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How does carbon pricing affect revenue and expenditure?

07 Mar 2018
Carbon prices
Carbon prices

Carbon pricing offers economic incentives to mitigate global greenhouse-gas emissions and encourage investment in cleaner technology. But how do initiatives operating in one country affect prices in another? And how does the picture change if the carbon price is applied at the point where fossil fuels are extracted from the ground, rather than focusing on their use or on the sale of the resulting goods and services?

Jonas Karstensen and Glen Peters from Norway’s CICERO Center for International Climate Research found that using different accounting systems makes a significant difference to revenues and expenditure. In addition, the team highlights that domestic and global trade play a key role in spreading the carbon price between sectors and countries.

Examples of carbon pricing include a tax on the carbon content of fossil fuels, and emissions trading systems that cap the total level of emissions and allow industries with low emissions to sell their extra allowances to larger emitters. So far, at least 40 countries, including seven out of ten of the world’s largest economies, have put in place some form of carbon pricing. The various initiatives translate to around 13% of yearly global greenhouse-gas emissions.

Reporting their results in Environmental Research Letters (ERL), Karstensen and Peters showed that while rising carbon costs bring large relative price increases in the electricity and energy-intensive sectors, the biggest absolute increases in expenditure are in non-energy-intensive and service sectors.

“It’s the volume of expenditure that matters most when considering carbon pricing, not necessarily how much emissions are required to produce a single product,” Peters told environmentalresearchweb. “Ultimately, households bear most of the costs, rather than governments or capital investments.”

Exploring global patterns, the scientists found that emissions income becomes more evenly distributed among nations when the point of accounting is shifted from mining through to production and consumption. The EU’s carbon price revenue jumped by more than €40 billion when the study associated emissions with production rather than mining, reflecting small fossil-fuel reserves and large imports.

“Because of the implementation challenges, climate policies are often a mosaic of different policy levers, but over time we could see carbon pricing initiatives becoming more uniform – in response to industry and consumer demand,” said Peters. “Theoretically, a gradually rising carbon price would be the optimal solution, so long as distortions and exemptions were kept to a minimum, and there was confidence that the carbon price would remain in place for the long-term.”

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