Do carbon pricing mechanisms work?
Almost every economist agrees (see Michael Keating and St Ross) that the most efficient, most effective, lowest cost, most flexible and fairest way to make significant inroads into emissions of CO2 is to put a price on carbon – a tax or an emissions trading scheme. The theory sounds good: fossil fuels are cheap because the externalities (the costs of the social and environmental damage they cause) are not included in the price consumers pay for the fuel. Plus, there’s the subsidies many governments are paying fossil fuel industries.
According to the economic logic, making fossil fuel industries pay for the social and environmental damage their emissions cause will encourage them to reduce their emissions to keep down the price and maintain competitiveness amongst themselves and with renewables.
On the other hand, almost every politician agrees that passing legislation to implement a carbon pricing scheme is fraught – Australia is, of course, the only country to date to pass legislation to remove a carbon pricing scheme.
With all the good economic logic and political angst that has accompanied carbon pricing all over the world during the last 20 years, you would think we’d know whether it works or not at reducing emissions. But apparently we don’t know much and what we do know isn’t very reassuring, according to a 2021 review.
Since 1990, only 37 studies, mostly in Europe, have examined the effect that the introduction of a carbon price has had on the jurisdiction’s CO2 emissions.
To the extent that evidence ever changes people’s prejudices, the findings of the meta-analysis of the 37 will rattle a few cages:
- The amount and quality of the evidence is low. A critical observer might wonder whether the results of any decent studies that have produced negative findings have been suppressed by vested interests. But that would be uncharitable.
- Although the findings of the 37 individual studies vary somewhat, the overall reduction in CO2 emissions after the introduction of a carbon pricing scheme is around 0-2% per year. That’s not much good to the rich G20 nations who must reduce their emissions by 11% per year between now and 2030 to stand a 50-50 chance of limiting warming to 1.5o And as attentive readers are aware, emissions are still increasing anyway.
- In this dismally performing field of pricing mechanisms, carbon taxes (16 studies) performed a little better than emissions trading schemes (19 studies). Two studies included both.
Why might the results have been so disappointing? Briefly, maybe the carbon prices are not high enough to incentivise emissions reductions; maybe the fossil fuel burners move their activities to a jurisdiction that doesn’t have a carbon price; maybe where there are emissions trading schemes the fossil fuel industries are buying cheap, and probably useless, carbon offsets rather than reducing their emissions; and, unlikely as it sounds, maybe the law makers and regulators have been captured by the industry, resulting in a carefully crafted scheme that can be talked up but achieves little.
The question is, do we need better schemes or better research?
