Carbon price

A carbon price — the method favored by many economists for reducing global warming emissions — is a cost applied to carbon pollution to encourage polluters to reduce the amount of greenhouse gases they emit into the atmosphere: it usually takes the form either of a carbon tax or a requirement to purchase permits to emit, generally known as carbon emissions trading, but also called 'allowances'. A carbon price — the method favored by many economists for reducing global warming emissions — is a cost applied to carbon pollution to encourage polluters to reduce the amount of greenhouse gases they emit into the atmosphere: it usually takes the form either of a carbon tax or a requirement to purchase permits to emit, generally known as carbon emissions trading, but also called 'allowances'. Carbon pricing seeks to address the economic problem that CO2, a known greenhouse gas, is what economists call a negative externality — a detrimental product that is not priced (charged for) by any market. As a consequence of not being priced, there is no market mechanism responsive to the costs of CO2 emitted. The standard economic solution to problems of this type, first proposed by Arthur Pigou in 1920, is for the product - in this case, CO2 emissions - to be charged at a price equal to the monetary value of the damage caused by the emissions, or the societal cost of carbon. This should result in the economically optimal (efficient) amount of CO2 emissions. Many practical concerns complicate the theoretical simplicity of this picture: for example, the exact monetary damage caused by a tonne of CO2 remains to some degree uncertain. 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. The choice of pricing approach, a tax or cap-and-trade, has been debated. A carbon tax is generally favored on economic grounds for its simplicity and stability, while cap-and-trade is often favored on political grounds. In the mid-2010s, economic opinion shifted more heavily toward taxes as national policy measures, and toward a neutral carbon-price-commitment position for the purpose of international climate negotiations. In late 2013, William Nordhaus, president of the American Economic Association, published The Climate Casino, which culminates in a description of an international “carbon price regime.” Such a regime would require national commitments to a carbon price, but not to a specific policy. Carbon taxes, caps, and hybrid schemes could all be used to satisfy such a commitment. At the same time Martin Weitzman, a leading climate economist at Harvard, published a theoretical study arguing that such a regime would make it far easier to reach an international agreement, while a focus on national targets would continue to make it nearly impossible. Nordhaus also makes this argument, but less formally. Similar views have previously been discussed by Joseph Stiglitz and have previously appeared in a number of papers. The price-commitment view appears to have gained major support from independent positions taken by the World Bank and the International Monetary Fund (IMF). On June 3, 2014, the Bank began circulating a statement for countries and businesses to sign, which advocated “putting a price on carbon” to reduce global warming. It specifies that countries could use either emissions trading or carbon taxes to price carbon. In 2014 the IMF published a 'Factsheet' that advised using 'carbon taxes or similar' and explained that 'cap-and-trade systems are another option.' Also in 2014 they published Getting Energy Prices Right, which was promoted by Christine Lagarde (head of the IMF) saying that the right prices would 'reduce carbon emissions by 23 percent.' The 'Economists’ Statement on Climate Change,' was signed by over 2500 economists including nine Nobel Laureates in 1997. This statement summarizes the economic case for carbon pricing as follows: In short, this statement argues that carbon pricing (either 'carbon taxes or the auction of emissions permits.') is a 'market mechanism' (in contrast to renewable subsidies or direct regulation of individual sources of carbon emissions) and hence is the way that the 'United States and other nations can most efficiently implement their climate policies.'