imgCarbonPriceIcon Carbon Pricing and Energy Standards

Set a global carbon price that makes energy sources more expensive depending on how much carbon dioxide they release, or enact a clean electricity standard or emissions performance standard. Energy producers frequently pass additional costs to their customers, so policy must be designed to minimize the impacts on the poorest.

Examples

  • Countries and regions implementing carbon taxes.
  • Grassroots campaigns generating public support for carbon pricing.
  • Clean Electricity Standards are similar to Renewable Portfolio Standards in use in several US States or the Renewables Obligation in the UK.

Big Message

  • Pricing carbon is a high leverage strategy, as it both reduces the carbon intensity of the energy supply and reduces the overall energy demand.
  • Clean Electricity Standards only affect part of the energy system, and so their leverage depends on being used in conjunction with electrification of transport and buildings and industry.

Key Dynamics

  • When the carbon price is increased, notice that Coal (brown area) reduces the most in the “Global 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 (dark blue area) decreases as well, although more modestly. Oil (red area) 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). Renewables (green area) increases as the relative cost of wind and solar make them more attractive.
  • Just like taxing coal, a significant carbon price increases energy costs, which reduces energy demand. View this in the “Final Energy Consumption” graph, noting that the high carbon price Current Scenario (blue line) is lower than Baseline (black line).
  • The economic effects of these policies are best seen as the cost of energy plus the cost of subsidies minus the revenue from taxes. See the two graphs “Total Annual Cost of Energy” and “Revenue & Cost from Taxes & Subsidies.”

Potential Co-Benefits of a Carbon Price

  • Renewable energy becomes relatively cheaper, which can incentivize job creation in the sector.
  • Reducing the use of fossil fuels improves air quality, increasing healthcare savings and worker productivity.
  • Revenue from carbon pricing can be allocated to social programs that can be shared with everyone.

Equity Considerations

  • 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.

Slider Settings

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

Clean Electricity Standard

The switch “Use clean electricity standard” sets a policy which requires a certain percentage of electricity to come from qualifying sources. This creates a system of incentives: producers of qualifying electricity receive additional revenue, like a subsidy except that the money comes through electricity prices rather than government spending. The added costs and revenues affect electricity markets and investment, pushing the mix of generation toward the target standards. The value of the incentive depends on the gap between target and actual generation, and on how ambitious the target is.

Under “Sources that qualify as clean electricity,” check the boxes for which sources qualify as “clean.” You can see the percent these sources contribute on the graph “% Electricity Consumption from Qualifying Sources.” Use the “Target % electricity from qualifying sources” slider to set the required amount of qualifying electricity.

Case Studies

Northeast United States: A 2016 MIT study examined a scenario where the Northeast United States implemented a carbon cap and trade program and found that the annual health savings to the region could be five times greater than the costs of the changes needed to satisfy the policy. [1]

Please visit support.climateinteractive.org for additional inquires and support.

Footnotes

[1]Thompson, T. M., Rausch, S., Saari, R. K., & Selin, N. E. (2016). Air quality co-benefits of subnational carbon policies. Journal of the Air & Waste Management Association, 66(10), 988–1002. https://doi.org/10.1080/10962247.2016.1192071