Research Briefing | Jan 10, 2023

Low carbon prices must rise to make a difference

Carbon price policies vary in design and scope. To make prices comparable, we calculate an emissions-weighted average price or “effective price.” We find European countries and countries with aggressive environmental policies like Canada have the highest effective carbon price, due to the breadth of emissions covered by the EU ETS and complementary country policies, as well as the recent increase in EU ETS carbon prices (from $9.3/tCO2e in 2012 to $86/tCO2e in early 2022). In contrast, the largest emitters like the US and China have lamentably low effective prices when we account for emissions share covered by pricing policy. Others, typically emerging markets, have yet to price carbon.

What you will learn:

  • While carbon prices historically have been low and limited, this should change with rising climate ambitions. We expect countries with established carbon markets and ambitious climate agendas will take the lead. Norway is expected to have the highest effective price among European nations, reaching $212/tCO2e in 2030. Elsewhere, Canada has an effective price of $93/tCO2e by 2030. Meanwhile, the effective carbon prices of China and the US will barely break $30/tCO2e in 2050. In the absence of stated policies, other economies like India and Saudi Arabia are not expected to price carbon anytime soon. For these countries, technical, administrative, and political barriers remain.
  • In our baseline forecast, carbon prices should not have a notable impact on inflation and competitiveness. The literature on the impact of carbon prices is mixed, with inflation from higher prices potentially mitigated by policy design and targeted fiscal spending. Furthermore, pricing carbon provides an incentive to switch to low-carbon energy sources, which should reduce the price impact over time.
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