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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 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. 


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.


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Comments 101 to 116 out of 116:

  1. Mal Adapted wrote: "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." And if we don't get carbon emissions under control then the costs of those future impacts will be even greater. Ergo, a carbon tax paid today to avoid those greater future impacts would indeed internalize some of the future cost. "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." The list goes on and on... and has nothing to do with global warming. You appear to be saying that solving every problem in the world would require vast political and economic changes... and therefor solving global warming would require vast political and economic changes. It is a non sequitur. Global warming can be solved without "radically reordering our economic and political systems". Read the article above for confirmation.
  2. jhnplmr said on inappropriate thread:

    "Nuclear, wind, solar and tidal?

    I agree, while it takes less energy to get it out of the ground than you can get from it they (we) will continue to use it. I'm afraid that it is very difficult to get people to stop heating their homes, using computers, electric lighting and their cars. It isn't going to happen while fossil fuel supplies are available. Any government that tried to ban their use would get voted out of office."

    Which is why there is such interest in carbon taxes, pigovian taxes, trading schemes. These effectively add the environmental cost (which isnt paid for in mining) to coal cost so that other energy sources become competitive. More acceptable to right-wingers (hey Milton Friedman thought costing externalities was acceptable), than just banning new coal fired stations.

    Bottom line though is that you will pay more for kWh of energy in the future. Beats paying the costs associated with very rapid (ie faster than glacial cycle) climate change though.

  3. PanicBusiness (from this previous thread)...

    First, you're repeating a citation of the exact same article you posted before and adding no new content. That is considered sloganeering here at SkS. The fact of the matter is that regulations positive net impact on the economy. Larry Bell is presenting only the cost side of the equation while ignoring the net benefits. You can go to google scholar and read dozens of papers on the economic impacts of environmental regulations and see that there is actually a net positive result.

    You still, also, seem completely oblivious as to what Figueres is saying relative to China. She's merely pointing out that it is far easier for China to take action on climate change. Figueres states,
    “They actually want to breathe air that they don’t have to look at,” she said. “They’re not doing this because they want to save the planet. They’re doing it because it’s in their national interest.” [From your own link here.]

    That's not a value judgement on which system she prefers. It's just a point of fact. Because of their political system the can move far faster than we can in the west. I often point out that China is run like the world's largest private corporation, and the Chinese people are their customers.

    If you want to have an open and honest conversation about this, I'm all for it. But you're definitely going to have to drop the dismissive attitude. The second thing you can do is support your claims with actual research rather than links to politically modivated people and groups like Larry Bell and the CEI.

  4. Check out how carbon emissions correlate to median income.

  5. Maybe this has been talked about in the comments: Where might I find a detailed examination of the likely performance of an ETS vs Carbon Tax/Fee and Dividend?

  6. You've used BC as an example of how carbon pricing works and linked how  lower fuel consumption was an outcome of BC's carbon pricing.

    However, in the US, they've achieved even greater results in lowering fuel consumption without a carbon tax.

    From "Explaining the US Petroleum Consumption Surprise", June 2015, Executive Office of the President of the United States:

    "U.S. petroleum consumption was lower in 2014 than it was in 1997, despite the fact that the economy grew almost 50 percent over this period. Petroleum consumption peaked in 2004 and the subsequent decline was one of the biggest surprises that has occurred in global oil markets in recent years. Actual consumption in 2014 was 6.4 million barrels per day (b/d) below the 2003 projection of 2014 consumption, which we refer to as the 25 percent consumption surprise for 2014. This consumption surprise is nearly twice as large as the 3.4 million b/d U.S. production surprise in 2014, and it frees up roughly $150 billion for spending on other purposes (2014 dollars).

    I'm all for reducing petroleum consumption not only in BC or the US but around the world.  Pumping oil out of the ground in North America, transporting it to tide line and shipping overseas to be burned there rather than in North America doesn't make sense either. Embracing carbon taxes may console one's conscience but it may do nothing to reduce GHG emissions.  The US outperformed BC without carbon pricing.  Why?



    [RH] Shortened link that was breaking page formatting.

  7. Try looking here. Improving fuel economy and fewer miles travelled. Now why did fuel ecomony improve? Actually, which to libertarians hate more - a pigovian carbon tax or fuel economy standards?

    I think less driving and demand for better efficiency are driven by perception (and reality) higher fuel costs. Carbon tax just plugs into that process. Want to bet on declining fuel consumption will fuel prices dropping and improving economy?

    I am curious as why you think a carbon tax will not reduce GHG emissions? Do you like paying tax?

  8. Looks like a shrinking industrial sector also markedly help with the reduction in consumption. Not sure you would want to advocate that.

  9. pwlg...  The idea of a carbon tax is to bring the external costs related to carbon emitting energy into the marketplace. Currently, we already pay a "tax" for fossil fuels in terms of the impacts of carbon emissions on the overall economy. The cost is estimated to be somewhere between, I think, $30-$200+ per ton of carbon emitted into the atmosphere. Those costs are an existing burden on the economy. In essence, those costs are currently "socialize" into our economy. We all pay that price.

