Carbon Pricing and Coverage Around the World

The global movement toward carbon pricing is partial and halting, but real. 

Ian Parry, Simon Black, and Karlygash Zhunussova provide some useful background and analysis in “Carbon Taxes or Emissions Trading Systems? Instrument Choice and Design (July 21, 2022, IMF Staff Climate Note 2022/006).

This figure illustrates carbon pricing around the world. Putting a price in carbon emissions can happen in different ways: for example, through a carbon tax or through an emissions trading system (where emitters must own permits for the quantity of their emissions, and these permits can be bought and sold). The horizontal axis shows what share of carbon emissions from that jurisdiction are covered by a carbon price. The horizontal axis shows the carbon price converted to US dollars per ton of CO2-equivalent emissions (that is, if it’s a greenhouse gas that isn’t carbon, it’s converted to an equivalent).

The world average for carbon pricing is the red point near the bottom left: that is, about 25% of global carbon-equivalent emissions are covered by some form of carbon pricing, at an average price of about $25 per metric ton of carbon-equivalent emissions. Some countries have coverage of most emissions, but at a very low price (Japan, South Africa). Others have coverage of only a small share of their emissions, but at a high price (Uruguay). In the upper right are the countries with high coverage and a high carbon price (Sweden and Liechtenstein).

There are of course lots of subsidiary questions here, which are discussed by the authors. Here’s a quick flavor of some of the questions.

There is the question of what policy tool is preferable. A carbon tax has the advantage that it clarifies the path of future prices, which helps private firms and households in making their choices about how to adapt. But a carbon tax doesn’t directly set a limit on carbon emissions. A system of emissions trading permits does set a quantitative limit. But the carbon price is then determined by interactions with the market for permits, which creates a degree of uncertainty for future planning. And of course, either approach can be enacted with a variety of loopholes, grandfather clauses, and offsets that could weaken its force.

There is the question of overlap with carbon pricing tools and other policy mechanisms. For example, consider the possibility that carbon taxes were substituted, in part, for existing fuel taxes, or for existing miles-per-gallon standards for cars. The economic incentives would shift toward a more direct focus on carbon emissions. A political tradeoff along these lines might bring some who are dubious about carbon pricing on-board.

Finally, there is a question of what a broad-based tax for all greenhouse gas emissions looks like. Applying a carbon price (whether via tax or emissions trading system) to direct production of fossil fuels (or to usage of imported fossil fuels) is fairly straightforward. But what about provisions that affect methane that is now released as part of fossil fuel production? What about greenhouse gas emissions (say, by various soil practices and livestock) or generated by agriculture or by industry (say, by cement manufacturing)?