18th Oct 2019 | 23:49
IS CARBON PRICING REALLY ACHIEVING ITS OBJECTIVE?
A key aspect inspected in last Friday’s article (link: Inevitable Policy Response: system models and metrics) was the inclusion of carbon pricing (also commonly referred to as a carbon tax) in the system modelling of the Inevitable Policy Response (IPR). This topic was touched upon in the analysis of how the economic system modelling is comprised, but the implementation of carbon pricing has its own debate and opinions. This refers to not just the IPR, but in any scenario where carbon pricing is utilised as an instrument to curb environmental damage. Climate policies are observed contrarily by different entities, where some take action primarily due to the burden of fossil fuel expenses, and others react more deeply to the availability of alternative and perhaps subsidised renewable energies instead. This, in turn, enables us to evaluate the extent to which the carbon pricing mechanism can help drive the technological shifts that the IPR forecasts and whether the sectors that need to react most urgently to the tax are actually acknowledging the purpose and burden of the carbon pricing strategy.
Diagrammatic analysis of the strategy portrays the objective of the measure is ‘to encourage polluters to reduce the amount of greenhouse gases they emit into the atmosphere’1. From a simple investment perspective, it would theoretically prompt a change in thinking and view towards alternatives. In spite of this, it is somewhat overlooked that as much effort must be done on the supply-side of the carbon market as the demand-side. If the theory holds, and carbon demand falls, it allows firms and industries who have hesitated to act, to then benefit from its subsequent reduced prices. Particularly in the EU, the emissions trading system (ETS) has plummeted prices since the recession from a decade back and it only reiterates the supply-side of the carbon market should be utilised. Many sectors in the economy and environment who need to act most are often the most hesitant, and government intervention is an example of preventing hesitancy from rewarding firms for their patience, with cheaper carbon costs of production.
Reducing imports and production of carbon-intensive products would provide strong encouragement for companies that low-carbon technologies are the next best and long term solution to this issue. A supply-side measure to accompany the tax can substantially drive the urgency to react.
For this to work, companies would still require low-carbon alternatives to switch to, as investments in input factors of production need to be made some way or another. It is common to think renewable energies are the main solution, and it makes sense for the revenues from carbon pricing to be directed towards the subsidisation of renewable energies. ‘Since the purpose of a carbon price is to create a price incentive to reduce carbon-intensive behaviours, governments do not necessarily need the actual revenue raised from the carbon price’2. However, a rising lack of trust and certainty within the carbon pricing strategy in reducing emissions means that it is unlikely to reach potential effectiveness unless something stronger is laid out underneath. A promise to use tax revenues on low-carbon and renewable energy subsidies adds a new layer of confidence for investors and households that enough impetus and dynamism is being used to drive sustainable production and consumption. This enables us to understand a deeper issue with regards to carbon pricing – when seeking to eliminate emissions, reducing demand is ‘neither necessary nor sufficient’ to achieve this, but instead having the availability of alternatives are the primary drivers of this change.3
Expanding on the subject of uncertainty, a characteristic seen from firms following the introduction of carbon pricing is a shift in production to countries with less stringent carbon regulations. This arises because carbon pricing is not consistent across all countries, and as such the reduction in emissions in one country disguises the growth in another. Uniform carbon pricing is an idea that has floated around as a potential solution to the problem of pollution havens, preventing firms from reallocating their emissions in an effort to keep costs down but maintain emissions levels as a way to generate revenues. It removes many uncertainties with pricing and is much more definitive, theoretically helping greater levels of compliance. The major questions to ask here are whether all governments around the world could agree on one uniform price at the same time and whether all governments will use the revenues from the tax in the same way (will it all go towards subsidising renewables, or will they be used to then reduce taxes in other sectors to remain revenue neutral?). As some nations pollute much more than others, it would appear implausible to think a uniform price would be agreed without any backlash or resentment from countries who feel they have not contributed so much as to drive the higher carbon prices. A great solution in theory, it would require a strong readjustment or even takedown in political egos for governments to accept the uniform carbon pricing strategy.
As a key policy instrument that is commonly adopted, carbon pricing is worth having its debate so as to ensure it is used the right way and its own limitations are both understood and worked upon. The idea to construct this article all stems from the previous pieces on the IPR, and indeed the next piece will also branch out from this as we look further into the critical and delicate issues surrounding land, a fundamental resource and factor of production for companies and their strategies.
1LSE Grantham Research Institute on Climate Change and the Environment (2018) What is a carbon price and why do we need one?, Available at: http://www.lse.ac.uk/GranthamInstitute/faqs/what-isa- carbon-price-and-why-do-we-need-one/ (Accessed: 13th October 2019).
3Patt, A. (2019) An alternative to carbon taxes, Available at: https://phys.org/news/2019-01- alternative-carbon-taxes.html (Accessed: 13th October 2019).
Problems cannot be solved at the same level of thinking at which they are created. I seek to publish content that dives into environmental, social and governance problems, and provide an insight into them through a unique lens and a deeper level, highlighting common misconceptions and assumptions.