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Carbon Pricing: Why Does It Work In Theory But Not Reality? - Büşra Öztürk


As the awareness of global warming has been growing, new solutions have begun to be sought, and new ideas have been put forward to slow climate change. The most common solutions were expanding the use of renewable energy, electric vehicles, and increasing recycling products, etc. Almost all these solutions have for the same purpose; reaching Net-Zero Emission by 2050. Since the aim is lowering carbon dioxide emissions, the economists came with the idea of putting a price on greenhouse gases. In this writing, we will try to understand the theory behind the pricing of CO2 and discuss whether it works efficiently or not.


Carbon pricing is a kind of environmental pollution recompense. It mainly aims to demotivate the polluters who cause highly CO2 emissions in the industry and transportation by charging them. In other words, it will no longer be free to pollute the air. Carbon pricing can be imposed in one of two ways: as a tax or as an emission trading system. A carbon tax is implemented on all goods and services that result in carbon emissions during production, and the tax impacts all consumers and producers. The carbon price in an emission trading system is issued for manufacturers that are required to get licenses in order to emit carbon. A maximum level of pollution has been settled, and a trading mechanism determines how much these licenses cost. As emissions approach the maximum level, the cost of a license rises.


The concept of placing tax for the emission of carbon is not a new policy, it has been implemented at the start of the 1990s in Scandinavian countries. However, there was no considerable amount on the carbon emissions. After approximately two decades later, in 2005, it has been debated across the EU countries and adopted. Then, it was subsequently implemented or scheduled by some other countries. According to Earth.Org reports, there are currently 27 countries with carbon pricing implemented. Turkey is one of the countries which have been considering implementing an emission trading system. The Minister of Environment and Urbanization of Turkey declared the deployment of a national emission trading system on February 17, 2021, although the exact start date is still unknown.

The fundamental purpose of carbon pricing is canalizing the manufacturers and businesses to environmentally friendly energy sources rather than using fuel derivatives. We may think of this situation as a traffic jam in a street. If there are too many cars on the single way, the traffic would be unsustainable to arrive at the destination. As a solution, some drivers may find another route or come up with a different mode of transportation. In this respect, a similar effect was expected on polluters as on drivers here. In theoretically, bringing a carbon tariff would be a dissuasive action for the polluters and lower the climate change effects. Putting a price on emitted greenhouse gases could be the best cost-effective way to reduce them. However, it has been found disappointingly counterproductive in recent years.

In the graph below, the global greenhouse emissions covered by carbon pricing between 2005-2020 is demonstrated. The total coverage for CO2 emissions has been increased thanks to the implementation from 5% percent to approximately 15% percent. However, affecting less than 15% percent of total greenhouse gas emissions is insufficient when the Net-Zero Emission by 2030 goal has been considered.


Source: World Bank


The first reason that inquires the efficiency of the carbon pricing is the fact that the demand for fuels is not changed regarding the price. Although how much the cost is increased, people still have to drive to work. Carbon pricing, in this political sense, would serve to further divide the country. These initiatives do not fall solely on the shoulders of those who can afford them. The rich ones would find the ways around them. However, the policy and the pay may be a burden for the middle class. It does not change the consumption due to compulsories, but the cost of consumption increments.


Secondly, the rise in pricing has generally been seen so punishing for small businesses. While small businesses are rigorously suffering from dealing with taxes, the bigger businesses could change their manufacturing regions to the countries where there is no implementation of carbon pricing. You may consider thinking of big brands that manufacturers their products in unexpected countries. It causes that while some countries are satisfied with having part-owner of decreasing greenhouse emissions, other countries are could be found responsible for emissions. However, actions in decreasing emissions should be taken internationally.

All in all, carbon pricing encourages investments in clean energy until it becomes political suicide. However, the main point, clean energy should be able to compete on an equal footing with fossil fuels. If not, in my opinion, we should continue to do scientific research in order to make renewable energy affordable without relying on carbon pricing.