Trend: Carbon Taxes – Are They an Effective Tool to Reduce Emissions?

09-11-2020

 

Around the world, people are waking up to the urgency of the climate crisis. It is imperative that we act now and that we act decisively. One of the measures that has been suggested to slow our approach towards environmental collapse is carbon pricing.

What is Carbon Pricing?

Carbon pricing can take several forms but two systems are the most common.

Firstly, there is the Emission Trading Schemes (ETS, also referred to as a cap-and-trade system). Under this system the total level of greenhouse gas emissions is capped at a certain level. This systems allows industries with lower emissions to sell their extra allowance to those with larger emissions. This creates a supply and demand for emissions allowances and establishes a market price for greenhouse gas emissions.

There are serious criticisms of this type of carbon pricing which should be carefully considered.

The EU has had an ETS in place since 2005. While carbon emissions have decreased during that time, the ETS has not been conclusively shown to lower emissions across the member countries. Other criticisms of the scheme include that has been costly to taxpayers and consumers and that it allows large companies to game the system and profit from trading in carbon permits. It is seen by many climate activists as little more than permission to pollute.

Secondly, there are carbon taxes. These are different to the ETS mentioned above in that a carbon tax is pre-defined by the government, rather than set by market forces.

Carbon pricing is popular as it is seen as a way to reduce greenhouse gases without asking too much of big businesses or risking unpopular decision making. Proponents say that it is an effective way to place the costs of carbon emissions on the organisations that create them, rather than on the citizens who suffer from the environmental and health costs of carbon.

Carbon Pricing Worldwide – Which Countries Have Put a Price on Carbon?

The ETS in place in the EU is one of the biggest, it covers around 45% of EU greenhouse gas emissions and 3.9% of global emissions. However, it mainly covers raw materials and therefore does not affect organisations that source their raw materials from outside Europe. It may be expanded in the next few years.

Australia, South Korea and New Zealand have their own ETS in place. There are plans by the Chinese government to expand the limited ETS that they introduced in 2017.

There are currently 25 countries around the world, including Canada, the United Kingdom, Japan and Argentina, that have a national carbon tax in place. There are more countries that are considering implementing or planning to implement a national carbon tax, such as China, Indonesia and Brazil.

What Price on Carbon is Effective at Reducing Emissions?

Carbon prices vary widely across countries, as does the success of schemes.

As we can see from the case of Sweden, which has one of the most successful carbon pricing schemes in the world, the price of carbon is important. Although the Swedish economy has grown by 60% since the introduction of the Swedish carbon tax in 1991, carbon emissions have decreased by 25%. In 2018, Sweden had the highest carbon price in the world at USD 139 per ton CO2.

The success (or failure) of carbon pricing schemes will depend heavily on how expensive they are. If the cost is too low then in many cases it will be profitable for polluters to simply pay the tax and carry on with business as normal.

Following the economic crisis in 2008, the excessive number of allowances within the European ETS were so high that the price per ton dropped below EUR 10 from 2012 to 2018. Measures have since then been taken by the EU to limit this misbalance and the price of carbon went back to 2008-like levels, between EUR 20 and EUR 30 per ton. However, this is still far below the Swedish rate.

While a high carbon tax is more effective, it can also be deeply unpopular, especially if it is not seen as socially just. An example of this can be seen in France, where a planned rise in the cost of fuel was the catalyst for the gilets jaunes protests. After weeks of unrest, the French government ceded to the protestors’ demands and abandoned the fuel tax rise.

Carbon pricing needs to target big business, the wealthy, and heavy polluters if it is to be effective. If it targets working people who are already feeling alienated and dissatisfied then it risks sparking resistance. It also matters how the proceeds from a carbon tax are spent.

There are also fears that, if the price of carbon is too high in one country, then manufacturing will simply move to countries where the price of carbon is lower, so-called “carbon leakage”. To try to solve this issue, the EU is considering implementing the Carbon Border Adjustment Mechanism. amfori has been gathering feedback from members in order to formulate our response to a consultation on this issue.

What Does This Mean for amfori Members?

Most amfori members (89%) have their headquarters in Europe, which means that they are based in a country with at least one carbon pricing scheme in effect. Many of the producers listed on the amfori Sustainability Platform are based in China, which launched a limited ETS in 2017, with plans to expand it in order to meet its commitment to become carbon neutral by 2060. amfori members will certainly be affected by any change in carbon pricing or the introduction of new schemes.

The amfori BEPI carbon calculator provides valuable information to assess (part of) the carbon content of traded goods. Carbon pricing is expected to increase the pressure on the carbon emissions of producers, increasing the usefulness of amfori BEPI.