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The European Journal
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Rachel Wolf

The pro-market case for a carbon price

One of the great downfalls of the EUs current system is that it is hard for people to understand. Carbon pricing, which many European countries use in sectors not covered by the EU’s overarching scheme, is easy to understand and react to.

Countries across Europe are wrestling with three challenges. First, how to drive recovery, including economic recovery, from the pandemic. Second, how to drive down emissions and reach a net zero economy. Third,  how to do both in a way that maintains public consent and support.

Our Commission – a group of well known experts in energy and climate change, who have been taking evidence and investigating how to practically deliver carbon pricing over the last six months – has recently published its final report.  It argues that clear, transparent carbon pricing is the best way of achieving those goals. A carbon price produces revenue to help fund the recovery – which could in turn be invested into green jobs. It incentivises people to reduce their emissions, and  our research found it can gain public support.

I am on the right, and I have always had two great fears about countries’ net zero plans.

First, that they might upend too much. Our economy and lives are built off copious amounts of cheap energy. It is the main reason we were able to escape the destitution of the past. A life unimaginable to even the elite in the 18th century is now accessible to nearly all.

Therefore, any successful programme to reduce emissions must understand that people will not go back. That means that our policies must work within the grain of people’s lives – not rewire them. We cannot be against trade; or consumption; or travel.  We just need ways to achieve all three without catastrophic environmental effects.

Second, that the plans rely on an implausible level of omniscience and competence from governments. We cannot engineer economies. We do not know exactly what innovations to support. We are likely to end up with endless unforeseen consequences and costs.

It is for both of these reasons that I – along with the expert commission – support carbon pricing.

Economists generally agree that putting a price on carbon is the single most effective emissions reduction policy. It uses the forces and ingenuity of the market to change behaviour. Governments don’t need to get into the prediction game, and they don’t need highly complex regulation. It doesn’t dictate what people can or can’t do – it just asks them to bear the cost of the damage.  In doing so, it encourages innovation from companies, scientists, and investors across the world.

Carbon pricing has been in sporadic use across the world. In the UK, where the carbon price on electricity is substantially higher than other European countries, it has been the single most effective policy – by some margin – in reducing emissions in that sector.

Carbon prices are fair. They ask those who emit the most, to pay the most. Those who reduce their emissions pay less. We found that public support hinged on this fairness. One of the reasons for the Gilets Jaunes protests was the sense that in the balance between business and the ‘worker’, it was the worker who was paying the most.

We also found that public support  required three other things. First, sensible redistribution. There are many ways you can spend the revenue from a carbon charge, but one is to send it back to households, and particularly those on lower-incomes.

Second, alternatives. People don’t want to be taxed if they can’t switch. That’s reasonable – and it’s the whole purpose of a carbon tax. Good carbon pricing needs to be combined with incentives and investments for credible net-zero alternatives – such as new household heating systems .

Third, transparency. One of the great downfalls of the EUs current system is that it is hard for people to understand. Carbon pricing, which many European countries use in sectors not covered by the EU’s overarching scheme, is easy to understand and react to.

Finally, people rightly think global warming is a global challenge, not a national one. Here again carbon pricing has a strength – as one of the best ways of driving global change.

Global action is, of course, where the environmental agenda has stumbled. Emissions are a collective action problem on a grand scale. But carbon pricing provides a potential mechanism for countries to band together through a “border carbon adjustment”.
 In effect, it acts as a tariff so that our own producers are not unfairly penalised for meeting emissions targets. Its aim, though, is not to increase trade costs, but to incentivise other countries to adopt carbon pricing too. The EU is looking seriously at a border adjustment – our view is that we should use COP26 to create a ‘high ambition club’ of countries willing to impose border adjustments and drive global change.

Carbon pricing  is not a silver bullet. I have oversimplified the changes necessary to reach net zero, and in our report we outlined a list of complementary policies. They recognise that the cost of reaching net zero is likely to be different for electricity, heating, industry and agriculture, and that the technologies are less mature for some sectors than others. But the basic human principle remains – if there is a price, people will change their behaviour accordingly.

We have been submerged in environmental rhetoric by countries across Europe for years. COP26 is a chance to show how serious they are and how much global leadership they are willing to show. A unified approach to carbon pricing, that encourages the rest of the world to adopt similar policies to drive down emissions, would be a good start.