Carbon price

Carbon pricing is considered by many economists to be the most economically efficient way to reduce emissions, taking into account the costs of both efficiency measures and the inconvenience of lesser fossil fuels. By pricing the externalities of carbon emissions, efficiency comes about by eliminating the market failure of the unpriced external costs of carbon emissions at its source. The exact monetary damage of the social cost caused by a tonne of depends on climate and economic feedback effects and remains to some degree uncertain. Latest calculations show an increasing trend: == Implementation ==

Cap-and-trade systems can include price stability provisions with floor and ceiling limits. A hybrid cap-and-trade program puts a limit on price increases and, in some cases, sets a floor price as well. The upper limit is set by adding more allowances to the market at a set price while the floor price is maintained by not allowing sales into the market at a price below the floor. The Regional Greenhouse Gas Initiative, for example, sets an upper limit on allowance prices through its cost containment provision. However, industries may successfully lobby to exempt themselves from a carbon tax. It is therefore argued that with emissions trading, polluters have an incentive to cut emissions, but if they are exempted from a carbon tax, they have no incentive to cut emissions. On the other hand, freely distributing emission permits could potentially lead to corrupt behaviour. Most cap and trade programs have a descending cap, usually a fixed percentage every year, which gives certainty to the market and guarantees that emissions will decline over time. With a tax, there can be estimates of reduction in carbon emissions, which may not be sufficient to change the course of climate change. A declining cap gives allowance for firm reduction targets and a system for measuring when targets are met. It also allows for flexibility, unlike rigid taxes. Revenue policies Standard proposals for using carbon revenues include • a return to the public on a per-capita basis This can compensate the risk of rising energy prices reaching high levels as long as cheap wind and solar power is not available yet. Rich people who tend to have a larger carbon footprint would pay more while poorer people can even benefit from such a regulation. • subsidies accelerating the transition to renewable energy • research, public transport, car sharing and other policies that promote carbon neutrality • subsidies for negative emissions: Depending on the technology, such as PyCCS or BECCS, the cost for generating negative emissions is about $150–165 per ton of CO2. The removal past emissions – 1,700 Gt in total – can theoretically be addressed by auctioning allowances starting with a price that exceeds the removal costs of the proposed emissions. == Price levels ==

About one third of the systems stays below $10/t, the majority is below $40. One exception is the steep incline in the EU-ETS reaching $60 in September 2021. Sweden and Switzerland are the only countries with more than $100/t. Market price surge in fossil fuels Unexpected spikes in natural gas prices and commodities such as oil and coal in 2021 caused a debate whether a carbon price increase should be postponed to avoid additional social burden. A redistribution on a per-capita-basis would even release poorer households which tend to consume less energy compared to wealthier parts of the population. The higher the high carbon price the greater the relief. Looking at individual situations though, the compensation would not apply to commuters in rural areas or people living in houses with poor insulation. They neither have liquidity to invest into solutions using less fossil fuels and would be dependent on credits or subsidies. On the other hand, a carbon price still helps to provide an incentive to use more effective fossil fuel technologies such as CCGT gas turbines in contrast to high-emission coal. == Scope and coverage ==

In the relevant countries with ETS and taxes, about 40% to 80% of emissions are covered. The schemes differ much in detail. They include or exclude fuels, transport, heating, agriculture or other greenhouse gases apart from like methane or fluorinated gases. In many EU member states like France or Germany, there is a coexistence of two systems: The EU-ETS covers power generation and large industry emissions while national ETS or taxes put a different price on petrol, natural gas and oil for private consumption. Other taxes and price components The final consumer price for fuels and electric energy depends on individual tax regulations and conditions in each country. Though carbon pricing is playing an increasing role, energy taxes, VAT, utility expenses and other components are still the main cause for completely different price levels between countries. == Impact on retail prices==

The table gives examples for a carbon price of $100 or 100 units of any other currency accordingly. Food calculation is all based on equivalents including the high impact of methane emissions. == Economics ==

