Last time I wrote “carbon pricing has failed to sweep the world’s economies”. If you are in the United States like me, the phrase “carbon tax” has a certain connotation... something like a punchline, except no one is laughing. Luckily, 2021 is the year our government could finally put a price on carbon (buh dum tss?).
This posts explains why governments (and not markets) are responsible for emissions and attempts to predict how carbon pricing policy coverage will change throughout the climate crisis. This is a two-part post (maybe three), so subscribe to make sure you don’t miss out.
Carbon pricing always seems to lead to an argument. You have those who believe governments should rule with an iron fist, and you have those who believe the market will work it out in the end. The problem with the trust-the-market argument is that we don’t have cost-effective solutions to decarbonize much of the economy and the apparent timeline of ‘in the end’ many decades away. Compare that timeline with the rapidly-mounting economic losses from climate change (temporarily disregarding the concurrent ecological catastrophe) and the most sensible course of action is for governments to price carbon, effectively making our current solutions cost-effective.
This could be construed as government intervention to fix a market failure. It’s actually the other way around.
Uncontrolled garbage dumping is locally harmful for two characteristic reasons: 1) proximity, and 2) concentration. If you dump your garbage in your yard, it looks and smells bad, brings pests, affects your garden, etc. However, if you dump your garbage in the woods or down the street, you likely aren’t directly affected by the pollution (but that doesn’t mean you haven’t created harm). Now if your garbage looks like sand, you could probably spread it in your yard or even in your walls and never notice. This is because it has been diluted over a large area. However, if that sand is actually asbestos, the apparently-benign garbage now requires remediation to prevent injury.
Apparently-benign GHGs (greenhouse gases) like CO2 are taken far away by wind (low proximity) and dispersed through the entire Earth’s atmosphere (low concentration). Simply put, few are strongly affected until everyone is somewhat affected. Regulating that kind of garbage/GHG dumping clearly falls under the purview of governmental action.
The market needs intervention because of a governmental failure.
Government inaction is why we have a problem with GHGs in the first place. Governments were unaware of the climate impacts (or at least the severity) until a few decades ago. Established industries emit GHGs today because they developed in an unconstrained environment – the negative externality of polluting was not internalized by the emitter. But that’s changing.
China’s carbon market came into effect a couple of months ago. That’s a huge step. Yes, it’s only on power sector emission. Yes, the price is too low and will probably remain that way. However, that single addition increased GHGs covered by policy by roughly two-thirds. What’s more, it is expected to expand to other industrial sectors over the next few years.
If China is willing to put a price on carbon, and the EU gets their border adjustment mechanism in order, international supply chains start bearing the cost of emissions mitigation. In effect, other countries start running out of excuses not to impose their own carbon pricing.
Today, over 20% of GHGs are priced by governments. Although the change is slow, it’s steady. Governments are picking up the mantle and committing to decarbonization. It’s quite possible that ~21(±5)GtCO2e/yr will be priced by policy in 2030.
The graph above shows the state of GHGs and carbon pricing over the last two decades. It also includes some future predictions about emissions and policy coverage1. The graph also shows two indicative scenarios for the global adoption of carbon pricing policy.
The ‘slow adoption’ curve follows the historic trend of carbon pricing uptake. The ‘rapid adoption’ curve represents a world increasingly taking climate action. The thought here is that as the climate changes and impacts become more visible, policy change will accelerate. ‘Rapid adoption’ is not a scenario for global climate cooperation, but more of a feasible-with-enough-motivation scenario.
In short: Policies pricing carbon could double before the end of the decade. Next time someone makes a never-going-to-happen joke about carbon pricing, remember that policy is dynamic, and it’s more likely to change the longer attention is sustained. Policies expanded four-fold over the last decade. Another doubling with continued (and worsening) heat waves, wildfires, and other natural disasters may not be as farfetched as it appears.
If you are Anticarbon and are excited for more carbon pricing, hit the button.
Part two coming next week.
Predicting future policy changes is not possible with any certainty, and even well-designed policies can fail to deliver their intended outcomes.