Why Do We Need “Carbon Pricing”?
Created By RISC | 3 years ago
Last modified date : 2 years ago
Carbon pricing is a growing and important field. The carbon licensing industry worldwide totaled $851 billion last year, up 164% year on year. Carbon prices range from $1 to 142 per ton CO2 equivalent in various markets (information from 1 October 2021).
So what drives the price of carbon dioxide?
All of us, even if we don’t create greenhouse gases, experience their negative effects through climate change. But manufacturers create more carbon dioxide than we need – and consumers use more – because they aren’t responsible for these costs. So the planet suffers.
Production costs and consumer prices need to be adjusted. The purchase price doesn’t include the cost of external impacts. When these are taken into account, costs and prices rise. Producers and consumers may then reduce their output and consumption.
Internalization of externality is an economic concept that forces those who cause greenhouse gas emissions to be responsible for them through a mechanism like carbon pricing. When the cost of production rises, the amount produced may decrease.
This pricing system makes greenhouse gas emissions expensive because they are no longer given away for free. There are two alternative price mechanisms:
A "carbon tax" is based on the polluter pays concept. The government can set a tax rate based on the amount of carbon emissions produced.
An "emission trading scheme (ETS)" is the second strategy, in which the government sets caps on greenhouse gas emissions and gives licenses. Manufacturers who emit less carbon than their license allows can resell the rest. If they emit more greenhouse gases than allowed, they must buy permits from other firms in a cap-and-trade system. If the emissions limit is low and there is a large demand for licenses, their price will grow in accordance with supply and demand.
The fundamental difference between a carbon tax and ETS system is that the tax doesn’t regulate the quantity of carbon emissions, if producers are prepared to pay. The ETS system limits the total quantity of permitted greenhouse gas emissions, keeping them under control.
In terms of pricing, a carbon tax is a price-based policy that has no effect on the volatility of carbon and product prices. The price of the ETS system may vary with demand for the license. If demand is high, the license price will rise, affecting product cost and pricing.
More than 64 carbon pricing instruments were adopted during 2021, covering 21.5% of greenhouse gas emissions. Although this is a significant increase from 15% in 2020, most market carbon prices are still below $40-80 per ton of carbon dioxide equivalent (USD/tCO2e).
A price level of 40-80 USD/tCO2e in 2020 would reduce greenhouse gases to keep global temperatures from increasing above 2°C, according to forecasts. But carbon costs remain below this level. In 2030, the world's next pricing target to meet its 2°C target is 80-120 USD/tCO2e.
Many countries are attempting to minimize greenhouse gas emissions to achieve Net Zero Emissions, which is another approach to save our planet.
Story by: Woraporn Poonyakanok, Senior Research Engineer at RISC
References:
Global Carbon Accounts in 2021. https://www.i4ce.org/download/global-carbon-account-in-2021/#:~:text=As%20of%20October%201st%2C%202021%2C%20explicit% 20carbon%20prices%20range%20from,USD%2010%20(EUR%208).
Pongwipha Lorsomboon. Reduce global warming with a price mechanism http://www.dsdw2016.dsdw.go.th/doc_pr/ndc_2017-2018/PDF/8459sc/8459%E0%B8%9E%E0%B8%87% E0%B8%A9%E0%B9%8C%E0%B8%A7%E0%B8%B4%E0%B8%A0%E0%B8%B2%20%E0%B8%AB%E0%B8%A5% E0%B9%88%E0%B8%AD%E0%B8%AA%E0%B8%A1%E0%B8%9A%E0%B8%B9%E0%B8%A3%E0%B8%93%E0% B9%8C.pdf
Chayan Tantiwasdakarn and Komsak Sawangsawang. Carbon Pricing https://progreenecon.files.wordpress.com/2017/12/policy-brief-carbon-pricing.pdf
The World Bank. 2021. State and trends of carbon pricing 2021 https://openknowledge.worldbank.org/bitstream/handle/10986/35620/9781464817281.pdf