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http://mit.edu/ceepr
International Experience with
Carbon PricingOpportunities, Challenges and
Lessons Learned
Michael MehlingChile | May 2017
http://mit.edu/ceepr
Overview
• Background and Rationale
• Carbon Pricing: State and Trends
• Political Economy of Carbon Pricing
• Carbon Pricing Mix
• Climate Policy Mix
• Case Studies:
⎯ British Columbia Carbon Tax
⎯ German “Ökosteuer”
http://mit.edu/ceepr
Background and Rationale (1)
• Climate change belongs to a new generation of
environmental challenges that require scalable,
flexible and economically efficient policy solutions
• Climate Change is the “greatest market failure ever
seen” (Stern, 2006), and carbon pricing can help
correct it by making polluters pay for the cost
• Carbon pricing offers flexibility for abatement to occur
where it is cheapest, and it can generate revenue
• Overall, therefore, carbon pricing is considered a
“logical foundation of any policy regime for clean
energy” (World Economic Forum, 2009)
http://mit.edu/ceepr
Background and Rationale (2)
• Climate change belongs to a new generation of
environmental challenges that require scalable,
flexible and economically efficient policy solutions
• Climate Change is the “greatest market failure ever
seen” (Stern, 2006), and carbon pricing can help
correct it by making polluters pay for the cost
• Carbon pricing offers flexibility for abatement to occur
where it is cheapest, and it can generate revenue
• Overall, therefore, carbon pricing is considered a
“logical foundation of any policy regime for clean
energy” (World Economic Forum, 2009)
http://mit.edu/ceepr
Carbon Pricing: Policy Options
• Generally two approaches to create an explicit carbon
price:
• Taxes, fees and charges: payment obligations based on
carbon emissions or a proxy, such as energy content
Price signal is determined by government
• Emissions trading: a system of emission allowances
distributed to emitters and tradable in a market
Price signal is discovered by the market
• Traditional regulation creates an implicit carbon price,
but does not offer the same efficiency gains or potential
revenue
Carbon Pricing: State and Trends
6/5/2017Source: World Bank, 2016
Source: World Bank, 2016
Carbon Pricing: State and Trends
Carbon Markets: Mention in INDCs
6/5/2017Source: IETA, 2016
Political Economy: Carbon Taxes
• Compelling premise: “Tax Bads, not Goods”, i.e. shift fiscal
burdens from production factors to negative externalities
• “Double Dividend”: correct a market failure and generate
revenue for public expenditure or to lower fiscal burdens
• Implementation can build on existing taxes, such as energy
taxes, and existing administrative capacities for collection
• While emissions outcomes are uncertain, they can be pre-
dicted with some accuracy and tax levels adjusted over time
• A central challenge faced by any meaningful carbon or energy
tax initiative are the unfavorable politics
Political Economy: Emissions Trading
• Certainty of outcome with consistently lower prices than
forecast during the political process
• Emissions trading has proven politically resilient:
• New supportive stakeholders (market facilitators, net “winners”)
• Harnesses creative, proactive engagement by compliance entities
• Discussion of cap less controversial than price: justified by science
• Opposition can be softened by allowance distribution decisions
• Emissions trading offers the opportunity to link to other trading
systems, with multiple benefits such as increased liquidity and
flexibility, foreign revenue, and cooperation
• But like other markets, emissions trading is subject to its own
dynamics and governance challenges, such as volatility
Prices and Binding Political Constraints
6/5/2017Source: World Bank, 2015
US$ 36/tCO2
Social Cost of
CO2 in 2015, at
3% discount rate
Source: U.S. EPA
Factsheet,
Update Dec.
12/2015
6/5/2017
Current Spectrum of Carbon Pricing Instruments
Source: adapted from Munnings, 2016
“Pure” Quantity Rationing “Pure” Pricing
No Trading
Full Trading
Floating Price
Fixed Price
EU ETS
(-2017)British
ColumbiaSouth Africa Mexico
California, Quebec, RGGI
EU ETS (2018-)
“Prices v. Quantities”: A Moot Question?
UK, France (within
EU ETS)
Carbon Pricing Mix
• Climate policy is caused by a bundle of different
market failures, justifying an instrument mix
• Carbon pricing offers unrivaled static efficiency, but
does not address all underlying market failures
• No conclusive theoretical guidance on instrument
choice between price controls and quantity controls
• A coordinated carbon pricing mix can leverage
synergies and harness strengths of both approaches
• Absent coordination, a carbon pricing mix can result
in adverse interactions and distributional effects
Carbon Pricing Mix: Alternative Options
6/5/2017
TimingCoverage
Synchronous Asynchronous
Symmetrical
Price Floor/CeilingUncoordinated
OverlapPhase-In
Transition
ComplianceAlternative
AsymmetricalNo Coordination
NeededOpt-In
Uncoordinated Overlap
Flexibility
Option
Price
Management
OptionTransition
Option
Sou
rce:
McK
inse
y, 2
01
0;
Gö
rla
chet
al.,
20
12
Is Carbon Pricing Enough?
