A call for reconceptualizing carbon pricing policies with both eyes open

Asgeir Barlaup and Valeria Zambianchi argue that it is crucial to move beyond the current understanding of carbon pricing and acknowledge its limitations, in order to mitigate the climate crisis and better design effective policies.

This article is part of the ISC’s new series, Transform21, which will explore the state of knowledge and action, five years on from the Paris Agreement and in a pivotal year for action on sustainable development.

Carbon pricing, such as through carbon taxes and emission trading systems, dominates international climate policy discussions. The idea that putting a price on CO2 emissions leads to cost-efficient mitigation of climate change stems from neoclassical economics theory. Accepting this logic, leading international organizations and economic scholars promote carbon pricing policies.

A 2019 report by the World Bank states that ‘carbon pricing is the most effective way to reduce emissions and all jurisdictions must go further and faster in using carbon pricing policies as part of their climate policy packages’. In a similar vein, a 2019 report by the business organisation IETA found that carbon pricing at the international level ‘has the potential to reduce the total cost of implementing [national climate pledges] by more than half’.

The argument of cost-effective climate change mitigation is an appealing prospect to many. Countries – and increasingly, firms – are responding accordingly; a growing number have started to adopt carbon pricing directly or are tentatively committed to do so.

Surveying the empirical literature on the observed effect of these policies gives a more realistic picture. Studies synthesising the track record of implemented carbon pricing schemes find that they have led to limited CO2 emissions reductions in technologically mature sectors in OECD countries. An often-cited example is the switch from coal- to gas-based power that occurred in the UK as a result of a carbon price that made gas generation more profitable than coal generation for utility companies. The scale and urgency of the climate crisis require far more effective action than merely pivoting between fossil fuels.

Yet most discussions on carbon pricing policies across international fora overlook the limited impact the policy of carbon pricing exhibits in real-life. Instead, they conform to theoretical, neoclassical economics expectations. Neoclassical economics, for instance, builds on normative assumptions related to market dynamics and human behaviour, e.g. the idea of homo economicus. This discourse fosters a stagnant approach to climate change mitigation that does not reflect the actual multi-layered reality of implementing carbon pricing. This calls for a reconsideration of the concept.

We argue that it is crucial to move beyond the current understanding of carbon pricing, by, for example, assessing it in tandem with fossil fuel subsidy levels.

Challenging the mainstream definition of carbon pricing means unpacking how the price of CO2 emissions is set, a tricky task. Governments that adopt carbon pricing policies must put a price on CO2 emissions. But too little is known about the relation between the price put on carbon and the subsidies received by carbon emitters.

It is time to understand both positive and negative carbon prices and to compare them. The former – ‘positive’ prices – align with what mainstream discourses acknowledge as carbon pricing policies; the latter – ‘negative’ prices – consist of the funds received by CO2 emitters through the form of tax breaks, for example. By one estimate, global fossil fuel subsidies are, per ton, more than four times higher than global carbon pricing levels. Beyond the specific terminology, acknowledging both types of carbon prices allows for a more comprehensive and exact understanding of the actual value of CO2 emissions.

Norway, for example, is considered an early adopter of carbon pricing policies with some of the highest carbon price levels in the world. Yet, at the same time, the oil sector receives substantial financial support from the government in the form of tax breaks, for example. Consistent with our argument, the actual price of carbon can be considered significantly lower than the price tag listed in policies because of the various forms of fossil fuel subsidies awarded to the same emitters. Looking at fossil fuel subsidies and carbon prices in tandem gives deeper insights regarding the incentive structure targeting heavy CO2 emitters. 

Research assessing the relationship between carbon pricing policies and fossil fuel subsidies is largely overlooked by policy makers and academics, but is necessary to challenge the mainstream understanding of carbon pricing. Only then – by reconceptualizing carbon pricing with both eyes open – would we be able to acknowledge the limitations of current carbon prices to mitigate the climate crisis and better design effective policies.

Further readings:

Green. Beyond Carbon Pricing: Tax Reform is Climate Policy. (2021)

Patt & Lilliestam. An alternative to carbon taxes. (2019)

Rosenbloom, Markard, Geels, & Fuenfschilling. Opinion: Why carbon pricing is not sufficient to mitigate climate change—and how “sustainability transition policy” can help. (2020)

Asgeir Barlaup and Valeria Zambianchi are PhD students at the University of Leuven and researchers for the ERC-funded project PolyCarbon, under the supervision of Prof. Katja Biedenkopf.  

Asgeir’s PhD evaluates carbon pricing policies in East Asia. He obtained a master’s degree in International Environmental and Resource Policy from the Fletcher School of Law and Diplomacy at Tufts University.

Valeria is pursuing a PhD on climate policy mixes and technological change for sustainable transitions in Germany and the UK. She holds a MPhil in Environmental Policy from the University of Cambridge.