The latest IPCC report has a lot to say about carbon fee and dividend
By Dana Nuccitelli, CCL Research Coordinator
In the third installment of its Sixth Assessment Report (the first two volumes covered climate change causes and impacts), the Intergovernmental Panel on Climate Change (IPCC) has summarized the latest scientific research relating to climate change mitigation. While the second volume released just over a month ago touched a bit on carbon fee and dividend, that was merely the climate policy hors d’oeuvre to the third installment’s main course, which is the most relevant volume to CCL. I summarized this latest report’s findings over at Yale Climate Connections.
Some news stories about the report framed its message as signaling “now or never” on climate action. While it’s true that the more ambitious 1.5°C Paris target is rapidly slipping out of reach, it’s important to understand that it will never be too late to lessen the impacts of climate change. The climate of a 1.8°C world is more livable than a 2°C world, which would be better than a 2.2°C world, and so on. While it’s true that climate policy is maximally urgent, there will be no point in any of our lifetimes when it will become too late to leave the world a better place for future generations than that which will result if we give up. For this reason, many scientists are pushing back against counterproductive climate doom talk.
But the IPCC report does make clear how important it is that Congress pass the strongest climate package possible through reconciliation this year, ideally including a price on carbon. Here’s what the IPCC had to say about carbon fee and dividend among the report’s 680 mentions of carbon pricing policies, with the chapter numbers provided in brackets.
Carbon pricing is effective at cutting carbon pollution
As CCL volunteers are well aware, a significant carbon price would be the single most effective policy to reduce emissions. The IPCC expert authors agree that carbon pricing is effective and efficient both in theory:
“Economic theory suggests that carbon pricing policies are on the whole more cost effective than regulations or subsidies at reducing emissions” [220.127.116.11]
“There is high agreement that carbon taxes can [be] effective in reducing CO2 emissions” [18.104.22.168]
“…there are reasons to believe that carbon pricing is the most efficient way to reduce emissions…” [5.6.3]
And in practice:
“There is abundant evidence that carbon pricing policies reduce emissions. Statistical studies of emissions trends in jurisdictions with and without carbon pricing find a significant impact after controlling for other policies and structural factors. Numerous assessments of specific policies, especially the EU ETS and the British Columbia carbon tax, conclude that most have reduced emissions” [22.214.171.124]
“Among the wide range of climate policy instruments, pricing carbon such as a carbon tax or an emissions trading system has been one of the most widely used and effective options to reduce GHG emissions … countries with a carbon price show an annual CO2 emission growth rates [sic] of 2 percentage points lower than countries without such policies. A more comprehensive evaluation of carbon prices shows that countries with a lower carbon pricing gap (a higher carbon price) tend to be more carbon-efficient” [2.8.2]
The IPCC report also notes that a carbon pricing policy can yield numerous other co-benefits, including improved health through cleaner air and improved energy security and price stability by reducing reliance on unstable fossil fuels (emphasis added):
“Where carbon pricing policies are effective in reducing GHG emissions, they usually also generate co-benefits including better air quality. For example, a Chinese study of air quality benefits from lower fossil fuel use under carbon pricing suggests that prospective health co-benefits would partially or fully offset the cost of the carbon policy. Depending upon the jurisdiction (for example, if there are fossil fuel subsidies) carbon pricing could also reduce the economic distortions of fossil fuel subsidies, improve energy security through greater reliance on local energy sources and reduce exposure to fossil fuel market volatility. Substantial carbon prices would be in the domestic self-interest of many countries if co-benefits were fully factored in” [126.96.36.199]
Dividends are important
The report also discusses the importance of coupling carbon pricing with cash back in order to ensure that low-income households are not unduly burdened by efforts to address the climate crisis, to ensure the policy remains popular, and to realize other benefits like alleviating poverty:
“Redistribution of tax revenue is critical to address the adverse impacts on low income groups” [188.8.131.52]
“Equity and distributional impacts of such carbon pricing instruments can be addressed by using revenue from carbon taxes or emissions trading to support low-income households, among other approaches” [E.4.2]
“Mitigation pathways in which national redistribution of carbon pricing revenues is combined with international climate finance, achieve poverty reduction globally” [184.108.40.206]
“Carbon pricing is most effective if revenues are redistributed or used impartially. A carbon levy earmarked for green infrastructures or saliently returned to taxpayers corresponding to widely accepted notions of fairness increases the political acceptability of carbon pricing” [5 – Executive Summary]
“returning the revenues to individuals in a salient manner may increase public support and alleviate fairness proposals, given sufficient information. Perceived fairness is one of the strongest predictors of policy support” [5.6.3]
Border adjustments are also important to couple with carbon pricing
The IPCC discusses several important reasons to pair carbon border adjustment mechanisms (CBAMs) with carbon pricing. One concern is called “carbon leakage,” where a company transfers its production from a country with a carbon price to one without in order to reduce costs, dodging the financial incentive to cut emissions in the process. On this subject, the report notes:
