Set a global carbon price that makes coal, oil, and gas more expensive depending on how much carbon dioxide they release. Energy producers frequently pass additional costs to their customers, so policy must be designed to minimize the impacts on the poorest.
- Countries and regions implementing carbon taxes.
- Grassroots campaigns generating public support for carbon pricing.
|status quo||low||medium||high||very high|
|Carbon price per ton||no carbon price||$0 to $20||$20 to $60||$60 to $100||$100 to $250|
- When the carbon price is increased, notice that coal (brown line) reduces the most in the “Sources of Primary Energy” graph. It is the most carbon intensive source of energy, which makes it the most sensitive to a carbon price. Natural gas (blue line) moves down as well, although more modestly. Oil (red line) decreases only slightly, even though it is more carbon intensive than gas, because it is not easily substituted for other energy sources (e.g. can’t power a diesel truck with wind power). Renewable energy (green line) increases as the relative cost of wind and solar make them more attractive.
- View “Final Energy Consumption” graph. Just like taxing coal, a carbon price increases energy costs, which reduces energy demand. View this in the “Energy Consumption” graph and notice that the current scenario with a carbon price (blue line) is lower than business as usual (black line).
- Pricing carbon is a high leverage strategy. It both reduces the carbon intensity of the energy supply and reduces the overall energy demand. That said, it is no silver bullet.
Potential Co-Benefits of a Carbon Tax¶
- Renewable energy becomes relatively cheaper, which can incentivize job creation in that market.
- Reducing the use of fossil fuels improves air quality, increasing healthcare savings and worker productivity.
- Funds raised can be earmarked for social programs that can be shared with everyone.
- As carbon taxes reach effective levels, companies may try to pass costs to customers, where the poor are most at risk of being impacted. Policies can be developed that limit this impact.
- Workers employed in fossil fuel industries risk losing their jobs if companies shrink workforces in response to higher costs of production, so job transition plans should be in place and protections for workers ensured.
- Due to the political nature of fossil fuel production, government corruption and rent-seeking could create the possibility of certain industries avoiding the carbon price due to loop holes or exemptions.