A new research study has revealed empirical evidence that carbon pricing has been effective where it has been implemented. Led by researchers at the Australian National University and Macquarie University, the study is one of the first to analyze the implementation of carbon pricing across countries to understand the efficacy of carbon pricing.
The study covers 142 countries from 1997 to 2017, 43 of which had adopted a carbon price, as a carbon tax or cap-and-trade, at national or sub-national level by the end of 2017. The researchers focus on emissions from fuel combustion, which were about 80 percent of global emission from human activities.
One key feature of this study’s methodology is to control for other policies that would have potentially impacted the carbon emissions growth rates. The policies that are captured in the study include: renewable portfolio standards, feed-in tariffs (a policy that encourages deployment of renewable electricity technologies), fossil fuel subsidies, net gasoline tax, and other measures to reduce emissions and deploy clean energy.
The study finds that other policies such as feed-in tariffs and renewable portfolio standards are associated with emissions reductions–although the estimates are less statistically significant compared to those of carbon prices.
After controlling for other factors, the authors found that countries with a carbon price have on average had annual CO2 emissions growth rates about 2 percentage points lower than countries without a carbon price. In other words, countries that have a carbon price in place on average are more effective in slowing down emissions growth than countries without a carbon price. The study also finds that an increase in carbon price of one euro per tonne of CO2 is associated with an average reduction in the subsequent annual growth rate in emissions of approximately 0.3 percentage points.
In addition to growth rate estimates, the study discovers that countries that have adopted carbon prices have subsequent lower per-capita emissions levels than similar countries without carbon prices.
The authors also pointed out that it’s possible that the effect of carbon pricing on emissions reductions is associated with carbon leakage – whereby emissions are transferred to jurisdictions without carbon prices from jurisdictions with carbon prices. Experts generally agree that a border adjustment should be included in a carbon tax to prevent carbon leakage.
As carbon pricing continues to develop, rising prices and falling costs of clean energy should push annual emissions down. This study provides empirical support for adopting a carbon price to address climate change. A serious national climate strategy would include a carbon tax as the main policy to incentivize emissions reduction efficiently.