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The Cost of Carbon: Putting a Price on Pollution

Published September 25, 2015 | By SECCCA

When factories belch smoke, everybody pays. Shouldn’t polluters feel the sting? That’s the big idea behind carbon pricing. Putting a price tag on each ton of carbon dioxide released into the atmosphere reflects its cost to the environment and fires up the search for the cheapest ways to fight climate change. Many policymakers accept that it’s the way to go, but they can’t agree on the best way to do it. Europe, parts of the U.S. and China use markets where companies buy and sell permits to pollute. So far, it’s not clear if that’s working better than a simple carbon tax.

The Situation

The effectiveness of carbon pricing is being debated at the United Nations-sponsored talks to forge a new global pact by the end of 2015 to combat global warming.  At least 20 countries or jurisdictions including the European Union have developed or plan to start emissions markets, known as cap-and-trade systems. At least 10 have a tax, ranging from $5 a ton planned for Chile to $157 a ton in Sweden. China, the world’s biggest emitter, will start a national pollution-trading system by 2017. Its pilot programs don’t try to cut the total pollution level, but instead aim to trim the emissions released per unit of industrial production. U.S. President Barack Obama tried and failed to start a national cap-and-trade system during his first term. Since the idea of a national carbon tax is unpopular in the U.S., he’s turned to direct regulation of power plants instead. In Canada, some provinces are joining California’s emissions market as the country shuns a national approach. Pollution levels have fallen in many of the areas covered by carbon trading, though much of the drop is attributed to the global recession and the lower price of natural gas, which is cleaner than coal or oil.

The Background

Carbon pricing provides incentives to invest in clean technology or switch to less carbon-intensive fuels. When a tax is used, it’s up to governments to set the levy at a level that’s high enough to encourage companies to act, but not so high that it forces factories to close or relocate. With cap-and-trade, governments typically set a target for how much pollution-cutting their economies can tolerate, then distribute or sell individual rights to release CO2. As the pool of permits is reduced over time, companies that clean up have more allowances than they need and can sell them. The EU was the first to require carbon dioxide permits, in 2005, only to see them plunge in value when industrial output and demand tumbled in the global recession, creating a glut. The price crawled back to about 8 euros ($9.20) a ton by the middle of 2015. Carbon markets of various forms have followed in the northeastern U.S., California, New Zealand and South Korea, all of them learning from the EU’s mistakes. As carbon pricing has spread, there have been setbacks. Australia repealed its carbon tax in 2014 and scrapped plans for permit trading after the measures were blamed for destroying jobs.

The Argument

In the emissions markets now up and running, the price probably isn’t high enough to change behaviors. That’s brought criticism from opponents such as New Jersey Governor Chris Christie, who pulled out of the trading system used by nine other U.S. states, saying it cost too much and did little.  Advocates of cap-and-trade argue that it’s better than a tax because it ensures a certain level of cuts and uses a market mechanism to identify the cheapest opportunities to curb pollution. Many countries — including the U.K. and most Scandinavian nations — use both permit trading and targeted taxes on dirty fuels like coal. Emissions markets can also provide important price signals to drive investment in green technologies ranging from energy-saving lightbulbs to carbon capture and storage. Critics of all types of carbon pricing say it hits the poor hardest by raising household energy prices, though the burden can be offset by redirecting revenue raised from polluters to low-income families.

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