What makes carbon pricing an effective tool to mitigate climate change?

In Global Environmental Politics, Sebastian Levi, Christian Flachsland and Michael Jakob analyse the conditions for successful carbon pricing.

Carbon pricing is widely considered a key policy instrument for mitigating climate change, but what social, political and economic conditions are necessary for it to be successful? Carbon pricing uses market mechanisms to force greenhouse gas (GHG) emitters to pay for their emissions. The idea is to discourage the use of fossil fuels that cause global warming. Although carbon pricing is considered efficient and effective, its implementation around the world is patchy, and price levels vary significantly across countries and regions.

In an article published in June 2020 in Global Environmental Politics, Hertie School Postdoctoral Researcher Sebastian Levi and Professor of Sustainability Christian Flachsland, as well as Michael Jakob of the Mercator Research Institute on Global Commons and Climate Change, analyse the structural, social, political, and economic conditions under which carbon prices have been implemented, using data on variations in carbon prices over 262 national and subnational jurisdictions.

“Our results highlight well-governed institutions and public attitudes as the most important conditions for carbon pricing and characterize fossil fuel consumption as a barrier to the implementation of carbon prices,” the authors say. “The results suggest that governance and public attitudes need to be further integrated into political economy analysis. Policy makers should take regulatory capacities and public attitudes seriously when designing carbon pricing policies.”

Countries have different levels of ambition and use different instruments to reduce GHG emissions, the authors note. Research subsidies, financial support for renewable energies, vehicle performance standards or coal exit policies are just a few. There has long been a broad consensus among climate economists that carbon pricing should also be included. This can take the form of a carbon tax, an emissions trading system (ETS), or a combination of the two. Carbon pricing is a flexible, low-cost way to reduce GHG emissions across sectors and regions and is thus widely considered as the most economically efficient mitigation policy.

In the paper, the researchers look at carbon pricing through a political economy lens. This enables the examination of characteristics of actual policies, the dynamics of the political process and the social-political structure in places where such policies are negotiated and implemented. In their research, the authors looked at existing theoretical explanations regarding the introduction of carbon prices and tested these empirically. In the paper, they offer a qualitative discussion of this quantitative analysis, alongside an examination of public attitudes and governance.

Through quantitative evidence, they show there is a “strong relationship between public belief and ambitious climate policy.”  Policymakers working towards designing carbon pricing policies need to consider regulatory capacities and public attitudes, they say. On the practical side, this means enhancing public understanding in places where people do not strongly believe in human-induced climate change or building government capacity for carbon pricing policies in countries with incapable or corrupt institutions.

In countries with limited capacities, carbon taxes might be a more appropriate choice because they are less bureaucratic to implement as opposed to emissions trading systems.

Communicating to people how such carbon taxes help mitigate climate change can also increase public support, according to the authors. Ensuring that revenues go to programs that support the community may also “prevent the perception of carbon taxes as being an elite project that disproportionally affects the poor”. Also, to avoid public and business opposition, it might be useful to start with “moderate carbon prices and targeted industry exemptions and then increase the price level and coverage over time”, the authors note.

Read the full study here.

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