(Credit: Pixabay)A new Moody’s report on the economic impacts of carbon pricing warns that carbon-intensive producers and consumers will be hard hit as more governments begin charging entities for emitting greenhouse gases. The transport, oil and gas, and coal mining sectors were found to be the “most exposed,” meaning they stand to lose the most money from carbon pricing. A price on carbon makes it more expensive for carbon-emitting companies to do business. It also incentivizes the adoption of alternative fuels, lowering the demand for carbon-based fuels.
Countries such as the Congo, Venezuela, and Saudi Arabia, whose economies rely on fossil fuels, will face the greatest economic impact, while less carbon-intensive countries investing in carbon-neutral technologies will reap the greatest gains.
In a recent press release, Moody’s Vice President and Senior Analyst Anushka Shah wrote, “In an indication of growing commitment to decarbonization and mid-century net-zero emissions targets, policymakers globally are increasingly advocating carbon pricing systems.”
Currently, 40 national and 25 sub-national jurisdictions have a price on carbon. Last month, China, the world’s current largest emitter, established a national carbon market. Carbon pricing is endorsed by the International Monetary Fund, World Bank and Organisation for Economic Co-operation and Development, and was adopted in July as a tool to address climate change by the G-20. As of May 2021, 21.5% of global carbon emissions were covered by carbon pricing instruments — up from 15.1% in 2020.
Carbon pricing takes two main forms: carbon taxes and and emissions trading systems. The former is a government tax on emissions, while the latter is a market in which companies and/or governments buy and sell emissions credits, the number of which is reduced over time. While both have succeeded in lowering emissions, carbon taxes have proved more effective.
Carbon pricing would equal 1% to 2% of GDP for most countries. The revenue could be allocated to low-income households to offset the regressive nature of the tax, distributed equally to all citizens in the form of a carbon dividend, invested in sustainability initiatives, or subsumed into the government’s general revenue. Presently, the average emissions price is $2 per ton of carbon: far short of the estimated $25 per ton required for most countries to meet their Paris climate agreement goals.
Another issue highlighted by Moody’s is leakage: “when economic activity subject to carbon pricing shifts to a jurisdiction without similar regulations.” To combat this, the EU, along with Democrats in the US, have proposed “border adjustment carbon taxes” to ensure that those not subject to carbon pricing pay the same as those who are.
Moody’s concluded that whatever the economic impacts of carbon pricing, they are preferable to the economic impacts of failing to address climate change:
“The cost of inaction on controlling emissions will accumulate with much greater social and economic costs in the future.”
The Federal Reserve estimated that the total economic cost of a business-as-usual climate scenario would be at least $2 trillion dollars more than meeting the Paris climate targets by 2050, and $50 trillion by 2100.
