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In the European Union’s emissions trading system (ETS), for instance, the price of emitting one tonne of carbon has exceeded $80 since the start of this year. Meanwhile, California’s cap-and-trade system has rarely seen prices approach even $30 per tonne of carbon dioxide. Economists increasingly favour a robust global carbon price that might imbue mid-century net-zero targets with a real sense of urgency. The International Monetary Fund has recommended that a worldwide carbon price of $75 per tonne (or more) be put in place by 2030.
Global price hike
However, when Reuters surveyed climate economists ahead of last year’s COP26 conference, it found they favoured an immediate global price hike to an average of $100 per tonne of CO2. There are several ways policymakers could go about setting carbon prices in their jurisdictions, with a straightforward carbon tax arguably being the easiest. Such a levy would hit carbon-intensive sectors and fossil-fuel producers hardest, although they would in turn pass these costs on to consumers.
Analysis by the accounting firm EY states that the most significant consumer price increases from a carbon tax would be seen on products such as natural gas, electricity and petrol. In a time when concerns about energy prices and the wider cost of living are already rising, politicians might be hesitant to introduce a carbon levy. In a recent study, the UK’s National Institute of Economic and Social Research (NIESR) found that a $100 per tonne global carbon tax could contribute to higher short-term inflation and cut GDP by up to 2% in most OECD countries.
NIESR researchers also estimate that a $100 carbon price would quadruple the post-tax price of coal relative to renewables, while the prices of oil and gas would rise by 60 to 70% relative to renewables. These figures might look alarming, but the true impacts of a carbon tax would vary by industry. For instance, EY estimates that power generation, transport and manufacturing would be hardest hit in the US.
The impacts of a carbon tax on heavy industry can be grouped direct costs of production (such as the coal used in steelmaking) and indirect costs incurred by production processes subject to a carbon tax in previous phases of production or earlier in a supply chain. Clothing retailers, for example, might face higher shipping costs because a carbon tax has increased the price of marine fuel. The way governments spend the money received from carbon taxes also matters: some redistribute it to green efforts, others simply add it to the pot.
Controversy in Ireland
Ireland is grappling with the implementation of its own carbon tax, which is due to be increased from €33.50 per tonne to €41 per tonne on 1 May. Opponents have argued that it will put more pressure on household incomes, but Taoiseach Micheál Martin has refused to abandon the policy. Contentions such as these are likely to play out in any country hoping to increase its carbon tax while inflationary pressures are growing. Regardless, economists’ dream of a higher carbon tax will probably persist. The levy would give both industries and consumers incentives to make their homes and businesses more efficient. It’s up to engineers to imagine these efficiencies. The days of low-cost fossil fuels are coming to an end.
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