Carbon Pricing Lessons

This chapter attempts to distil key lessons from recent decades of experience with carbon pricing. It notes that American emissions have actually dropped despite the lack of national carbon pricing and that future attempts to develop carbon pricing need to draw directly from past experience. This includes careful attention to building political constituencies, developing effective management systems, and setting politically realistic goals. The chapter also explores other forms of energy taxation that might serve to impose a carbon price but do so at the point of extracting fossil fuels from below the surface of the ground. Nearly all states that produce oil and gas impose severance taxes and they generally retain broad political support across partisan lines.

A Carbon Pricing Work in Progress

California may be on the way toward replicating the experience of the Regional Greenhouse Gas Initiative, as it moves beyond early stages into full operation as a cap-and-trade system. It formally partners with one Canadian province, Quebec, and has begun to expand beyond its original focus on electricity. The program has experienced a number of significant challenges to longer-term operations but has retained a strong base of political support and could be poised to become a leading example of cap-and-trade effectiveness.

Why Carbon Pricing Is Appealing

The use of taxes to elevate the price of popular commodities in order to reduce consumption and risks related to use did not originate with carbon taxes. Excise taxes on tobacco have been used aggressively by governments in the United States and beyond in recent decades to achieve significant reductions in smoking. Fossil fuel use has long been deemed by diverse economists as a viable target for a sequel, leading to innumerable reports and scholarly arguments making the case for a carbon price. This can take the form of either a direct tax on the carbon content of fossil fuels or a cap-and-trade system that allows for purchase of rights to release emissions at a price. Both are thought to offer effective paths to reduce emissions in a cost-effective manner.

A Second Act for Carbon Pricing?

This chapter considers the future political viability of carbon pricing, given national and international developments since 2015. This includes a range of developments, including the Paris climate accord and major new initiatives in the United States and Canada on carbon taxes and cap-and-trade. It also revisits severance taxes and a mix of other efforts such as electricity fees and methane taxes that have emerged as possible counterparts to these carbon pricing mainstays, given their greater political feasibility.

Why Carbon Pricing Has Often Failed

This chapter examines nearly two decades of experience (1997-2015) in federal and sub-federal governments in the United States and Canada but also European and Asian nations in attempting to adopt carbon pricing. It explores various stages of the policy life-cycle and concludes that there are many points that challenge the adoption and durability of these policies. Even in cases where a policy is approved, its launch process, survival through a subsequent election and change of leadership, and management over the longer term can pose great challenges, frequently resulting in an erosion of support and reversal of policy. Enduring those stages of the life cycle is no guarantee that a surviving policy actually succeeds in reducing emissions in a cost-effective manner.

Why Politicians Are Reluctant to Price Carbon

The preferences of economists in policy do not necessarily correspond with what is politically feasible for elected officials. Indeed, carbon pricing to address climate change represents an enormous political challenge, as it imposes a visible and immediate price increase on the cost of a common commodity in exchange for the possibility that reduced consumption may offer climate benefits at some future point. Politicians may choose to avoid any policy step, particularly if opposition to pricing is steep and climate change is not a leading public concern. In turn, they may also select policies such as regulation and action plans, which may be less effective but may be easier to sell politically because any related cost increases are not obvious.

When Cap-and-Trade Works

Cap-and-trade has also faced numerous political challenges but also includes some more successful cases. Some of the experience of the American sulfur dioxide emissions trading program has been replicated for carbon in the case of the Regional Greenhouse Gas Initiative. This alliance among nine Northeastern states has retained political support for more than a decade and also pioneered a system to auction allowances to generate revenue. These funds are then concentrated on expansion of energy efficiency and renewable energy in the region, thereby further addressing climate change and also building a broader base of political support.

When Carbon Taxes Work

Carbon pricing is a political challenge but not an impossibility. This chapter examines cases where initial carbon tax adoption was followed by an enduring period of political support, successful implementation, and achievement of key policy goals. This includes a series of carbon taxes adopted in four Nordic countries in the 1990s and also more recent cases from British Columbia and Ireland. The British Columbia case is particularly noteworthy as it represents an effort by a center-right government to establish a relatively steep tax and reallocate all revenue to the public through a series of tax reductions.