Does Carbon Pricing Really Reduce Emissions?

When polled, many economists agree that carbon pricing is an effective way to reduce emissions,  whether it is cap and trade or carbon tax – and it is cheaper than other alternatives.   Further, However, a truly free market is necessary for the best result, i.e. without freely granted preferential allowances, unverified offsets, etc.

Of the carbon pricing schemes currently in place, most are so recent that any emissions reductions seen are difficult to be confidently attributed only to carbon pricing.  For example, in the Regional Greenhouse Gas Initiative (RGGI), emissions have been reduced, but until very recently the cap was well above emissions levels.  Rather the reduction seems to be from investment of revenues in energy efficiency.  There is a drop in EU emissions from 2005 onwards, which corresponds with the initiation of the EU ETS begun in 2005. In the early years of the EU ETS prices were low (typically less than $10/ton CO2e), largely because individual countries were allowed to set their own caps and provide free allowances. Those and other flaws are being addressed in Phase 3 which began in 2013.   The British Columbia carbon tax is highly touted as a success, and indeed, carbon emissions dropped by 10% from its inception in 2008 to 2011, but other factors also have a bearing so direct credit to the tax for the reduction may not be warranted.  Revenues are returned as other tax reductions, giving BC the lowest income tax rate in Canada, and since 2008 the BC GDP remained on a par with the rest of Canada.

Last update:  Nov 2, 2016