Where the Price of Carbon is Today and Where it Has to Go to Move Us to Net-Zero

Austria this week joined many other countries in instituting a carbon tax. This may have come about because of the approaching COP26 conference in Glasgow, Scotland, beginning at the end of this month. Mind you the price Austria put on carbon is well below where experts on the subject believe it needs to be to impact its citizens’ consumer and business behaviours. Set to begin in July of next year, Austria’s carbon price will be pegged at 30 Euros ($34.62 USD) and will rise to just over 56 Euros ($65 USD) by 2025.

How does this compare to the current European Commission price which governs most of the members of the European Union? At the moment, that price is 60 Euros ($70 USD) which is better than most other jurisdictions but far from the largest carbon price on the continent. That number belongs to Sweden at 1,183 krona ($135 USD) per ton of carbon.

Putting a price on carbon (primarily carbon dioxide emissions, but also methane) is a market mechanism first tried out through a global agreement in the 1990s aimed at reducing hydrofluorocarbons (HFCs) responsible for the depletion of the ozone layer. A market exchange system involving caps on the amount of HFCs each country could produce ended up establishing a price for these polluting gasses. It proved effective in getting countries and the industry to reduce HFC use and find alternative refrigerant gasses.

Under the umbrella of the United Nations, the meetings on climate that we call COP (Conference of the Parties) adopted the HFC agreement applying it to carbon to begin the process of changing business as usual to one where reductions in the combustion of fossil fuels, namely coal, oil and natural gas, could become the new normal. Whether the mechanism being employed is a market exchange trading carbon credits or a tax imposed by national, state, provincial, or municipal governments, the idea is to raise the cost of doing business the old way to change industry and consumer behaviour.

Where the European countries go, does the rest of the planet follow?

Not so far. Take, for example, the United States, which to date still hasn’t instituted federal carbon pricing or emissions trading system. Instead, it has left it to states and cities to do it with a confusing array of programs and schemes. The American states that have imposed carbon exchanges or taxes are largely found along the eastern and western seaboard roughly reflecting Democratic Party governments. The rest of the United States, however, has little in the way of regulation or taxation in place to reduce carbon emissions.

The Citizens’ Climate Lobby, a growing global organization, has been lobbying U.S. Members of Congress to pass a carbon pricing bill that would establish a benchmark price of $15 USD per ton in the current year with $10 annual increases to $105 by 2030. The likelihood of achieving this result, however, is hampered not just by Republican opposition, but also by the indifference of the executive branch to imposing a price on carbon.

Canada began instituting a price on carbon several years ago. It currently sits at $40 CDN (approximately $30 USD) per ton and will rise in $15 increments annually to $100 by 2025 and $175 by 2030 (approximately $140 USD). As a federation, however, Canada gives its provinces and territories license to create equivalent programs which mean carbon pricing regulation varies across the country.

What constitutes a quality carbon pricing or exchange policy? The consensus is the following:

• Revenue neutral – the tax or levy collected from emissions at the source whether a chimney stack or a gas pump is meant to alter industry and consumer behaviour. The revenue collected gets returned in the form of tax rebates or cash payments to households to offset the increase at the point-of-sale that the carbon price creates. This ensures little or no economic impact or consequence that could lead to a recession or depression if properly administered.
• Replaces existing regulation – changing the rules uniformly means that compliance comes with no risks to industry or consumers. The key to carbon pricing rules is to make them flexible to recognize the full range of scenarios that apply to various industrial sectors. This ensures a level playing field both within a nation and with its trading partners.
• Eliminates subsidies to fossil fuel producers – financial support for fossil fuels has long been a government tradition to ensure adequate energy supply for a country’s citizens. But fossil fuel subsidies perpetuate the behaviours that have led to anthropogenic-caused atmospheric warming. If a political jurisdiction is serious about driving down GHG emissions, then rapid phase-out of existing subsidies is a must.
• Reduces subsidies to alternative energy producers – although this may seem counterintuitive, renewable energy from sunlight, wind, tide and geothermal heat costs far less to produce and maintain when compared to coal, oil and natural gas. The latter three require constant investment in exploration, infrastructure, chemical processing, and transportation. Renewable sources once built, other than proactive maintenance and occasional replacement, require far less capital. So once government incentives establish renewables as the predominant source of energy, the need for subsidies goes away.

Unfortunately, current carbon taxes and emission trading schemes across many countries do not conform to much of the above. A recent Fraser Institute study issued in the fall of 2020 notes that most carbon pricing schemes are wanting. States Elmira Aliakbari, Associate Director of Natural Resource Studies, at the Fraser Institute, “overall, no high-income OECD country with a carbon tax has implemented it based on sound design.”

The OECD is the Organization for Economic Cooperation and Development consisting of 38 countries. The Fraser Institute, in its study, looked at 31 OECD countries with carbon emissions or carbon trading schemes. Fourteen of them had implemented a carbon tax where almost three-quarters of the revenue being collected never got returned to citizens through tax rebates or payments. In addition, a mere 12% of the revenue collected from these carbon levies was being spent on environmental and climate change issues. In its conclusions, the Fraser Institute pointed to these failures in carbon policy that were contributing to increased costs and deterring entrepreneurship and investment, rather than driving down emissions.

A bit more about carbon exchanges needs to be said here. Market-driven emission exchanges similar to the ones instituted in North America in places like California, Quebec, Ontario, and some New England states, are known as cap-and-trade systems. Why? Because they put a ceiling on the amount of greenhouse gas emissions (GHGs) an industry sector is allowed to produce. All companies within a sector are assigned a quota and if they produce fewer emissions than their quota they can sell the credits earned on an open exchange to others who have exceeded their quotas. In this way, an entire sector can achieve its GHG goals. For the exchange to be an effective emissions deterrent, each year the GHG cap is lowered which encourages companies within these sectors to reduce their emissions from all aspects of operations. Carbon exchanges don’t involve consumers directly whereas a carbon price on gasoline, diesel and home heating fuel does.

A final cautionary note: Carbon pricing and market exchanges do not of themselves constitute an all-encompassing program to address GHGs and climate change. Governments, industry and service sector associations as well as  NGOs can work together to provide direction on the implementation of policies targeted at emission reductions. Decisions made within every department of government, whether local or national, need to be filtered through a climate change lens. In an article I read recently it was proposed that every country appoint a super ministry for climate change. By doing this we may be capable of keeping atmospheric temperatures from rising above 1.5 Celsius in the next two decades, which is what current trends are showing based on existing programs and policies.