Abstract
Pricing carbon is one of the most important tools to reduce emissions and mitigate climate change. Already, about 40 nations have implemented explicit or implicit carbon prices, and a carbon price was explicitly stated as a mitigation strategy by many nations in their emission pledges submitted to the Paris Agreement. The coverage of carbon prices varies significantly between nations though, often only covering a subset of sectors in the economy. We investigate the propagation of carbon prices along the global supply-chain when the carbon price is applied at the point where carbon is removed from the ground (extraction), is combusted (production), or where goods and services are consumed (consumption). We consider both the regional and sectoral effects, and compare the carbon price income and costs relative to economic output. We find that implementation using different accounting systems makes a significant difference to revenues and increased expenditure, and that domestic and global trade plays a significant role in spreading the carbon price between sectors and countries. A few single sectors experience the largest relative price increases (especially electricity and transport), but most of the carbon price is ultimately paid by households for goods and services due to the large expenditure and indirect supply chain impacts. We finally show that a global carbon price will generate a larger share of revenue relative to GDP in non-OECD nations than OECD nations, independent on the point of implementation.
Highlights
While global emissions are showing signs of slower growth (Le Quereet al 2016), emissions must soon start to rapidly decrease to keep global warming below 2◦ (Rockstrom et al 2017)
Modeling has shown that if this is expanded to an international carbon market, this may reduce the costs of implementing the National Determined Contributions (NDCs) by up to 50% by 2050 (World Bank 2016)
In the third case (figure 4(c)), we show a carbon price implemented on the combustion of fossil fuels in combination with consumption-based emissions
Summary
While global emissions are showing signs of slower growth (Le Quereet al 2016), emissions must soon start to rapidly decrease to keep global warming below 2◦ (Rockstrom et al 2017). Among the various policy instruments available, carbon pricing has been found to be one of the most cost-effective, more so than industry regulations or subsidies (OECD 2013, Stern 2007, Pachauri et al 2014, Baranzini et al 2015). These market-based policy instruments would lead to larger emission cuts for a given costs, and could be implemented directly as a carbon tax or indirectly via an emissions trading system (ETS). Modeling has shown that if this is expanded to an international carbon market, this may reduce the costs of implementing the NDCs by up to 50% by 2050 (World Bank 2016)
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