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All IPCC definitions taken from Climate Change 2007: The Physical Science Basis. Working Group I Contribution to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Annex I, Glossary, pp. 941-954. Cambridge University Press.

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The economic impacts of carbon pricing

What the science says...

Select a level... Basic Intermediate Advanced

The costs of inaction far outweigh the costs of mitigation.

Climate Myth...

CO2 limits will harm the economy

"Legally mandated measures for reducing greenhouse gas emissions are likely to have significant adverse impacts on GDP growth of developing countries [...] This in turn will have serious implications for our poverty alleviation programs." (Pradipto Ghosh)

If climate change proceeds without any efforts to reduce it, we can expect to incur serious economic costs. In fact, it's not unreasonable to expect that the effects of climate change will create greater economic instability worldwide.The solution is, of course, to reduce fossil fuel use. One way to do this is to shift away from fossil fuels towards renewable energy sources. The other way is to reduce energy demands through increased efficiency.

Both mechanisms have economic implications. In order to stimulate the private sector’s investment in renewables, governments can put a levy on fuels, which may be used to fund or subsidise new initiatives.

To reduce demand, there are a number of solutions available, but most seek to raise the cost of carbon through taxes. Such increased costs give rise to concerns that change underwritten by taxes or levies will damage economic prospects, particularly in developing countries.  However, there is a consensus among economists with expertise in climate that we should put a price on carbon emissions.

NYU Fig 9 

2015 New York University survey results of economists with climate expertise when asked under what circumstances the USA should reduce its emissions

The Representative Picture

In the Fifth IPCC Assessment Report (AR5), a new set of scenarios called Representative Concentration Pathways (RCP) will be used. The four RCPs replace the previous scenarios from the "Special Report on Emissions Scenarios" (SRES). Each RCP represents a set of initial conditions and projections to year 2100, based on a synthesis of the peer-reviewed literature.

The graphs below show the predicted RCP trajectories for economic performance:

             

GDP projections of the four scenarios underlying the RCPs (van Vuuren et.al. 2011). Grey area for income indicates the 98th and 90th percentiles (light/dark grey) of the IPCC AR4 database (Hanaoka et al. 2006). The dotted lines indicate four of the SRES marker scenarios.

The number of each RCP is the forcing (in watts per square metre) associated with a specific amount of emissions for each scenario, up to the year 2100. The graph of GDP clearly shows that the pathways that reduce emissions the most in that time frame (2.6 - green, and 4.5 - red) are those with the best long-term economic performance. In other words, the investment required to reduce emissions is repaid by increased economic performance. Business as usual strategies (high-emission scenarios RCP 6 and 8.5) are the least profitable; the money saved early on is dwarfed by the costs of damage and disruption done in the longer term.

Putting a Price on Carbon

There are a number of schemes under consideration, and a number already implemented. According to the article Pollution Economics in the New York Times, more than 20 percent of global greenhouse gas emissions are now subject to carbon pricing systems. About 60 other states, provinces or countries are considering similar approaches, according to a recent World Bank report.

It’s too early to judge long-term economic performance of the early adopters, but Canada’s province of British Columbia serves as a good example of how carbon pricing can reduce fuel use - in their case through a revenue-neutral scheme. A recent study found that since 1st July 2008, when the tax was introduced:

  • BC’s fuel consumption has fallen by 17.4% per capita (and fallen by 18.8% relative to the rest of Canada).
  • These reductions have occurred across all the fuel types covered by the tax (not just vehicle fuel)
  • BC’s GDP kept pace with the rest of Canada’s over that time
  • The tax shift has enabled BC to have Canada’s lowest income tax rates (as of 2012).
  • The tax shift has benefited taxpayers; cuts to income and other taxes have exceeded carbon tax revenues by $500 million from 2008-12.

Source: BC’s Carbon Tax Shift After Five Years: Results, Elgie & McClay 2013

In a separate report, the British Columbia Department of Finance found that in 2012, BC's taxes were among the lowest corporate tax rates in North America and the G7 nations. 

Conclusions

There is a consensus among expert climate economists that carbon pollution limits are needed to prevent climate change from badly damaging the global economy.  

A number of economic incentives are being tried with varying degrees of success. Regional schemes are already proving effective, flexible and popular. An important ingredient seems to be an accompanying tax reduction that makes the carbon tax revenue-neutral.

In the long term, unless we drastically reduce the rate at which we are still emitting greenhouse gases, we are very likely to incur huge costs as a result of climate change. Part of these costs will be in adaptation, and the inevitable disruption. In part costs will escalate due to turmoil and uncertainty throughout the economic world. There will also be costs that cannot be quantified, particularly when we try to value a human life and its loss.

