Carbon pricing is a cost applied to the emissions of greenhouse gases, and is seen by many as the most effective way to cut carbon emissions into the atmosphere. There are two systems of carbon pricing: a carbon tax and an emissions trading system.
A carbon tax is a direct tax on CO2. In some cases, the tax is placed on the actual fuel that is purchased, and is based on the CO2 content of that fuel. Alternatively, emitters may pay a tax on each ton of emissions produced. Some argue that simply taxing carbon, rather than putting a limit on the amount of carbon that can be emitted in a given year, is not aggressive enough to combat climate change.
An emissions trading system (ETS), or cap and trade, on the other hand, puts a limit on carbon emissions. Companies are issued permits, each of which allows a certain amount of emissions. The total number of permits is “capped.” Permits can be sold between companies, allowing those who use cleaner energy sources to sell their permits to companies that produce greater levels of emissions. Ideally, the cap is decreased over time, in turn encouraging companies to switch to cleaner forms of energy, such as wind and solar, in order to meet their energy needs.
According to the World Bank, 12 percent of global emissions are covered under some form of carbon pricing. In fact, out of the ten largest economies in the world, the United States and Russia are the outliers that do not have a system of carbon pricing. A full list of countries, states and cities that have a system of carbon pricing can be found here, but we’ve highlighted a few places that are successfully cutting emissions through carbon taxes and cap-and-trade practices.
In 2008, the conservative, right-leaning British Columbia Liberal Party (we know, it’s a bit confusing) introduced what economists at Duke University called “the first comprehensive and substantial carbon tax in North America.” The tax covers approximately three-quarters of greenhouse emissions in the province, and was increased from ten Canadian dollars/ton of CO2 (2008) to thirty dollars/ton in 2012.
The Duke University study, released in Nov. 2015, estimates that the carbon tax reduced emissions in the province by 5-15% and “has had negligible effects on the aggregate economy.” The tax did lead to an increase in gas prices by what is equivalent to 19 US cents, which successfully encouraged residents to drive less and be more cautious about heating their homes. However, they were pleasantly greeted with tax breaks in return, which helped to decrease opposition to the tax among residents from 47 percent in 2009 to 32 percent in 2015.
The key to the success is that “every single carbon tax dollar would be returned to families and businesses through a variety of breaks,” including tax credits for low-income families and cuts in income tax rates.
But the government has gone above and beyond that requirement, estimating that it “will return about 1.7 billion Canadian dollars to businesses and families this year, more than the 1.2 billion dollars it expects to collect though the carbon tax, which amounts to roughly 5 percent of the province’s total tax revenue.”
However, after freezing the carbon tax at thirty Canadian dollars, the province saw industrial emissions begin to increase again. The balance between cutting emissions and allowing local industries to remain competitive despite the carbon tax is fragile. There is discussion of further increasing the carbon tax in British Columbia. But the province’s experiences show that a carbon tax has the ability to decrease emissions without causing any significant harm to the economy.
A cap-and-trade system has been enforced in California since 2013, and has generated $969 million through the end of 2014. In contrast to British Columbia’s system of returning that money to residents and businesses through tax breaks and cuts, California must use the generated income on projects that will further cut carbon emissions. The funds produced by the system have been used to aid hundreds of projects, ranging from reforestation and land preservation to a rebate program for those who buy electric vehicles. Click here for an interactive map that shows many of these projects. In 2014, California and Quebec linked their cap-and-trade systems, expanding the market for permits. This example of cap and trade is considered to be proof that such a system does not result in the collapsing of a state’s economy, as many naysayers predicted.
European Union Emissions Trading System
Launched in 2005, the European Union Emissions Trading System (EU ETS) is a cap and trade system that includes 31 countries (including Iceland, Liechtenstein and Norway, which are not EU countries, but were welcomed to join Europe’s fight against climate change). It covers more than 11,000 power stations and industrial plants, as well as all airlines, or about 45% of the EU’s greenhouse gas emissions. It is very similar to the California/Quebec system, but on a much larger scale. The system not only covers CO2 emissions, but also nitrous oxide (from the production of various acids) and per fluorocarbons (from the production of aluminum). Here’s a video that explains the system.
Carbon pricing is key to reducing greenhouse gas emissions and fighting climate change. If you are a resident of New Jersey or Pennsylvania and would like to cut your own carbon footprint by going solar, contact us using the form below!