    What a carbon tax does is pull those cost into the marketplace. It says, carbon emitters must bear the responsibility of that burden on the economy. That puts alternative means of energy production on a more even playing field with carbon emitters. 

    When that happens, you, as a consumer, have fully marketized choices. It's no longer an issue of choosing between carbon emitting or non-carbon emitting energy. You just make your choices based on price. You're obviously going to choose the lowest price source of energy. And overall, the cheapest energy is going to also be the lowest carbon emitting choice.

  10. "CO2 limits will harm the economy"
    So you claim it doesn't harm economy? All ideas for shifting posted requires state interventionism, socialist taxation - all of them alone are harming economy.

    Taxes lowwers poor people income, consumption, bought production so less adaptable to changing climate. Tariffs damages (as we see now) competition on the market and so increasing local prices and lowwering local companies competitiveness on global market (and tariffs cause countertarrifs). Only competition and free market builds growth.

    "our estimates reveal that these countries also experienced an average reduction in GDP per capita growth rates of around 1–2 percentage points relative to non-Annex I countries."

    1-2% GDP is a hell lot of growth slowing both economical and technological development.

    Germany is the best example of how emissions trade and radical transition into renewable energy based economy ends with failure

    a) not meeting lowwer CO2 goals b) breaking ecological standards, taking space, reshaping terrain in ugly way, damaging ecosystems and animals c) adding new costs for citizens and so taxes, failing in sustaining stable electricity supply when it's needed



    "by 2030. It will, however, also have varied effects on the macroeconomy, with GDP losses of 1.54% to 2.5%"

    Increase in food prices

    But the real problem is not in lowwering CO2 emissions - which can't as any radical transition of economy not come with a big costs. It is these socialist antifreemarket policies that comes with it in package and lack of economical realism brings bigger costs for economy, especially for economies based on fossil fuels. In Europe emissions trade was a political tool of decreasing competitiveness of Eastern Europe which was already burdened with hard adaptation to new reality after fall of communism and prices of electricity are surging there. This was a taxation of Emerging Markets by Developed Markets.

    So please don't fool people with 0 costs retoric. You probably already can see these costs in everyday bills in grocery store, taxes and electricity bill.

    The asnwer is a gradual transition with replacing coal and oil with lowwer emission of CO2 with natural gas and in long term strategy building power plants which: a) provides ecological, sustainable 24h a day, cost-effective, competitive energy, friendly for economy, b) doesn't require great interference in environment and ecosystems, doesn't harm animals, or placed close to houses doesn't affect human health c) and so creates a real acceptance for such a transition without polarising society and risking the backfiring effect like in USA.

    Climate might be on the edge of collapse in future but the global economy after years of such irresponsible anticapitalist, economically ineffective and to radical policies is on the edge of collapse already (what similar central planning showed earlier in Soviet Union and as similar will be seen in China also ). EU the vanguard of this revolution is the best example of how patetic effects it has. Japan still uses nuclear power and it's the only way they could keep CO2 reduction course, otherwise would be economically forced to reversing progress.

    And also why nobody speaks about adding reforestation programs? Every country could meet CO2 reduction goals by increasing it's capacity to bind CO2 from air in plants and rebuilding it's old ecosystems and wildlife (also adding renewable resources as wood). And FYI there are other alternative technologies like controlled coal burning underground - what makes CO2 filtering, storage easy and cuts any pollution to zero.


    [PS] Please read and comply with the comments policy, this is not the place for political sloganeering. Labelling something that Milton Friedman would agree with as "socialist" is not conducive to constructive discussion. Data demonstrating that revenue-neutral fee-and-dividend is harmful would be more welcome. "nobody talks about reafforestation" is a strawman - it is key part of many countries Paris plans and gets a whole chapter in IPCC WG3 report, including the limits. Leave the rhetoric behind if you are going to post here.

  11. Sarmata @110,

    You have evidently done a lot of reading, although I am pretty sure it is not a well-rounded reading list you present here (which your commenting at SkS recently also managed, here & here, although these earlier comments were questioning the references), and as such your references lead you to what are obviously poor conclusions .

    Rather than address the various references you make, perhaps it would be best if you set out your own position on AGW mitigation (ie emissions reduction strategy).

    You write "The asnwer is a gradual transition with replacing coal and oil with lowwer emission of CO2 with natural gas and in long term strategy building power plants..." these 'long-term power plants' being described as renewable, eco-friendly, economically viable and efficacious in every way.

    So what do you consider to be the time-scales of this "gradual transition" and this "long term strategy"? I ask because the timliness of AGW mitigation is important. We cannot be shutting th stable door after the horse has bolted.

  12. Can anyone point me to a comprehensive review and response to Bjorn Lomborg's July 2020 article, "Welfare in the 21st century: Increasing development, reducing inequality, the impact of climate change, and the cost of climate policies" ?


    [BL] Link activated. Please learn how to do this yourself.

    As previously mentioned, you can do this when posting a comment by selecting the "insert" tab, selecting the text you want to use for the link, and clicking on the icon that looks like a chain link. Add the URL in the dialog box.