Negative abatement costs: apparently, cost is not the main issue
here – other barriers are at work. Carbon pricing can help, but will not
remove the primary obstacles
Slightly negative to positive abatement costs: carbon pricing can correct market failure and encourage
deployment at scale
High abatement costs: even with carbon pricing, technologies will not
become competitive. R&D investment can bring down costs and
encourage deployment at scale
Instrument Mix: Another Perspective
(Source: Grubb et al., 2014)
Blunt, unfit to scale or risk of
rebound effects
Politically difficult,
competitiveness issues, results
temporary
Risk of failure or lackluster
returns
British Columbia’s Carbon Tax
6/5/2017
• Started on 1 July 2008: $10/t CO2
• Rising $5/t each year to 2012 (now $30/t)
• Covers all domestic fuel use and most
greenhouse gas emissions
• Revenue-neutral: 100% of revenue goes
towards reducing income tax
• Additional reductions for vulnerable (low income,
rural) communities
• Pioneer in carbon pricing in North America
BC: Political Economy
6/5/2017Source: Elgie et al., 2013
• Political leadership: Premier Gordon Campbell
• Good timing harnesses window of opportunity:
– High concern for global warming
– Healthy economy, steady gas prices
• Carbon tax becomes a central issue in 2009
provincial elections
– Recession dominates political debate
– Opposition party campaigns on “Axe the Tax”
– ENGOs
BC: Political Economy
6/5/2017Source: Elgie et al., 2013 17
Window)of)Opportunity:)2006-2008)
''Global'Warming'''''''''' ''Carbon'Tax '''' ''Recession'
BC&C&Tax&
29'
2004' 2005' 2006' 2007' 2008'
News'reference'volume'
Search'term'volume'
Google'Trends:'“Search'Terms”'versus'“News'Reference”'
Federal&elecPon&
BC: Effect on Fuel Consumption
6/5/2017Source: Elgie et al., 2013
BC: Effect on Fuel Sales
6/5/2017Source: Elgie et al., 2013
BC: Effect on GHG Emissions
6/5/2017Source: Elgie et al., 2013
BC: Effect on the Economy
6/5/2017Source: Elgie et al., 2013
Change in GDP (in %) 2008-2011
BC: Fiscal Impacts (1)
6/5/2017Source: Elgie et al., 2013
Net Income Tax Rebates (in $ million)
BC: Fiscal Impacts (2)
6/5/2017
Distribution of Revenue Uses, 2008–2018
Source: Murray et al., 2015
BC: Public Opinion
6/5/2017Source: Murray et al., 2015
Polling Results on the BC Carbon Tax, 2008-2014
Germany’s “Ecological Tax Reform”
27
• Increased tax rates on mineral oil and gas
(“Mineralölsteuer”):
– 3.07 cents per liter and year for gasoline and diesel from 1999
to 2003
– 2.05 cents per liter and year for heating oil from 1999 to 2003
– 36 cents per kWh of natural gas by 2003
• Introduced new levy on electricity (“Stromsteuer”):
1.02 cents per kWh, increased by 0.26 cents per kWh
from 2000 to 2003
• Tax of 33 cents per Gigajoule introduced in 2006 for coal
used for heating purposes, but further increases of tax
rates deferred until further notice
6/5/2017
Reactions to the “Ökosteuer”
28
• Perception of undue
burden on industries and
competitiveness
• Consequence: Politically
negotiated tax exemptions
(60%) and rebates for
manufacturing industries
and agriculture
• Increased social
transfers to the public
instead of exemptions
6/5/2017
Ecological Tax in 1l of Transport Fuel (ct/l)
29
6/5/2017
Source: UPI
Ecological Tax in 1l of Heating Fuel (ct/l)
30
6/5/2017
Source: UPI
Changes in the Consumption of Gasoline and Diesel
31
6/5/2017
Source: UPI
Changes in Transport Fuel Consumption (kt/year)
32
6/5/2017
“Double Dividend” of the Ecological Tax Reform
33
• Revenue largely earmarked to reduce non-wage
labor cost: In 2003, roughly 16.1 billion EUR in
revenue allowed a reduction of pension contributions
by 1.7 % of wage costs
• Empirical studies suggest a positive macroeconomic
balance: Tax reform is officially estimated to have
created 250.000 new jobs by 2005, and yielded 100
mio. annually invested in subsidies and tax credits for
renewable energy and energy efficiency
• Behavioural change: By 2010, the reductions of CO2
emissions were estimated at 3 percent, or roughly 24
million tons of CO2eq per year
6/5/2017Sources cited in Bühler et al., 2011
http://mit.edu/ceepr
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Environmental Policy ResearchMassachusetts Institute of Technology (MIT)
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