More Countries Are Pricing Carbon, but Emissions Are Still Too Cheap

IMF Blog, July 21, 2022

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As the world gears up to avoid a climate catastrophe by limiting global warming to 1.5 to 2 degrees Celsius, more countries are putting carbon pricing at the center of their mitigation strategies.
Carbon pricing, in one form or another, is likely to be an essential element of mitigation strategies as the world transitions to net zero over the next three decades.
Credit (Photo: Andrzej Rostek/iStock by Getty Images)
Simon Black, Ian Parry, Karlygash Zhunussova — July 21, 2022
The chart for this blog, originally published July 21, 2022, has been updated to reflect Indonesia's status as under consideration or planned.

46 countries are pricing emissions through carbon taxes or emissions trading schemes (ETS).
ETSs and carbon taxes cover 30 percent of emissions globally.
Prices rise as high as $90 per ton (in the European Union).
Global average price of carbon today is $6 per ton of CO2.
To limit global warming, prices need to rise from $6 per ton of CO2 today to $75 by 2030.

Key decisions for policymakers considering introducing or scaling up carbon pricing:
- Ease of implementation.
- Price levels.
- Competitiveness concerns.
- Alignment with other mitigation instruments.
- Coordination across countries.
Countries may choose different approaches based on their own circumstances and objectives.

Carbon taxes:
- Provide certainty over future emissions prices, helping encourage green investments and energy conservation.
- Can be simple to implement by tweaking existing fuel taxes.
- Provide revenues that finance ministries can use to assist the poor, cut other taxes, or boost productive investments.
- Could be extended to broader emissions sources (for example, methane emissions from extractive industries and, in some cases, agriculture).
Emissions trading schemes (ETS):
- Appeal to policymakers who prefer certainty over future emission levels.
- Can mimic some advantages of taxes, including through price floors and allowance auctions.
- Allocating some allowances initially for free may garner support from affected firms.
- Present significant complexity in design, implementation, and administration, making them challenging for many countries.

Both carbon taxes and ETSs operate on the “polluter pays” principle and efficiently encourage switching to more sustainable energy sources and reducing emissions-intensive activities.
Political acceptability is vital for the rise in carbon prices needed to tackle climate change.
Carbon pricing reforms can protect the poor while supporting economic growth, for example:
- Using some of the revenues to compensate vulnerable households.
- Using remaining revenues for labor tax cuts or productive investments.
With careful design, implementation and coordination, the economic costs of carbon pricing can be manageable.
For some countries, costs are more than offset by domestic environmental co-benefits (such as fewer deaths from local air pollution) even before counting the global climate benefits.

Source: IMF Blog — "More Countries Are Pricing Carbon, but Emissions Are Still Too Cheap" (July 21, 2022).