Climate Change

What is carbon pricing?

Carbon pricing works by putting a monetary value on carbon, which makes the cost of emitting carbon explicit to those polluting

By DTE Staff
Published: Wednesday 27 April 2022

Can you imagine a world where nations have to pay a price for every tonne of carbon they emit? This 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 putting a monetary value on carbon, which makes the cost of emitting carbon explicit to those polluting. Carbon markets can function in two ways according to the Paris agreement of 2015 — an emissions trading system (ETS) or a ‘cap and trade’ scheme, works by setting a cap on the total overall emissions target and allocating ‘carbon permits’ accordingly.

On the other hand, there is a carbon offsetting scheme which provides tradable carbon credits in exchange for carbon saving projects outside the ‘capped area’. The third is the ‘carbon tax’ which charges a premium on every ton of carbon emitted.

The Biden administration’s ‘social cost of carbon’ calculates future climate damages to justify restrictions on industries. American leaders are divided on this issue since it could cause heavy losses to businesses.

Other governments like Canada have also started taking measures like imposing fuel charges on individuals and making big polluters pay for emissions. According to the World Bank, 27 nations have started adopting some kind of carbon pricing.

So, what is the problem? The problem is that it is very difficult to put a ‘price tag’ on carbon emissions. The Biden administration has calculated $51  in economic damages for every tonne of carbon spewed.

But the state of New York in 2020 has calculated $125 keeping economic trends into account. In the northeast US, under the Regional Greenhouse Gas Initiative, the cost is $13.50 per tonne, which Pennsylvania is part of.

In Canada, the fuel charge is $40 per tonne for an individual. Economists say the social cost of carbon and carbon pricing in actuality must line up to reflect the true cost of rising carbon emissions to society.

In the US, carbon pricing policies have fluctuated as administrations have changed. In 2009, the push to establish a nationwide cap and trade programme in the US failed because the Congress continued to argue over whether climate change was even occurring.

The Obama administration (2009-2017), started including future damage estimates in the cost-benefit analyses for drafting new regulations. As the Trump government (2017-21) rolled back many of Obama’s policies, they reduced the social cost to $7 from 50.

They calculated only domestic impacts instead of global damages. Under the current Biden administration, the US interior department is applying the social cost of carbon to oil and gas sales.

Economists are expecting the social cost to double since an overhaul of the government energy policy is essential to keep up with the impacts of climate change.

Carbon pricing in Pennsylvania remains murky since there are legal challenges and the state’s Democratic governor could be replaced by a successor who opposes the regulations.

Subscribe to Daily Newsletter :

Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.