Intro to Carbon Pricing: Carbon Pricing’s Global Appeal

In this fourth and final installment of our series exploring a more inclusive definition of carbon pricing, we return to the canonical carbon price. That is, a carbon tax or a cap-and-trade system covering carbon dioxide emissions from fossil fuels. Taking a global view, such policies are booming.

This may surprise American readers, living as we do in the only developed national economy without one. Many developing economies have one, too. Others want one, and they want rich countries to have them as well. For instance, the consensus opinion of September’s first-ever African Climate Summit was that there should be a global carbon tax. In total, 23 percent of all global emissions are now covered by a carbon price, prompting the Economist to recently publish an article titled, “How Carbon Prices Are Taking Over the World.”

Nor are we talking about measly, low-impact carbon prices here. The price of the European Union Emissions Trading System (EU ETS), covering 30 countries, eclipsed 100 euros at several points last year. What’s more, last October the European Union put into effect what it is calling a carbon border adjustment mechanism (CBAM). In effect, the policy described by this clunky acronym requires importers to pay a comparable carbon price to what EU-based producers are already paying. It’s the international policy equivalent of the playground maxim “even-steven.”

Remarkably, given how widespread canonical carbon prices are, the European Union is the first place to enforce such playground rules. But it will not be the last. Taiwan is set to start collecting fees later this year (thus ahead of the European Union, which now demands reporting, but won’t demand payments until 2026), and the United Kingdom has proposed its own CBAM in some detail. Canada, Japan, Australia, South Korea, and India are all at various stages of study, consultation, and contemplation for their own versions.

To be clear, the EU CBAM will probably help US exporters, because for the products the European Union is targeting (cement, iron, steel, aluminum, hydrogen, electricity, and fertilizer), the United States tends to be a relatively low-carbon producer. So, accounting for it means that US goods will be better deals relative to similar goods from countries that pollute more to produce essentially the same goods. In economic terms, American goods are likely to capture a larger market share. However, the European Union will exempt from payment goods from countries with comparable carbon prices. So, US producers will probably gain market share even if they have to pay at the border. It’s just they’ll be paying the EU governments instead of the US government.

This loss of revenue is probably a large factor explaining why border carbon measures are one of the hottest climate topics in Congress of late, with both Republicans and Democrats showing interest. Given that 40 percent of all US imports come from countries with carbon prices expected to exceed $50 in 2024, politicians may also be figuring it can’t be long before American businesses and the consumers they serve begin to notice the United States is an outlier.

Recent congressional interest has focused on CBAMs and border carbon tariffs. The distinction is that a CBAM is a policy that is paired with an explicit domestic carbon price, whereas a tariff is not. A border carbon measure could therefore only be properly considered a CBAM if Congress also passed a national carbon price or came up with a dollar amount for the thicket of regulations, environmental fees, and other related compliance costs on products we export. A border carbon tariff would not adjust for any internal costs, explicit or imputed. Instead, it would simply put a price on a good coming into the United States based on its carbon intensity (which is not straightforward to calculate). Countries sending goods to the United States with significantly higher emissions intensities would pay the tariff; goods from cleaner countries wouldn’t pay.

The Foreign Pollution Fee Act, a Republican-sponsored bill in the US Senate, is such a tariff. Intriguingly, this bill is clearly geared toward encouraging a climate club. To underscore the difference between CBAMs and border carbon tariffs, the bill text also includes strong language against any possible interpretation that it enables a domestic carbon price.

This US interest in border carbon measures is encouraging because, though the United States made historic investments to combat climate change in the first two years of the Biden administration and during the 117th Congress, we are falling short of our own metrics for success. To briefly recap, the passage of the CHIPS and Science Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act in the last Congress amounted to a historic investment in reducing emissions that has already led to a doubling of manufacturing investment in the United States, with Republican-voting states getting most of these investments. Together, these three policies are estimated to reduce US emissions by about 40 percent below 2005 levels by 2030.

However, the US commitment under the Paris Agreement is a 50 percent reduction in emissions by 2030. More legislative solutions that complement these policies are necessary. We need both carrots and sticks. This trifecta of legislation has more or less maxed out politicians’ appetite for subsidies and incentives (carrots). Sticks are the only tool that’s left, and carbon prices are the most obvious way to do this. While things might have turned out differently, none of these three laws includes a price on carbon dioxide emissions.

To conclude, carbon pricing is having a moment right now, especially when you take a broader, more chemically and economically sound view of carbon prices. Look at all the greenhouse gases that include carbon, think of how pricing affects decisions at more than just the point of sale, and you see carbon prices all around. This is especially true when you take a global view—carbon prices are indeed taking over the world.