Countries across the globe have been struggling to deal with the impact of COVID-19 and the accompanying economic slowdown. As economies “build back better”, it may be an opportune time to introduce carbon pricing to tackle climate change while generating socioeconomic benefits, according to new interdisciplinary policy research by philosophers and economists.
While endorsed by many economists, carbon pricing has been slower to gain traction because of its potential to shock economies and the difficulty of securing political support for increasing taxes. However, according to the authors of a new paper published in the journal Climate Policy, fuel prices are already low and people are buying fewer goods and traveling less, so there could be greater benefits to introducing or strengthening carbon prices.
Carbon pricing, whether in the form of taxes or emissions trading, is an economic instrument to account for the environmental costs of emitting greenhouse gases from burning fossil fuels. Carbon pricing typically applies to the producer with increased costs ultimately trickling down to any activity using carbon.
For example, oil-extraction companies would be taxed, adding costs to any process that involved burning oil. Emissions-trading schemes set some cap on emissions and permits to emit are traded, but the number of total permits available correspond to that cap.
The authors of the research argue that with markets already reorienting to adjust to supply-and-demand shocks brought on by the pandemic, introducing carbon pricing now would result in marginally less disruption and could help drive greener economic activity. Since carbon pollution already increases health and environmental costs, disproportionately borne by the most vulnerable parts of society, forcing those generating the costs to pay for them would lead to fairer production and consumption.
In the context of low fuel prices over an extended period, as seen in recent months, the researchers also suggest that a carbon tax could help stabilize prices and ensure that renewable energy sources, the prices of which were becoming cost-competitive even before the COVID-19 crisis, can remain competitive.
“As economies move toward recovery, placing a price on carbon could prompt industries, individuals, and firms to move away from more costly fossil-fuel intensive practices and toward long-term economic and environmental sustainability in an equitable way,” explains coauthor Thomas Schinko, Deputy Director of the IIASA Risk and Resilience Program.
The researchers acknowledge that governments are under pressure to prioritize economic recovery from the COVID-19 crisis, so any policy changes with the potential to dampen a stimulus effect could be unpopular. However, they argue that high prices are not the primary obstacle to consumer purchasing; the cause of the economic slowdown has more to do with restricted market activity during the pandemic.
Revenue generated from a carbon price could contribute toward government spending on social safety nets, fund other green priorities to drive innovation and new jobs, or be returned as credits to taxpayers. In all cases, the potential revenue source could be a welcome infusion during the COVID-19 crisis, when regional and national governments face massive fiscal shortfalls, which can be expected to grow in the coming months.