“[Carbon pricing] hurts the competitiveness of sectors that face imports from countries with lower carbon prices, leading to “carbon leakage” if carbon-intensive production (and related jobs) migrates from countries with relatively high carbon prices. Research confirms that a border carbon tax (or adjustment), set on the basis of the carbon content of the import, including a downward adjustment on the basis of any carbon payments (taxes or other) already made before entry, could reduce carbon leakage while also raising additional revenue and encouraging carbon pricing in the exporting country” [220.127.116.11]
“with asymmetric rising carbon prices, discussions about specific policy mechanisms to address carbon leakage like carbon border adjustments were amplified” [6.3]
“[CBAMs] are increasingly being considered by policy makers to address carbon leakage and create a level playing field for products produced in jurisdiction with no, or lower, carbon price. On 14 July 2021, the European Commission adopted a proposal for a CBAM that requires importers of aluminium, cement, iron and steel, electricity and fertiliser to buy certificates at the ETS price for the emissions embedded in the imported products” [11.6.1]
Carbon pricing spurs innovation
New technology innovations can help accelerate carbon emissions cuts at lower costs. As such, spurring innovation is among conservatives’ favorite approaches to tackle climate change. In fact, Republican House Minority Leader Kevin McCarthy unveiled an ‘Energy Innovation Agenda’ last year that was advertised as the party’s climate change platform. On this topic, the IPCC reports that carbon pricing provides a key financial incentive to spur innovation:
“a carbon tax that incentivises clean technological change increases the competitiveness of clean technologies not only locally, but also abroad” [18.104.22.168]
“a price on carbon that corrects the emission externality is sufficient to induce optimal level of green technological change.” [22.214.171.124]
“In combination with other policies, such as subsidies, public R&Ds on resource-saving technologies, properly designed carbon taxes can facilitate the shift towards low-carbon, resource-efficient investments” [15.6.2]
There is no silver bullet; complementary policies can grease the carbon pricing skids
Although a significant carbon price would be the single most effective policy to reduce emissions, as CCL has long acknowledged, it would not be sufficient to solve the climate crisis alone. There is no silver bullet, but the IPCC reports that other policies can serve as key complements to a carbon price:
“studies of carbon pricing find that additional policies are often needed to stimulate sufficient emissions reductions in transportation” [126.96.36.199]
“winning support will require a mix of policies which go beyond carbon pricing, and include subsidies, mandates and feebates” [3.8.4]
“many researchers recognize that complementary policies must be developed to set current production and consumption patterns toward a path consistent with achieving the Paris agreement goals as cap and trade or carbon taxes are not enough” [11.6.1]
As one good example, the IPCC authors note that carbon pricing can encourage people to lower their carbon footprints by moving into cities, but high urban housing costs can make that an unaffordable choice for many people [188.8.131.52]. Implementing smart housing policies can complement carbon pricing to overcome this barrier. Other policies like clean technology subsidies (e.g. for electric vehicles and heat pumps) can also lower barriers to their adoption, thus making a carbon price more palatable. Research has indicated that in the real world, these sorts of policies have often greased the skids in countries that have subsequently adopted carbon pricing.
Carbon pricing has been implemented too infrequently and ineffectively
Despite the fact that carbon pricing is a great climate policy solution, the IPCC notes that there are far too few examples of its implementation around the world. And in many places where the policy has been implemented, the carbon price has been set too low to effectively cut emissions:
“While the coverage of emissions trading and carbon taxes has risen to over 20 percent of global CO2 emissions, both coverage and price are lower than is needed for deep reductions” [13 – Executive Summary]
“Tax rates tend to be too low in many cases and the scale and frequency of the rate changes has not been sufficient to stimulate further emissions reductions“ [184.108.40.206]
“The High Level Commission on carbon pricing estimated an appropriate range as USD40-80/tCO2 in 2020, rising steadily thereafter. In practice the extent and level of carbon pricing implemented to date is far lower than this or than most economic analyses now recommend” [1.8.2]
Now is the time!
Finally, the IPCC report notes that now is the time to solve that problem by implementing major climate policies like carbon fee and dividend. Not only is time running out to meet the Paris targets, but with Congress considering serious climate solutions and the world facing the major fossil-fueled problems of inflation and war in Ukraine, we now have a key window of opportunity:
“The timing of carbon pricing reforms is also important: they are more likely to succeed if they exploit windows of opportunity provided by events that raise awareness of the costs of carbon emissions (like bouts of elevated local air pollution or reports about the role of emissions in causing global warming), as well as momentum from climate actions by other countries and international climate agreements” [220.127.116.11]
“a study of 66 implemented carbon pricing policies show important effects … seizing political windows of opportunity” [1.8.2]
Seize this opportunity by contacting your representatives!
If you’d like more information, Dana will be giving a CCL University talk about all three volumes of the latest IPCC report on April 21 at 8 PM ET.
Dana Nuccitelli is an environmental scientist and climate journalist with a Master’s Degree in physics. He has written about climate change since 2010 for Skeptical Science, for The Guardian from 2013 to 2018, and since 2018 for Yale Climate Connections. In 2015 he published the book “Climatology versus Pseudoscience”, and he has also authored ten peer-reviewed climate studies, including a 2013 paper that found a 97% consensus among peer-reviewed climate science research that humans are the primary cause of global warming.