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Smoke rises from chimneys and facilities of steel plants on a hazy day in Benxi, Liaoning province November 3, 2013. A chronic shortage of natural gas is hurting China's plan to move away from burning coal to heat homes and offices, raising the prospect of more choking air pollution this winter and beyond. The problem is worst in northern China, where air pollution mainly caused by decades of reliance on coal has lowered life expectancy by an estimated 5.5 years compared to the south, Chinese and international researchers said in July. Picture taken November 3, 2013. REUTERS/Stringer (CHINA - Tags: ENVIRONMENT ENERGY) CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA - GM1E9B40RS301
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The carbon-price chimera

Partisans in the climate-change debate don’t agree on much. But they’ve long shared a belief in the potential of one elegant policy prescription: slapping a price on carbon. By harnessing markets to help the planet, the idea has gone, humanity can slash greenhouse-gas emissions enough to avoid catastrophic global warming—and, in the process, it can birth new green industries rather than break the bank.

It’s a lovely theory. Alas, mounting evidence shows it’s not panning out in practice. As I explain in a new essay in the July/August 2018 issue of Foreign Affairs, “Why Carbon Pricing Isn’t Working,” more countries, regions, and states than ever before are forcing carbon polluters to pay for coughing out greenhouse gases, and yet global emissions are hitting new highs. In 2017, indeed, even as carbon pricing was spreading across the globe, energy-related carbon emissions worldwide rose for the first time in four years. What’s going wrong?

What’s going wrong with carbon pricing is a combination of political reality and structural policy shortcomings. From the essay:

If governments proved willing to impose carbon prices that were sufficiently high and affected a broad enough swath of the economy, those prices could make a real environmental difference. But political concerns have kept governments from doing so, resulting in carbon prices that are too low and too narrowly applied to meaningfully curb emissions. The existing carbon-pricing schemes tend to squeeze only certain sectors of the economy, leaving others essentially free to pollute. And even in those sectors in which carbon pricing might have a significant effect, policymakers have lacked the spine to impose a high enough price. The result is that a policy prescription widely billed as a panacea is acting as a narcotic. It’s giving politicians and the public the warm feeling that they’re fighting climate change even as the problem continues to grow.

Essentially everywhere around the world—in the United States, in the European Union, and, most notably and newly, in China—aspirational carbon-pricing regimes are proving less environmentally effective than their boosters had hoped. (Evidence of this has been accumulating; Brooking’s David Victor, for instance, made a similar point about the U.S. and European cap-and-trade systems in 2009.) Two statistics in particular are worth keeping in mind. First, only about 15 percent of global emissions are subject to a carbon price. Second, and more relevantly, only about 0.15 percent of global emissions are subject to a carbon price high enough, according to economists, to make much environmental difference.

What to do? A grab bag of blunter policies would help: phasing out the use of coal that’s not paired with carbon-capture-and-sequestration, or CCS, technology; accelerating the development of that CCS kit; ending the practice, now underway in various countries, of shutting down nuclear plants that have years of life left in them; forcing more economic efficiency in renewable-energy-support policies; and raising the price of fossil fuels. None of this would be easy. But it might well be politically possible, and it could help the climate in a meaningful way.

I conclude the Foreign Affairs essay with this coda:

Maybe one day carbon pricing will be the best tool for fighting climate change. But the planet doesn’t have time to wait. To the extent that the carbon-pricing experiment lets policymakers and the public delude themselves that they are meaningfully addressing global warming, it’s not just ineffectual; it’s counterproductive. The time has come to acknowledge that this elegant solution isn’t solving the problem it was designed to solve. In the toughest environmental fight the world has ever faced, a good idea that isn’t working isn’t good enough.

The findings, interpretations and conclusions posted on Brookings.edu are solely those of the authors and not of The Brookings Institution, its officers, staff, board, funders, or organizations with which they may have a relationship.

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