We have to reduce our emissions. If we are to avoid draconian government intervention, carbon pricing schemes are a viable method of encouraging us to reduce fossil fuel use. Coupled with other measures to stimulate renewable energy development, putting a price on carbon may help us make the transition away from fossil fuels. And from our experience to date, it seems likely  that carbon taxes, instead of bringing an economy to its knees, may well help transform an outdated system into one fitting for a sustainable century.

Basic Rebuttal written by GPWayne and dana1981

Further Reading: The Intermediate and Advanced rebuttals contain detailed information about carbon pricing and tax schemes. Skeptical Science contributor Andy Skuce has also written an article about British Columbia’s experience here, with an update here describing the findings of the Elgie & McClay paper.

Last updated on 2 January 2016 by dana1981. View Archives

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Further reading

Only tangentially relevant but a nifty java animation at the Quaker Economist projects the world's future energy production and when it's expected to peak.

Comments

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Comments 76 to 100 out of 111:

  1. Eric, Personal Housekeeping Robots. Flying cars. Jetpacks. Life on the moon and Mars. Are you really going to depend on predicted, timely advances in technology? With the exception of faster computers and mobile phones, how much has technology and life really changed since 1970? Even 1950. Seriously. What can you name that qualifies as a quantum leap from those time periods? You're putting all of your eggs into one basket that you don't have yet, and they've promised you the basket will be delivered within 20 years, or your money back... not.
  2. "Trillions of dollars on things aimed only at reducing CO2 emissions, just in case?" So tell me what the cost of adaption will be if you are wrong and who will be pay for it? The polluters - or those affected? All the science says tells you it is happening. It is not "just in case". Desperately trying to find excuses for inaction is fooling yourself. Try a first step. The IEA analysis has revealed that fossil fuel consumption subsidies amounted to $557 bn in 2008. Now tell me how killing those subsidies is costing the economy?
  3. scaddenp77 : "Now tell me how killing those subsidies is costing the economy? " Have you even looked which where the countries subsidizing fossil fuels on the link you indicate ? 1. Kuwait 2. Iran 3. Saudi Arabia 4. Qatar 5. Venezuela 6. Lybia 7. UEA 8. El Salvador 9. Turkmenistan 10. Algeria and it goes on and on, with no OECD country. So are you saying we should ask those countries to stop subsidizing fossil fuels ? Why do you think they are subsidizing fossil fuels in the first place ?
    Response: [DB] Please provide a link to the source you used to derive the above list of countries as it does not appear in scaddenp's linked source.
  4. Energy subsidy data
    Response: [DB] Considering that the majority of the globe in the linked source you provide has invalid data, the needed context to derive any substantive conclusion is entirely missing. And thus no weight should be given to it.
  5. Helena: The list you provide is nowhere to be found in the 2-page PDF scaddenp links to. The online database available at the IEA website (the database itself is here). The database appears to corroborate your list. That said, that the IEA does not provide detail on any major economies does not in fact mean that they do not subsidize their fossil fuel industries (suggesting the IEA estimate may be an underestimate) in at least some cases. For example, Ed Brayton of Dispatches from the Culture Wars links to an article documenting the effective tax rates and tax subsidies of the largest companies in major industries in the US. Of note, over the period 2008-2010 the "Utilities, Gas & Electric" category pays a mean effective tax rate of 3.7% (surely a subsidy in its own right) as well as receiving $31 billion in subsidies, and the "Oil, gas and pipelines" category pays a mean effective tax rate of 15.7% as well as receiving $24 billion in subsidies. (Those effective tax rates are contrasted with the nominal corporate tax rates all US corporations are expected to pay on profits of, as I understand it, 35%.)
  6. I'm assuming Helena's list is derived from one of the metrics used by the IEA database. Is that correct?
  7. Guys that's where the 557bn $ figure comes from ! Just click on the links of IEA website, all the numbers are there : http://www.iea.org/files/energy_subsidies_slides.pdf Last page, just add the numbers up. So, are we gonna ask those countries (to my knowledge most people here are from US/Canada/EU) to cut their subsidies ? Ranking in bn $ (2008) : Iran, Russia, Saudi Arabia, India, China, Egypt, Venezuela, Mexico, Indonesia, Argentina, Iraq, Uzbekistan, UAE, Pakistan, Ukraine, Malaysia, Kuwait, Algeria, South Africa, Thailand, Chinese Taipei, Turkmenistan, Ecuador, Bangladesh, Libya, Qatar, Vietnam, Nigeria, Kazakhstan, Azerbaijan, Angola, Colombia, Sri Lanka, Peru, Brunei, Korea, Philippines. Sum = 557 bn $.
    Response: TC: Added link.
  8. The IEA database doesnt cover many developed countries yet. You can get OECD consumption subsidy estimates here and in spreadsheet form here. Note USA at 15 billion in consumption subsides. I'm not exactly sure why you think it matters who is subsidizing. All that matter is that it stops. You should end of paying more for energy if you use fossil fuels but less in tax. OECD estimate of producer subsidies are around $100B and detailed here.
  9. "All that matter is that it stops." Why do you think those subsidies exist in the first place ? "You should end of paying more for energy if you use fossil fuels but less in tax." Not sure to get it...
