## Five things to know about carbon pricing ## Source details **Canonical URL:** [Five things to know about carbon pricing](https://www.imf.org/-/media/files/publications/fandd/article/2021/september/five-things-to-know-about-carbon-pricing-parry.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2021/september/five-things-to-know-about-carbon-pricing-parry.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2021/september/five-things-to-know-about-carbon-pricing-parry.pdf.json) --- ### Implementation: carbon taxes and emissions trading systems - Carbon pricing can be implemented through a tax on the carbon content of fossil fuels or on their carbon dioxide (CO2) emissions, and can be administered as an extension of existing fuel taxes. - Carbon taxes provide certainty about future emissions prices, which helps mobilize clean technology investment. - Revenue from carbon taxes can be used to lower burdensome taxes on workers and businesses or to fund investment in climate technology. - Carbon pricing can also be implemented through emissions trading systems where firms must acquire allowances for each ton of greenhouse gases they emit; the supply of permits is limited by government. - Emissions trading programs can be designed to mimic the advantages of taxes through price-stabilizing mechanisms like price floors and revenue-raising measures such as permit auctions. ### Momentum, coverage, and current price gaps - More than 60 carbon tax and emissions trading programs have been introduced at the regional, national, and subnational levels. - Recent initiatives: major pricing initiatives have been launched in China and Germany; the emissions price in the European Union has risen above €50 a ton; Canada announced its emissions price would rise to CAN$170 a ton by 2030. - Coverage and price gaps: - Only about one-fifth of global emissions are covered by pricing programs. - The global average price is only $3 a ton. - The global carbon price of about $75 a ton is needed to reduce emissions enough to keep global warming below 2°C. ### Carbon pricing within a comprehensive mitigation strategy - Carbon pricing should be supported by complementary measures to enhance effectiveness and acceptability. - Reinforcing instruments include regulations on emission rates or fee-rebates for products (for example, vehicles, appliances) or firms (for example, power generators, steel producers); these instruments have a narrower impact than carbon pricing (they do not encourage people to drive less) but may be easier politically because they avoid large energy price increases. - Use of carbon pricing revenue: - Boost the economy and counteract economic harm caused by higher fuel prices to build public support. - Fund just transition measures for low-income households and vulnerable workers and regions (for example, stronger social safety nets and retraining); these measures would require only a minor portion of carbon pricing revenues. - Finance public investment in clean technology infrastructure networks (for example, electric vehicle charging stations and power grid extensions for wind and solar). - Carbon pricing must eventually be extended to other sectors, like forestry and agriculture. ### International coordination: an international carbon price floor - The IMF staff proposes an international carbon price floor to complement and reinforce the Paris Agreement, with two key components: - Focus negotiations on the small number of countries responsible for the majority of global emissions. Example coverage: - An arrangement among China, the European Union, India, and the United States would cover 64 percent of future global CO2 emissions. - An agreement among the Group of Twenty (G20) large economies would cover 85 percent of emissions. - Focus on a minimum carbon price each country must implement, giving countries flexibility to set higher prices if needed to achieve Paris pledges. - Design considerations: - Developing economies could have lower price floors and simple mechanisms for financial and technological support. - The floor could accommodate countries where carbon pricing is a political hard sell, provided other policies achieve equivalent emissions reductions. - Scenario illustrating potential effectiveness: - A 2030 price floor of $75 a ton for advanced economies, $50 for high-income emerging market economies such as China, and $25 for lower-income emerging markets such as India would keep warming below 2°C with just six participants (Canada, China, European Union, India, United Kingdom, United States) and other G20 countries meeting their Paris pledges. ### Why a pragmatic price floor is preferred to other regimes - Regime alternatives and limitations: - A regime requiring all participants to impose the same carbon price does not allow differentiation for equity and cannot accommodate countries where carbon pricing is difficult domestically. - A regime based on agreed annual, progressively tightening emissions targets requires agreement on many parameters, is zero-sum (a laxer target for one country means stricter targets for others), and leaves uncertainty about the policy actions countries would take. - Without an international carbon price floor or similar arrangement, countries are likely to impose border carbon adjustments (tariffs on carbon-intensive imported goods). Example: - The European Union announced such a proposal in July 2021. - Limitations of border carbon adjustments: - They would price only emissions embodied in traded products and not the large bulk of nontraded emissions (for example, from power generators, manufacturers selling domestically, buildings, and transportation). - From the perspective of scaling up global mitigation, border carbon adjustments would be far less effective than an international carbon price floor. *Ian Parry, principal environmental fiscal policy expert, IMF Fiscal Affairs Department.* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2021/september/five-things-to-know-about-carbon-pricing-parry.pdf_