Pricing carbon effectively: a pathway for higher climate change ambition

Abstract

Closing the gap between current climate change mitigation policies and those needed to deliver on the Paris Agreement’s temperature targets requires significant scaling up of policy ambition. This article argues that policy action that aims to reach a minimum level of effective carbon prices can increase countries’ ability to implement ambitious climate change policies, including carbon taxes and emission trading schemes (ETSs). Effective carbon prices include prices applied via energy taxes, fossil fuel subsidies, carbon taxes, and ETSs. Action on effective carbon prices can create new synergies among government departments–thereby strengthening their capacity to implement climate policies. Policy action on effective carbon pricing can also integrate finance ministries more directly in climate change policy than focusing exclusively on explicit carbon pricing. Lastly, acting on effective carbon pricing can broaden countries’ engagement in carbon pricing policy compared to focusing exclusively on explicit carbon pricing. Civil society actors, governments, and international organizations could foster higher ambition on climate policy by promoting action on effective carbon prices. The article also highlights that analyses of effective carbon pricing gaps–which measure differences between current effective carbon prices and benchmark prices needed to meet the temperature targets of the Paris Agreement–need to be carefully communicated and interpreted so as to avoid undermining climate change policy. Key policy insights Policy action on effective carbon prices can unlock in-house synergies in countries that have substantial experience with energy and environmental policy but not in climate policy. Climate action that focuses on effective carbon prices can enhance finance ministries’ participation in climate policy. Policy action centred on effective carbon prices can help to involve more countries in carbon pricing policy. Estimates of effective carbon pricing gaps need to be carefully communicated and interpreted to avoid reducing the sense of urgency of acting on climate change mitigation.