Many economic properties of carbon pricing hold regardless of whether carbon is priced with a cap or a tax. However, there are a few important differences. Cap-based prices are more volatile and so they are riskier for investors, consumers and for governments that auction permits. Also, caps tend to short-out the effect of non-price policies such as renewables subsidies, while carbon taxes do not. Carbon leakage Carbon leakage is the effect that regulation of emissions in one country/sector has on the emissions in other countries/sectors that are not subject to the same regulation. There is no consensus over the magnitude of long-term carbon leakage. The leakage rate is defined as the increase in CO2 emissions outside the countries taking domestic mitigation action, divided by the reduction in emissions of countries taking domestic mitigation action. Accordingly, a leakage rate greater than 100% means that actions to reduce emissions within countries had the effect of increasing emissions in other countries to a greater extent, i.e., domestic mitigation action had actually led to an increase in global emissions. Estimates of leakage rates for action under the Kyoto Protocol ranged from 5% to 20% as a result of a loss in price competitiveness, but these leakage rates were considered very uncertain. Eco-tariffs on imports ("virtual carbon") consistent with a carbon price of $50 per ton of CO2 could be significant for developing countries. In 2010, World Bank commented that introducing border tariffs could lead to a proliferation of trade measures where the competitive playing field is viewed as being uneven. Tariffs could also be a burden on low-income countries that have contributed very little to the problem of climate change. Interactions with renewable energy policies Cap-and-trade and carbon taxes interact differently with non-price policies such as renewable energy subsidies. The IPCC explains this as follows:A carbon tax can have an additive environmental effect to policies such as subsidies for the supply of RE. By contrast, if a cap-and-trade system has a binding cap (sufficiently stringent to affect emission-related decisions), then other policies such as RE subsidies have no further impact on reducing emissions within the time period that the cap applies [emphasis added]. In order for such a business model to become attractive, the subsidies would therefore have to exceed this value. Here, a technology openness could be the best choice, as a reduction in costs due to technical progress can be expected. Already today, these costs of generating negative emissions are below the costs of CO2 of $220 per ton, which means that a state-subsidized business model for creating negative emissions already makes economic sense today. In sum, while a carbon price has the potential to reduce future emissions, a carbon subsidy has the potential to reduce past emissions. == Advantages and disadvantages ==

In late 2013, William Nordhaus, president of the American Economic Association, published The Climate Casino, The "Economists' Statement on Climate Change" and businesses may also be purchased through carbon offset retailers like Carbonfund.org Foundation. A new quantity commitment approach, suggested by Mutsuyoshi Nishimura, is for all countries to commit to the same global emission target. The economics of carbon pricing is much the same for taxes and cap-and-trade. Both prices are efficient; they have the same social cost and the same effect on profits if permits are auctioned. However, some economists argue that caps prevent non-price policies, such as renewable energy subsidies, from reducing carbon emissions, while carbon taxes do not. Others argue that an enforced cap is the only way to guarantee that carbon emissions will actually be reduced; a carbon tax will not prevent those who can afford to do so from continuing to generate emissions. Besides cap and trade, emission trading can refer to project-based programs, also referred to as a credit or offset programs. Such programs can sell credits for emission reductions provided by approved projects. Generally there is an additionality Unfortunately the concept of additionality is difficult to define and monitor, with the result that some companies purposefully increased emissions in order to get paid to eliminate them. Cap-and-trade programs often allow "banking" of permits. This means that permits can be saved and can be used in the future. This allows an entity to over-comply in early periods in anticipation of higher carbon prices in subsequent years. This helps to stabilize the price of permits. == Internal carbon pricing ==

Internal carbon pricing (ICP) can be used as a supplement to carbon pricing enforced externally by national or subnational government institutions, whereby companies assign a monetary value to their greenhouse gas emissions. ICP is a Pigouvian tax that internalizes the environmental and societal damage caused by emitting additional carbon into the atmosphere. When institutions assemble internal carbon budgets prior to adopting ICP, emissions are sorted into three scopes. Scope 1 includes emissions from generating electricity, heating or steam, combustion fuels, and other physical or chemical processes. Scope 2 includes indirect emissions from purchased electricity and HVAC. Scope 3 encompasses all other indirect emissions. Some examples of Scope 3 emissions are those associated with business trips, employee commuting, transportation of purchased products, and waste. Hybrid More than one ICP strategy can be used simultaneously. For example, different carbon fees can be associated with different business units or activities. == Notes ==