  10. Why? Beats me. Usually someone with a lot of pull in government is reason for subsidies. It means the government is trying to pick winners instead of the market. Better to give citizens their taxes back and let them choose. Why right-wingers support subsidies is beyond me. My country pretty much went cold turkey on subsidies on anything other health care and education during 80s and 90s. I note we (NZ) are still listed as subsidizing to tune of NZ$14M in management of data,R&D and data aquistions; and $38M in fuel duty exceptions for off-road vehicle use -(justified by fact duty is levied to pay for the roads). How does your country do?
  11. "It means the government is trying to pick winners instead of the market. Better to give citizens their taxes back and let them choose." Would you also kill all subsidies to renewables ?
  12. Yes, if there is any. (None here). Again, that puts government in the position of picking winners. If price support is necessary for de-carbonizing then price carbon accordingly. Use pigovian tax on carbon to keep the libertarians happy. ETS is another way, (we have very half-hearted version slowly coming in) but I am not convinced it is effective nor cost-efficient. I would consider supporting "subsidy" in way of R&D, particularly into say next-generation nuclear where there are hurdles that make normal market mechanism for funding difficult. It would depend a lot on the detail of the R&D.
  13. Helena: "also kill all subsidies to renewables ? " Not a real comparison. Subsidies exist to encourage companies to take risk. The coal industry got land grants. Oil depletion allowances have been part of US tax code since the 1920s, when the oil industry was still in its developmental stages: The federal government has always been in the energy business, and with good reason. Private capital may be good at identifying and incubating new technologies, but bringing those technologies to commercial scale often requires significant public capital. Land grants, for instance, helped build the coal industry, Depression-era spending created hydroelectric dams, and the Defense Department helped develop the first nuclear reactors. The oil and gas business benefited hugely from tax breaks like the oil depletion allowances that go back to the 1920s and were intended to encourage production in what was then a risky game. You can't compare subsidies for an established, highly profitable industry to subsidies for risk-taking new ventures and startups.
  14. Muon, my point was that the 557 bn $ figure is money from countries that are free to do whatever they want, buying social peace through energy subsidies and allowing the development of the poorest being two examples. I guess scaddenp's point would be that it's always easier to take risks ("subsidies for risk-taking new ventures and startups") with other people's money.
  15. With regards to It means the government is trying to pick winners instead of the market. Better to give citizens their taxes back and let them choose as raised by scaddenp In point of fact, due to a number of factors, most especially: (a) negative externalities of fossil fuel use (which are the main point of this site given its focus on the rapid global overheating caused by fossil fuel CO2 emissions) (b) the information asymmetry between producers & consumers of energy products (c) various perverse incentives that can exist when the interaction of energy producers & consumers results in collective action problems I would suggest that markets aren't very good at picking winners in cases where these three phenomena are at work: they are well-known market-distorting effects (negative externalities especially, since they lead to over-production of goods with externalized costs). IMO quite obviously, the fact that factor (a) is in play at all suggests that markets can easily pick - and stubbornly hang on to - 'loser' energy generation technologies. With regards to my point was that the 557 bn $ figure is money from countries that are free to do whatever they want, buying social peace through energy subsidies and allowing the development of the poorest being two examples as raised by Helena, I should note that not a lot of social peace has come from those energy subsidies taken on their own, then (e.g. Egypt & Saudi Arabia), and I am sure I would appreciate a reference showing that energy subsidies, in and of themselves, are sufficient to alleviate widespread poverty (especially when one considers the climate-related disasters that, say, Russia & Pakistan recently had to contend with).
  16. Helena's "it's always easier to take risks ("subsidies for risk-taking new ventures and startups") with other people's money." Well indeed, as that seems to constitute the bulk of the activity in stock exchanges these days...
  17. Suggested reading: “Ka-Ching: Big Oil’s Mighty First-Quarter Profits: Keeping Tax Breaks for Biggest Oil Companies Is Ludicrous,” Center for American Progress, May 1, 2012 To access this article, including financial data for the 1st Quarter of 2012, click here.
  18. So Helena, I take you agree that killing the subsidies is a good start, (you still seem to assuming that absence of data in the online database for developed countries means that most of subsidies are elsewhere,despite the OECD figures.) And lets not have high school debating tricks please about ducking the substantive question.
  19. I think this article fails to adequately answer the "skeptical" viewpoint quoted at the top, since it focuses mainly on the USA. The world outside of North America contains an enormous number of very poor people who would benefit from being able to live in air-conditioned apartment buildings instead of sweltering, rat-infested slums. Can such an improvement in the masses' quality of life be achieved without increasing their carbon footprint? I suspect that the answer is no. I am not a "climate skeptic". I think that man-made climate change is real, is happening, and will probably have catastrophic effects. But a solution that involves making cheap electricity more expensive must surely be expected to place a terrible burden on the many humans who can barely afford electricity now. Arguments that carbon pricing would increase the GDP of a highly developed economy such as the United States seem irrelevant to this problem.
