Not Priceless

Read about different cases on carbon pricing.


An Incentive to Reduce Pollution

In order to diminish the amount of fossil fuels we burn some countries have been implementing carbon taxes [Arthur Pigou had proposed something similar in 1920]. The main objective of a tax on carbon is to internalize the negative externalities produced by carbon, which would lead to the adoption of technologies that pollute less. This tax goes from one dollar per ton of CO2 [$/tC] in Mexico, to 168 $/tC in Sweden.

“It is not necessary for this estimate of social cost (of carbon) to be precise. Few magnitudes in economics or in policy analysis are precise. Acting on reasonable estimates is better than acting on no estimate, because the latter course of action necessarily implies a social cost. If there is uncertainty about a social-cost estimate, that uncertainty does not magically disappear by not adopting the social cost estimate” (Pearce D., 2003)

Ideally, carbon taxes should be based on the social cost of carbon [SCC], which is the economic cost caused by emitting CO2 into the atmosphere, taking into account negative externalities and time trajectories. In reality, however, carbon taxes tend to differ from the SCC. The methodology used and the time frame considered would change the SCC. And even after having the ideal price, this number has to adequate to the social and economic reality of the place to be implemented.

For this reason there are different prices all over the world. Here, we will see some examples.


Chile

How much? 5 U$D per tonne of Carbon 

Photo by Pablo García Saldaña on Unsplash.

Chile is the second country in Latin America to have adopted a carbon tax [the first one was Mexico, who adopted a one $/tC tax]. This tax began to be collected in 2017 and only applies to the companies whose boilers or turbines individually or collectively total 50 megawatts or more.

Each of these companies will pay 5 $/tC emitted, unless the company’s primary energy source is biomass.

Although seeing countries in the region adopting measures to diminish the amount of CO2 they emit is good news, the tax remains very low, and very few countries have applied it. For some experts, the tax should be 130 $/tC if Chile plans to be on track for the Paris Agreement’s goals. The current tax does not generate the necessary economic incentives for industries to switch the energy sources to cleaner ones: there would be no emissions reductions, and tax collection would correspond to $16.3 million.


Australia

How much? 16.5 – 17.3 U$D per tonne of carbon 

Photo by Keith Zhu on Unsplash

In 2009, the Australian government released a report with the impacts that climate change would bring to the country. The changing climate would mean hotter seasons, which would affect water availability and water quality. Besides, rising sea levels would lead to displacement of coastal populations. Higher temperatures, reduced rainfall, and more frequent extreme weather events would affect agriculture. 

In order to reduce its impact on the climate, Australia introduced a carbon tax in 2011 as part of its Clean Energy Act. This bill also created the Climate Change Authority and the Clean Energy Regulator. This tax came into effect in 2012.

The mechanism was to purchase “carbon units” from he Clean Energy Regulator for a fixed pice of 16.5 U$D per ton of carbon at the beginning, and of 17.3 U$D on later years.

The revenues from the tax would be used for payment increases for pensioners, a Jobs and Competitiveness Program, a Steel Transformation Plan, and Energy Security Fund (to support energy security while transitioning to cleaner sources), and an independent Climate Change Authority (who was in charge of establishing the caps).

However, in 2014 this bill was rejected due to social discontent of 10% increased energy prices on households. You can read more about it here.


British Columbia

How much? 35 U$D per tonne of carbon

Photo by the Bialons on Unsplash

In 2008 British Columbia implemented the first tax in North America. The province’s GDP grew more than 17% between 2007 and 2015, while net emissions declined 4.7%. 

The rate was 35 U$D per tonne of carbon dioxide equivalent emissions in 2018, and this price will increase each year by 5 U$D until it reaches 50 U$D per tonne in 2021. 

The revenues will be used to protect affordability (by increasing the Climate Action Tax Credit), maintain industry competitiveness (with the Clean Growth Initiative Program), and to encourage green initiatives.

This tax also applies to fuels, which is key for reducing emissions from transportation. You can read more about this tax here.

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