  13. retiredguy:

    Bjorn Lomborg is a broken record, who basically keeps repeating most of the same arguments over and over and over (and over). Much of his stuff has been debunked in a variety of sources (over, and over, and over, and over).

    Is there anything particularly new in that work you linked to? Any reason to spend time on it, since (for me, at least) it has been years (if not decades) since I have seen anything worth reading from him?

    You can read more about his general track record at Desmog.

    ...and for the most, part, I think what he usually has to say bears a strong resemblance to this XKCD cartoon:

    Bigger Problem

  14. retiredguy @112,

    As Bob Loblaw has pointed out, serious pursuers of better understanding may not have bothered to do 'yet another' detailed debunking of Lomborg's nonsense. I read some of his earlier books and was able to easily identify many misleading claims he made. He has a history of changing his claims, but not his motivation to be misleading regarding the climate impact problem and its solutions.

    Based on the title of the 2020 Lomborg item, I am almost certain that this version of his misleading story-telling efforts can be effectively corrected by reading helpful detailed documents like the UNDP's Human Development Reports. I particularly recommend the 2020 HDR which includes a robust evaluation that dispels the myth that GDP is a meaningful measure of advancement.

    Other documents that help people learn how to dismiss the claims of people like Lomborg include:

  15. retiredguy @112,

    You do specifically ask about rebuttals of Lomborg's verbose 2020 paper 'Welfare in the 21st century: Increasing development, reducing inequality, the impact of climate change, and the cost of climate policies' and as has been pointed out, this paper is packed full of the usual Lomborg nonsense. I don't know of any specific rebuttal to this paper. I think with a 'broken record' like Lomborg, you need the expertise to unpick his nonsense as well as the dedication to keep at it. A month after this paper, Lomborg published a book 'False Alarm: How Climate Change Panic Costs Us Trillions, Hurts the Poor, and Fails to Fix the Planet' and that did result in a rebuttal.

    As for the paper 'Welfare in the 21st century: Increasing development, reducing inequality, the impact of climate change, and the cost of climate policies,' we can cut through all Lomborg's nonsense and simply consider his basic argument which is that AGM mitigation preventing large levels of global warming (as in scenario SSP1-1.9) is, according to Lomborg, not as benificial to mankind as allowing fossil fuel use to continue without restriction (as in secanario SSP5-8.5, roughly similar to the previous RCP8.5). From the abstract:-

    Long-term impacts of climate policy can cost even more [than 2030 costs]. The IPCC's two best future scenarios are the “sustainable” SSP1 and the “fossil-fuel driven” SSP5. Current climate-focused attitudes suggest we aim for the “sustainable” world, but the higher economic growth in SSP5 actually leads to much greater welfare for humanity. After adjusting for climate damages, SSP5 will on average leave grandchildren of today's poor $48,000 better off every year. It will reduce poverty by 26 million each year until 2050, inequality will be lower, and more than 80 million premature deaths will be avoided.

    This argument is thus mainly based on the economic predictions set out by IPCC ARs within these SSPs and then downplaying to the point of insignificant the economic damage in a SSP5-8.5 world experiencing +4.4ºC by 2100 (this a central figure in the range +3.3ºC-5.7ºC) and which will continue warming post-2100, the 2300 range being given as  +6.6ºC−14.1ºC.  Now that is scary. (And note in the graphic below, the SSP5/RCP8.5 temperatures are still rising in 2300. There is even more to come.) Lomborg is advocating a really scary future while insisting there is no scary future.

    Warming to 2300 scenarios

  16. As usual, MA Rodger @115 manages to find links to useful links to these things...

    I did read Lomborg's "The Skeptical Environmentalist" many years ago. The major thing that struck me was the way he compartmentalized the various "costs" and alternative solutions. He'd look at one specific/isolated problem caused by climate change, and then claim that it was cheaper to fix that problem after the fact than to avoid the climate change.

    Of course, to avoid climate change you only have to pay for it once - not many times for each individual/isolated problem. He would never add up all the costs of the different isolated problems and compare that total to the one-time "avoid climate change" cost.

    It's like saying "it will cost me $10,000 to fix that leaking roof on my house", and then conclude that it is cheaper to clean and repaint the bedroom ceiling when the water damages it. And then when the leaking roof causes damage to wall insulation, it's cheaper to replace the insulation. And when electrical wiring shorts out, it's cheaper to re-do the wiring. And when the TV gets wet, it's cheaper to replace the TV. And  on, and on, and on.

    Eventually, the rational home owner realizes that it would have been cheaper to fix the roof than to replace the many, many things that the leaking roof damaged. But as long as you can fool the home owner into looking at each individual problem in isolation, you can sell them a paint job, an electrical job, and new TV, etc. If your business is home repair - not roofing - then it becomes a lucrative approach. Also lucrative if your business is to prevent roof repairs.

    MA Rodger's link to the rebuttal is worth reading. Lomborg, not so much. All you need to do is look to see what Lomborg's proposed alternatives are and assess how much effort he puts into making those alternatives happen - as opposed to how much effort he puts into arguing against preventing climate change. (Cue the XKCD cartoon...)

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