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Is carbon pricing politically feasible?

April 20, 2018
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ANN ARBOR—When China formally announced plans to establish a national carbon market this past December, it was double the European Union’s carbon market and 10 times the size of California’s cap-and-trade system.

With the launch, China became the latest country to attempt to create a market for carbon pricing, a field that has been littered with stories of many failures but also some successes over the last two decades.

This uncertainty about adopting and sustaining pricing carbon to contain emissions and the challenges to its implementation is the subject of research and a new book of a University of Michigan researcher who has tracked real-world attempts to price carbon over the last two decades in North America, Europe and Asia.

Barry Rabe, the J. Ira and Nicki Harris Family Professor of Public Policy, said political support for a carbon price remains one of the heaviest lifts in American politics and beyond.

“Between 2002 and 2010, 23 states in the U.S. adopted a version of carbon pricing known as cap and trade,” Rabe said. “But 13 of these states abandoned their commitments by 2015 and only a few states have come close to returning since.”

A carbon price is a cost applied to carbon emissions, for example, from burning coal or using other fossil fuels, to reduce the amount of greenhouse gas emitted into the atmosphere. It can be a carbon tax or take the form of cap and trade.

Rabe says that while economists widely agree that introducing a carbon price is the single most effective way for countries to reduce their emissions, political barriers have largely deterred elected officials from taking such steps.

In this expansive study, Rabe offers the first major political science analysis of the sustainability of carbon tax and cap-and-trade policies across the world to study how carbon emission policies were adopted and implemented. He explored the challenges, the ways in which revenue was collected and distributed, the impact over time and the lessons learned going forward.

The first major success stories in carbon pricing date back to early 1990s with the first adoption of carbon taxes by Denmark, Norway, Finland and Sweden. In his book “Can we price carbon?” Rabe looks at those nations along with British Columbia in Canada and U.S. northeastern states that have managed to implement some form of a carbon price.

“In 2007, a right-of-center party in British Columbia was able to roll out plans for a carbon tax that would ultimately reach $30 per ton on all fossil fuel sources. Not only was then-Premier Gordon Campbell able to implement the tax, he used it as a campaign tool for a third consecutive electoral victory in 2009,” said Rabe, adding that British Columbia is seen as the gold standard for carbon tax adoption, durability and performance in North America.

Rabe has studied people’s opinions around climate change and carbon pricing for more than a decade. He says the U.S. remains divided largely along party lines on those issues, a pattern also evident in Canada and other nations. However, he argues that support for these programs change when the issue of tax revenue comes in.

“When we asked the question about how the tax revenues collected from carbon price should be distributed in surveys, we see some significant shifts in public opinion,” Rabe said.

The revenue in the Nordic nations was targeted largely for reducing personal income and payroll taxes, supporting government programs and underwriting other environmental objectives.

“There has been no repeal of any of the policies in a quarter century,” Rabe said.

Rabe also examined the case of an Australian carbon pricing initiative that did not survive political change. Prolonged battles over carbon pricing led to a policy in 2007, which was repealed in 2014. A study conducted two years after the repeal showed that carbon emissions increased by 7.5 percent in Australia.

Recently, China and South Korea have taken steps to launch their own versions of cap and trade, while other nations also have explored some form of carbon pricing. Canada is currently attempting to adopt a national carbon pricing system and Mexico is in the early stages of implementing one as well. In the U.S., New York has set a 50-percent renewable energy target by 2030.

Rabe is hoping these emerging policies can build on the lessons from cases in which carbon pricing has proved most successful and avoid the pitfalls where it has failed.

To date, no carbon price adopted and sustained has been designed as the exclusive mechanism for achieving climate protection goals, according to the Rabe. Instead, durable carbon taxes and cap-and-trade programs operate alongside a wide range of other policies with overarching goals.

“The successful carbon pricing cases, in collaboration with other policies, have been able to provide visible public benefits that their citizens find tangible and can embrace politically,” Rabe said.

More Information:

Barry Rabe

Can we price carbon?

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