Tax Notes chief correspondent Amanda Athanasiou discusses the effectiveness of carbon pricing as a climate change mitigation strategy and possible alternative policies.
This transcript has been edited for length and clarity.
David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: everything’s got a price.
For some time now, the gold standard of climate mitigation policy has been carbon pricing. Whatever the method, it made economic sense that establishing a price on unwanted emissions was going to be the thing that reined in global warming and put the Earth on a sustainable path. But is that still the case?
Here to talk more about this and to discuss her recent article is Tax Notes chief correspondent Amanda Athanasiou. Amanda, welcome back to the podcast.
Amanda Athanasiou: Thanks, Dave. It’s great to be back.
David D. Stewart: So let’s start with the basics and we’ll go from there. Why has carbon pricing been considered so important for reaching climate goals?
Amanda Athanasiou: Sure. So probably the root of the emphasis on carbon pricing as key to net-zero commitments and the Paris Agreement goals is this general consensus in the economic community, which has also driven the efforts of many nongovernmental organizations and governments, that carbon pricing is the most efficient, least costly way for governments to combat climate change. So the theory is put a price on carbon, whether through a tax on emissions or a trading system, and emitters will figure out a way to reduce their emissions and pay less tax.
David D. Stewart: So how prevalent are these carbon pricing regimes?
Amanda Athanasiou: Well, as far as uptake, the World Bank keeps track of this, and their latest count is that there are 75 carbon pricing instruments implemented worldwide, and that includes both emissions trading systems and carbon taxes. So out of about 195 countries in the world, that’s not too bad; there’s clearly some buy-in on this concept. But there are some important caveats. First, there are some major emitters that are missing from the list, notably India and the United States, but also Brazil and Russia. All of those are among the top 10 emitters in the world.
The second thing is that while coverage of emissions by these regimes seems to be growing, the prices within the systems are often really, really low — too low to keep warming within the bounds that are needed. So by way of example, the suggested carbon price for major emitting economies ranges from around $50 to $100 per metric ton of emissions by 2030, or even up to $200 depending on who you ask, if we’re using the social cost of carbon as a guide. So we have China, which is the world’s largest emitter, and it has a growing emissions trading system. But that system launched in 2021 at about $8 a metric ton, and it hit a record in 2024 — just under $14. So there is a bit of a ways to go in a lot of these systems.
David D. Stewart: So it sounds like there are other factors at play here, aside from just the cost-effectiveness of carbon pricing. So what have been the challenges to establishing more robust pricing mechanisms?
Amanda Athanasiou: Right. So the efficiency argument is clearly not winning the day here on a large enough scale, which raised questions in my mind about whether maybe there’s a government messaging problem. Surely if carbon pricing is the lowest-cost option, there must be a way to make that palatable to voters who want to get things done as cheaply as possible. But after taking a closer look at this, it turns out that, as one of my sources for the article pointed out, it’s just hard to get people to stop caring about what they pay at the pump, for example. Even with the best intentions and messaging by governments, it’s hard to make an immediate cost increase in people’s daily lives attractive just by pointing to a more abstract, further-off cost savings, or even by pointing out scheduled concrete rebates that they’d be entitled to. There have actually been studies showing that rebates and messaging don’t have much of an influence on public perceptions of these policies.
One’s political leanings tend to be a pretty good predictor of support for climate change policies, and that’s regardless of messaging and policy design in general. Canada’s administration is a good example of this. Climate economist Danny Cullenward pointed out for the story that that administration has been very consistently pro-carbon-pricing. It’s had clear messaging, and it designed a system that rebates revenue back to households, and they’ve still faced a lot of backlash to their federal regime — not just from individuals, but also provincial governments. This is all to say that the political challenges facing carbon taxes are formidable and have kind of swallowed up the efficiency argument.
It definitely tends to be a partisan issue. Carbon taxes are thought of as regressive. There are associations being made between carbon taxes and rising food costs and inflation. And even if there’s evidence to the contrary, once those associations have been made in voters’ minds, it’s hard to unhear them. Sources also pointed out that when you look at alternatives like green subsidies and incentives for clean technology tax credits and the like, it’s not immediately clear to voters what the cost of those approaches are and how they work exactly. And that opacity has sort of had a politically insulating effect for those kinds of policies.
David D. Stewart: So let’s dive into these alternatives. What are they, and can they get us to where we need to be on climate change?
