Carbon pricing works, and it proves it
Putting a price on carbon should reduce emissions, because it makes dirty production processes more expensive than clean ones, right?
This is economic theory. Put bluntly, it’s obvious; however, there may be a small chance that what happens in practice is something else. In one newly published article, we present the results of the largest study of what happens to emissions from fuel combustion when they attract a load.
We analyzed data from 142 countries over two decades, 43 of which had some form of carbon price at the end of the study period.
The results show that countries with carbon prices have on average growth rates in carbon dioxide emissions that are about two percentage points lower than countries with no carbon prices, after taking into account many other factors. .
As a background, the average annual growth rate of emissions for the 142 countries was around 2% per year. This effect size adds up to very large differences over time. It is often sufficient to differentiate between a country with an increasing or decreasing emissions trajectory.
Emissions tend to fall in countries with carbon prices
A quick glance at the data gives a first clue. The figure below shows the countries that had a carbon price in 2007 as a black triangle and the countries that did not have a green circle.
On average, carbon dioxide emissions decreased by 2% per year from 2007 to 2017 in countries with a carbon price in 2007 and increased by 3% per year in others.
The difference between a 3 percent increase per year and a 2 percent decrease per year is five percentage points. Our study reveals that around two percentage points are due to the price of carbon, the remainder being due to other factors.
The higher the price, the greater the benefit
The challenge was to determine to what extent the change was due to the introduction of a carbon price and to what extent it was due to a series of other things happening at the same time, including improved technologies. , demographic and economic growth, shocks, support measures for renewable energies and differences in fuel tax rates.
We checked a long list of other factors, including the use of other policy instruments. It would be reasonable to expect a higher carbon price to have greater effects, and that is indeed what we have seen. On average, an additional euro per tonne of carbon dioxide price is associated with a decline in the annual growth rate of emissions of around 0.3 percentage point in the sectors it covers.
Avoid politics if possible
The message to governments is that carbon pricing almost certainly works, and generally, to a great effect.
Although a well-designed approach to reducing emissions would include other complementary policies, such as regulations in certain sectors and support for low-carbon research and development, carbon pricing should ideally be the centerpiece of the effort.
Sadly, carbon pricing policy has been heavily poisoned in Australia, despite its popularity in a number of countries with conservative governments, including Britain and Germany. Even the Australian Labor opposition seems to have given up.
However, it should not be forgotten that the Australian experience of two years of carbon pricing delivered emissions reductions as the economy grew It worked as expected. Groups such as the Business Council of Australia which welcomed the abolition of the carbon price in 2014 are calling for an effective climate policy with a price signal at its heart.
Carbon pricing elsewhere
The results of our study are highly relevant to many governments, especially those in industrialized and developing countries, which are weighing their options. The world’s largest economic organizations, including the International Monetary Fund, the World Bank, and the Organization for Economic Co-operation and Development, continue to call for increased use of carbon pricing.
If countries are committed to a low-carbon development model, the evidence suggests that setting an appropriate price on carbon is a very effective way to achieve this.