizes=\"(max-width: 768px) 100vw, 768px\" /></figure>\n    </block>",
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    "excerpt": {
        "rendered": "We are paying a price for fossil fuels, but that price is not paid by those that burn the fossil fuels \u2013 we need to change that.",
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    "date_gmt": "2021-06-01T10:30:00",
    "modified": "2022-09-04T10:57:33",
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