Amanda Athanasiou: Yeah. So while carbon pricing continues to linger sort of below what it would need to be at to do the whole job of curbing global warming, we have seen an evolution of alternative emissions reduction policies in the form of green subsidies and incentives for investment in clean technology, as we were speaking about. These are a little harder to track, both in number and effect, because they take so many forms. But the most significant recent example is probably the package of climate-driven tax credits in the U.S. Inflation Reduction Act, which itself has prompted similar policies in other countries. So this is basically the carrot approach, right? Governments draw out new innovation and better technology, cleaner cars and electricity, carbon capture technology through these positive incentives. The challenge with these policies, of course, is that they are the higher-cost option and they’re more targeted to specific technologies, so they, too, face some opposition.
Ian Parry with the IMF, for example, said that subsidies promote a narrower range of behavioral responses than carbon taxes and they cost governments money, which is the opposite of what carbon tax does. And Jack Mintz, an economist at the University of Calgary that I also spoke with, he said he was concerned that governments are putting all this money behind technology that they’re sort of picking and choosing today, but that might not end up being the optimum technology down the road. And in the meantime, we’re ending up with this pancaking of approaches that many governments aren’t going to be able to afford. So his position is that these things are better left to the private sector, and this is sort of the tension that led to this article. If the low-cost option isn’t going to work, what kind of mix of carrots and sticks are we going to end up with? Will countries be able to afford it, and will it ultimately be enough in terms of achieving emissions reductions?
David D. Stewart: Well, that’s some big questions to answer. What did you find out while you were reporting?
Amanda Athanasiou: Yes, they’re big and future focused. So, unfortunately, even having spoken to a number of very smart economists and policy experts, we can’t determine the globe’s ultimate package of policies, right? And evaluate the prices, and then debate the pros and cons. But there were some important points that emerged from these conversations that gave some good hints about where we might be headed. The first is that, well, this is a global problem and the quintessential tragedy of the commons situation. Sources generally agreed that not every single country needs to be on board with carbon pricing in order for the requisite change to happen. There are various ideas for multilateral and even bilateral action that have been floated in this article and others.
The IMF’s idea for a minilateral pricing agreement among the world’s biggest emitters has been around for a while. A couple sources suggested that the EU and the U.S. should team up on pricing and that that joint market would be too hard for other economies to ignore. The hope here seems to be that once a group of the world’s major markets join forces on carbon pricing, it will have a domino effect elsewhere, which, based on the ripple effects from the EU’s carbon pricing system and its carbon border adjustment mechanism, seems to be a sound prediction. The carbon border adjustment mechanism is a mechanism implemented by the EU that attaches a price on imports to sort of equalize the price of goods and ease competition concerns. One caveat to this is that China and India are really important players here, given their respective shares of worldwide emissions, and it might take some negotiations to get them on board with the more aggressive schemes. But the takeaway is that there is some optimism about the future of global carbon pricing despite the current situation.
On the expense of it all, when it comes to these proliferating carrot approaches, a number of sources had some concerns and a little pessimism about subsidy wars and evolution of costly pancaking incentives that we’ve talked about. You know, are developing countries going to be able to afford this, and things like that. But Gernot Wagner of Columbia Business School for the article sort of put things in perspective when he said, “Is this path we’re on inefficient? Yes. Are we tying up money that could be used for other public goods? Sure. But this isn’t the first time, and it won’t be the last, that we don’t end up with a perfectly efficient global policy solution. We’ve seen this in other policy areas; it probably won’t be the end of the world.” And he added that we are so far away from actually internalizing the cost of environmental damage from emissions that he isn’t really worried about subsidies being too costly or subsidy wars per se. The costs are sort of a proxy for what we should be paying. That was that theory.
Similarly, Kim Clausing said specifically with respect to the U.S. that there’s this focus on the regressivity of carbon taxes, but all the climate change policy options have distributional effects, so we might as well pick the things that are the most effective and don’t break the government budget. She also made the case that we shouldn’t give up on the prospect of carbon pricing in the U.S. just yet. A lot has changed since the last time it was tried, including the fiscal situation, the climate itself, and the introduction of the IRA, which she argued sets the stage in a couple ways, which is addressed in this article and some things that she’s written.
So I guess the good news is that while, as Danny said, carbon pricing hasn’t played that starring role that economists prescribed for it, other policies have rolled in to hopefully bridge the gap. And while they might be more costly than a perfect multinational carbon price floor, we have to go with what’s politically achievable, and at least the proliferation of these policies is evidence that the issue is being taken seriously. So we’ll have to see what happens.
David D. Stewart: All right. Well, Amanda, thank you so much for being here and for walking us through all of this, and we’ll definitely leave a link to your article in the show notes.
Amanda Athanasiou: Thank you so much for having me.
Read the full article here
