Carbon Pricing: Taking Over

by | Jan 22, 2024 | Policy

This is the last in a series of 4 blogs exploring carbon pricing policies that make the true costs of emitting greenhouse gasses visible at key decision points so climate futures are always present. Here are links to the first, second, and third in the series. 

In this fourth and final installment of our series exploring a more inclusive definition of carbon pricing, we return to the canonical carbon price. That is, a carbon tax or a cap and trade system covering CO2 emissions from fossil fuels. Taking a global view, such policies are booming.  

This may surprise American readers, living as we do in the only developed national economy without one. Many developing economies have one too. Others want one, and they want rich countries to have them as well. For instance, the consensus opinion of September’s first ever African Climate Summit was that there should be a global carbon tax. In total, 23% of all global emissions are now covered by a carbon price, prompting the Economist magazine to recently publish an article titled “How carbon prices are taking over the world”. 

Nor are we talking about measly, small carbon prices here. The price of the European Union Emissions Trading System (EU ETS), covering 30 countries, eclipsed 100 Euros at several points last year. What’s more, last October the EU put into effect what they are calling a carbon border adjustment mechanism (CBAM). In effect, the policy described by this clunky acronym requires imports from other countries to pay a comparable carbon price to what EU-produced goods are already paying. It’s the international policy equivalent of the playground maxim “keep it even-steven”. 

Remarkably, given how widespread canonical carbon prices are, the EU is the first place to enforce such playground rules. But they will not be the last. Taiwan is set to start collecting fees later this year (thus ahead of the EU, which now demands reporting, but won’t demand payments until 2026), and the United Kingdom has proposed its own CBAM in some detail. Canada, Japan, Australia, South Korea, and India are all at various stages of study, consultation, and contemplation for their own versions. 

To be clear, the EU CBAM will probably help US exporters, because for the products the EU is targeting (cement, iron, steel, aluminum, hydrogen, electricity, and fertilizer), the US tends to be a relatively low-carbon producer. So, accounting for it means that US goods will appear like a better deal relative to similar goods from countries that pollute more to produce essentially the same goods. In economic terms, American goods are likely to capture a larger market share. However, the EU will exempt from payment goods from countries with comparable carbon prices. So, US producers will probably gain market share even if they have to pay at the border. It’s just they’ll be paying the EU governments instead of the US government. 

This loss of revenue is probably a large factor explaining why border carbon measures are one of the hottest climate topics in Congress of late, with both Republicans and Democrats showing interest. Given that 40% of all US imports come from countries with carbon prices expected to exceed $50 in 2024, politicians may also be figuring it can’t be long before American consumers begin to notice. 

Recent Congressional interest has focused on border carbon adjustments (BCAs) and border carbon tariffs1. The distinction is that a BCA is a policy that is paired with an explicit domestic carbon price, whereas a tariff is not. A border carbon measure could therefore only be properly considered a BCA if Congress also passed a national carbon price, or came up with a dollar amount for the thicket of regulations, environmental fees, and other related compliance costs on products we export. A carbon tariff would not adjust for any internal costs, explicit or imputed. Instead, it would simply put a price on goods coming into the US based on their carbon intensity (which is not straightforward to calculate). Countries sending goods to the US with a significantly higher emissions intensity would pay the tariff, goods from cleaner countries wouldn’t pay. 

The Foreign Pollution Fee Act, a Republican-sponsored bill in the Senate, is such a tariff. Intriguingly, this bill is clearly geared towards encouraging a climate club. To underscore the difference between BCAs and tariffs, the bill text also includes strong language against any possible interpretation that it enables a domestic carbon price. 

This US interest in border carbon measures is encouraging because though the US made historic investments to combat climate change in the first 2 years of the Biden Administration/ during the 117th Congress, we are falling short of our own metrics for success. To briefly recap, the passage of the CHIPS and Science Act, the Infrastructure, Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) in the last Congress amounted to an historic investment in reducing emissions that has already led to a doubling of manufacturing investment in the US, with republican-voting states getting most of these investments. Together, these 3 policies are estimated to reduce US emissions by about 40% below 2005 levels by 2030. 

However, the US commitment under the Paris accord is a 50% reduction in emissions by 2030. More legislative solutions that complement these policies are necessary. We need both carrots and sticks. This trifecta of legislation has more or less maxed out politicians’ appetite for subsidies and incentives (carrots). Sticks are the only tool that’s left, and carbon prices are the most obvious way to do this. While things might have turned out differently, none of these 3 laws include a price on carbon dioxide emissions2

To conclude, carbon pricing is having a moment right now. Especially when you take a broader, more chemically and economically sound view of carbon prices. Look at all greenhouse gasses that include carbon, and think of how pricing affects decisions at more than just the point of sale, and you see them all around. This is especially true when you take a global view – carbon prices are indeed taking over the world. 

At the Pricing Carbon Initiative, these developments give us hope. We are interested in the spirit of the policy suite: making true costs visible at key decision points so climate futures are always present. We are following all these story lines, and we enjoy bringing them to our network. Better information in decision making is a bipartisan concern, and our focus on carbon pricing in all its many forms continues to be a productive focus for our diverse network.

Photo by Kyle Glenn on Unsplash

  1. While every canonical carbon price introduced in the US Congress over the last decade has included a BCA, this element has always played second fiddle to the domestic price. This is completely flipped in the current discussion. Compare, for instance, Senator Whitehouse’s recently reintroduced Clean Competition Act to his Save Our Future Act or American Opportunity Carbon Fee Act of previous Congresses. ↩︎
  2. As noted in the second blog in this series, the IRA did include a methane fee. ↩︎

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