Carbon Pricing to Mitigate Climate Change

The OECD published the report “Effective Carbon Rates, 2018,” which shows how the 42 OECD and G20 countries price carbon emissions from energy use. This group of countries accounts for 80 per cent of global carbon emissions. It suggests that significant emission reductions from these countries can prevent climate change. Failing to do so may lead the world toward costly adaptation measures (Effective Carbon Rates, 2018).

The report mentions that carbon pricing is an efficient tool for reducing carbon emissions because emitters pay for them. Correct carbon pricing can increase carbon-based energy prices, encouraging polluters to invest and shift to low-carbon technologies.

The report explains a significant gap between the present carbon price and the benchmark value for carbon prices.

The report used two benchmark values for carbon pricing:

• EUR 30t/CO2, which is a low-end estimate of the carbon cost and
• EUR60/CO2, which is a middle estimate against the carbon cost.  

Understandably, the pricing gap is more significant for the EUR60/CO2 benchmark than the EUR 30t/CO2. Nevertheless, there is still a considerable carbon pricing gap, even for the low-end estimate of EUR30/CO2.

The lowest pricing gap is in road transport (21% for EUR 30t/CO2 and 58% for EUR 60t/CO2), and the highest pricing gap is from the industries (91% for EUR 30t/CO2 and 95% for EUR 60t/CO2, followed by residential and commercial sector (87% for EUR 30t/CO2 and 93% for EUR 60t/CO2) (Effective Carbon rates, 2018).

According to the report, countries with low carbon pricing gaps are set for decarbonisation and a low-carbon economy. Countries with high carbon pricing are those whose climate mitigation plans may be limited or not cost-effective.

Countries that rely more on policies to reduce emissions are likely to increase their abatement costs or costs required to reduce pollution. They will likely miss out on opportunities for a low-carbon economy and later face higher transition risks.

The report also shows the price mechanisms in all 42 OECD countries, leading to steering its economy to a low-carbon one.

To read the full report, click on the link below: