Does carbon pricing work?

Does carbon pricing work in reducing emissions?

Whether carbon pricing results in decreasing carbon emissions without adversely impacting the economy and jobs depends on the structure and implementation of the carbon pricing system, and exemptions in the case of carbon taxes, and offsets, allocation and banking of permits in the case of cap and trade.

Effect of carbon taxes on reducing emissions

The effect of carbon tax on per capita CO2 emissions was examined in one study by comparing five European countries which has implemented a carbon tax to 13 other European countries that had no carbon pricing (after controlling for GDP per capita, industry structure, and energy price).1 In all five countries except Norway, the carbon tax reduced the growth of CO2 emissions. However, the reduction was directly linked to carbon tax after controlling for above mentioned factors in only one country – Finland . It was concluded that this was because relatively few exemptions to the carbon tax levied were allowed. In fact, Finland allowed no tax exemptions or tax relief to the affected industry.2 In the other four carbon-taxing countries, tax relief and tax exemptions were put in place along with the carbon tax. Similar decreases in GHG emissions have been reported in another report.2 In 2000, a study concluded that the emissions in Finland in 1998 were 7% lower than they would have been in the absence of a carbon tax.3 Similarly, a study by Johansson and others concluded that the GHG emissions decreased by 15% from 1990 to 1996 as a result of the carbon tax.4

In many other jurisdictions with carbon pricing, emissions have decreased in the periods following its introduction; however, whether these are specifically due to the carbon price has yet to be determined. For example, in Boulder, Colorado, overall emissions decreased in 2007 and 2008 compare to 2006 levels after a carbon tax was introduced in 2007. In Denmark, there was a 15% reduction in per capita emissions from 1990 to 2005 after a tax was introduced in 1992. In the UK, there was a decrease of CO2 emissions by 58 million metric tonnes from 2001 to 2005. However, in Norway, emissions increased by 15% from 1991 to 2008, the years following the introduction of a carbon price.5

In BC, since the introduction of a revenue-neutral carbon tax, per capita consumption of petroleum fuels subject to the carbon tax decreased by 17.4% in the 2008-12 period -- even in the period after the 2008 recession. In comparison, petroleum fuel use increased 1.5% in the post-2008/09 period for the rest of the country.6 With regards to GHG emissions per capita, they decreased by 10% in BC and 1% in the rest of the country between 2008 and 2011. In fact, while per capita GHG emissions increased by 3.9% in 2011 for the rest of Canada; they decreased 2.4% in BC. The carbon tax appeared to not affect the BC economy: In 2008-11, BC's GDP per capita kept pace or outpaced the rest of Canada. The overall decrease in per capita GDP was 0.15% in BC compared to 0.23% for the rest of Canada.6

Change in GHG emissions per capita from sources subjected to BC carbon tax

bc - ghg emissons carbon tax.png

Source: BC’s carbon tax shift after five years: Results. An environmental (and economic) success story.6

Effect of cap and trade on emissions reduction

EU Emissions Trading System: While studies have shown that, overall, there was a 3% or 210 million tonnes decrease in emissions across all regulated sectors during Phase I and first two years of Phase II, the role of the industrial sector in these reductions is unclear. Other analysis has shown that there was a decrease in emissions in a few industrial sectors during the transition from Phase I to Phase II independent of economic conditions or decrease in economic activity of the firms, and that the firm-level allocation of permits played a role. However, whether the carbon price, the allocation rules or the signaling effect led to emissions abatement is unknown.7 Studies suggest that before the recession, there was an attributable emissions decrease of 40-80 Mt of CO2 per year.

Change in EU countries' emissions following environmental tax shifts

eu - emissions redn ets use this.jpg

References:

1.    Lin, B. & Li, X. The effect of carbon tax on per capita CO2 emissions. Energy Policy 39, 5137–5146 (2011).

2.   Andersen, M. S. et al. Competitiveness Effects of Environmental Tax Reforms (COMETR). Final report to the European Commission. (National Environmental Research Institute, 2007). at http://www2.dmu.dk/Pub/COMETR_Final_Report.pdf

3.   Prime Minister’s Office Economic Council. Environmental and Energy Taxation in Finland - Preparing for the Kyoto Challenge Summary of the Working Group Report. (Prime Minister’s Office Economic Council, 2000). at http://vnk.fi/julkaisukansio/2000/j03-04-ymparisto-ja-energiaverotuksen-...

4.   Johansson, B. in Innov. Environ. (Organisation for Economic Co-operation and Development, 2000). at http://www.oecd-ilibrary.org/environment/innovation-and-the-environment_...

5.    Sumner, J., Bird, L. & Dobos, H. Carbon taxes: a review of experience and policy design considerations. 922–943 (National Renewable Energy Laboratory, 2009). at http://www.tandfonline.com/doi/abs/10.3763/cpol.2010.0093

6.   Elgie, S. & McClay, J. BC’s carbon tax shift after five years: Results. An environmental (and economic) success story. (Sustainable Prosperity, 2013). at http://www.sustainableprosperity.ca/dl1026&display

7.    Martin, R., Muuls, M. & Wagner, U. An evidence review of the EU emissions trading system, focussing on effectiveness of the system in driving industrial abatement. (UK Department of Energy and Climate Change, 2012). at https://www.gov.uk/government/uploads/system/uploads/attachment_data/fil...

Photo credit (on rotating banner on home page):

“Salo_nuva_ry_meeting_4116” by sbamueller is licensed under CC BY 2.0. The image was cropped and resized for our purposes.

“Welcome to British Columbia. The Best Place on Earth.” by Neal Jennings is licensed under CC BY 2.0. The image was cropped and resized for our purposes.