What is carbon pricing?
Carbon pricing works by assigning a monetary value to carbon, making the cost of carbon emission explicit to those who pollute
Can you imagine a world where nations have to pay a price for every ton of carbon they emit? It is slowly becoming a reality. On April 23, 2022, Pennsylvania became the first fossil fuel producing state in the United States to adopt a carbon pricing policy.
Carbon pricing works by assigning a monetary value to carbon, which makes the cost of carbon emission explicit to those who pollute. Carbon markets can work in two ways according to the 2015 Paris agreement – an emissions trading system (ETS) or a “cap and trade” system, works by setting a cap on the target global total emissions and allocating ‘carbon permits’ accordingly.
On the other hand, there is a carbon offset program that provides tradable carbon credits in exchange for carbon saving projects outside the “capped area”. The third is the “carbon tax” which levies a premium on each tonne of carbon emitted.
The Biden administration’s “social cost of carbon” calculates future climate damage to justify restrictions on industries. American leaders are divided on this issue because it could cause serious losses to companies.
Other governments like Canada have also begun to take measures such as imposing fuel charges on individuals and making big polluters pay for emissions. According to the World Bank, 27 countries have started adopting some kind of carbon pricing.
So what’s the problem? The problem is that it is very difficult to put a “price” on carbon emissions. The Biden administration calculated $51 in economic damage for every ton of carbon released.
But New York State in 2020 calculated $125 taking economic trends into account. In the northeastern United States, under the Regional Greenhouse Gas Initiative, the cost is $13.50 per ton, of which Pennsylvania is one.
In Canada, the fuel charge is $40 per tonne for an individual. Economists say the social cost of carbon and carbon pricing in reality must align to reflect the true cost of increased carbon emissions to society.
In the United States, carbon pricing policies have fluctuated as jurisdictions have changed. In 2009, the push to establish a national cap and trade program in the United States failed because Congress continued to argue over whether climate change was even happening.
The Obama administration (2009-2017) began including future damage estimates in cost-benefit analyzes for drafting new regulations. When the Trump administration (2017-21) reversed many of Obama’s policies, it reduced the social cost from $50 to $7.
They calculated only national impacts instead of global damages. Under the current Biden administration, the US Department of the Interior applies the social cost of carbon to oil and gas sales.
Economists expect the social cost to double as an overhaul of government energy policy is essential to deal with the impacts of climate change.
Carbon pricing in Pennsylvania remains murky as there are legal challenges and the state’s Democratic governor could be replaced by a successor who opposes the regulations.
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