  20. D.B. - two things. First, yes poor people can be provided with power without significantly increasing their carbon footprint, if that power is provided from renewable sources. Second, the poor are disproportionately impacted by climate change, so you have to take that factor into consideration as well when evaluating the economics of the situation.
  21. 94, D.B., I think my problem with that particular argument is that the developed world isn't bending over backwards right now to improve quality of life around the world, and the carbon footprint involved is in no way the "limiting factor." That argument amounts to "there are poor people, and if we were to actually decide to try to help them, this would make it even harder, so we shouldn't do anything." The reality is, however, that western perceptions of what will be helpful (and in fact are feasible) are simply not relevant. The simplistic idea that you'll simply change every society to live like "The West" is absurd. Real solutions involve things like this.
  22. Responding to Comment here markx - "equitable" <> "equal". What I means is that most of the extra carbon in the air is from the west. Other countries need to emit to grow their economies while the west has the wherewithal to decarbonise. I would also notice that in the west, it is predominantly the rich convervatives on the right that deny climate change and resist calls for decarbonising. Mind you a carbon-tax on the border would ensure that exporters to the west would rapidly look for ways to decarbonise too. Let the market work its magic.
  23. Mal Adapted - We are already paying the external costs of fossil fuels, in health and environmental damage. Shifting those costs to the producers, as with a carbon tax, does not subtract the value from the economy twice. To use your phrasing, there is no such thing as a free lunch - but approaches such as carbon tax don't mean you have to pay for two of them... Adaptation to climate change (with Business As Usual/BAU) will by conservative estimates cost 10x what mitigating additional CO2 now will, (by, for example, shifting those costs to the producers, hence providing incentive to move to renewables). If we want to minimize economic damage, that's the approach we should take.
  24. Mal Adapted wrote: "If they were, we'd all be paying much more for heat, electricity and transport already" We do already pay much more for these things... we just pay the extra costs in taxes that go to the subsidies, healthcare costs, food costs, water costs, wars, increased natural disaster cleanup, et cetera. If we switched to renewable energy we might be paying more for the upfront cost of energy (though even that isn't certain), but the total cost would be much much less... so we'd have more money available... so the 'impact' to the economy would be positive. And hence no, "radically reordering our economic and political systems" (aka 'we must declare martial law and abandon all technology!'). "And at least in the early stages of transition to sustainability, without some kind of assistance the poorest may actually freeze to death in the dark -- at infinite cost to them." Who did you think it was dying from AGW, food prices, water prices, wars, pollution, et cetera now? The rich?
  25. It appears I've given the impression I'm opposed to a carbon tax. For the record, I think a carbon tax is the most efficient way to internalize some of the external costs of fossil fuels and encourage their replacement with renewables, and the sooner a substantial carbon tax is in place the better. Some of our disagreement here is because we're focusing on different time scales. My argument is that (assuming the tax isn't rebated in the right way), average buying will decline while the carbon tax is in place, before the transition to renewable energy is complete. After that, once energy unit costs stabilize and once the socialized costs you enumerated are no longer being paid (and little or no carbon tax is being collected), it's reasonable to predict that average buying power will be about the same as today. However, the socialized external costs of fossil fuel use we're currently paying don't include things like the death of coral reefs from ocean acidification, the imminent extinction of the polar bear and the costs of weather disasters 50 years from now. These costs will be incurred even if all carbon emission ceases today. It's doubtful that a carbon tax could internalize them. The argument of Naomi Klein that I linked to, and that I think is ineluctable, is about more than systems of energy production. It's about the costs that have been external to total gross global product until recently, but are now being socialized: groundwater overuse in the Great Plains; overfishing of all seafood stocks; growth of urban areas forcing agriculture onto less productive soils; the list goes on and on. This is the liquidation of global natural capital I was referring to, and as long as any of it continues, global society will not be sustainable. I can't escape the conclusion that ending liquidation of all natural capital will require "radically reordering our economic and political systems", and neither can some of the more forward-looking deniers. They want to keep socializing the loss of natural capital while they continue converting it to private gain. That's the freedom they're afraid of losing, as well they should be.

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