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A Carbon Price Can Benefit the Poor While Reducing Emissions

The world is vastly underestimating the benefits of acting on climate change. Recent research from the Global Commission on the Economy and Climate finds that bold climate action could deliver at least $26 trillion in economic benefits through 2030. This ground-breaking research, produced by the Global Commission and more than 200 experts, highlights proof points of the global shift to a low-carbon economy, and identifies ways to accelerate action in five sectors: energy, cities, food and land use, water and industry. Our blog series, The $26 Trillion Opportunity, explores these economic opportunities in greater detail.


Climate discussions like those we’ve just been seeing at the UN summit in Katowice, Poland tend to focus on working together to deliver existing climate commitments and raising ambition—getting countries to reduce more GHG emissions, faster.  But there’s an equally important issue that gets far less attention: ensuring climate action is delivered in a way that doesn’t leave anyone behind, particularly the world’s most vulnerable people.

The effects of climate change will not be equitably distributed. Poor populations—those with the least capacity to adapt—will be hit the hardest by droughts, floods and other impacts. Women are particularly vulnerable to the impacts: For example, women and children are 14 times more likely to die during natural disasters than men.

On the other side of the coin, climate action can inadvertently hurt the poor if policies aren’t designed properly. The world saw this play out in France this month with the “Yellow Vests” protests. While the protests are clearly reflecting a wider anger over stagnant living standards and economic inequality, they were initially sparked in response to a rise in fuel taxes. The Yellow Vests protests, however, are not against climate action; rather, they are pro-equity, reflecting mounting dissatisfaction from rural and working-class citizens being left behind.

The good news is that the New Climate Economy’s 2018 Report describes how a low-carbon transition can, if managed well, deliver inclusive, sustainable growth. But, if poorly managed, there is real potential to exacerbate social exclusion, for example for workers and regions whose economies depend on coal mining. We don’t just need a low-carbon transition; we need to ensure that it is a “just transition.”

Carbon Pricing Can Achieve Both Economic and Climate Benefits

Putting a price on carbon emissions can drive efficient emission reductions, spur innovation and allow businesses and households to choose how they reduce emissions. It means that clean technologies and practices can compete on a more equal playing field with fossil fuels or other GHG-emitting technologies. Expanding carbon pricing to more places, along with fossil fuel subsidy reform, are essential to accelerating the low-carbon transition. If designed and implemented effectively, carbon pricing can also achieve broader sustainable development benefits and reduce economic inequalities.

In 2017, carbon pricing programs raised $33 billion in government revenues globally. The New Climate Economy finds that fossil fuel subsidy reforms and carbon pricing could generate $2.8 trillion—more than India’s GDP today—in government revenues in 2030.

By creating new sources of public finance, carbon pricing initiatives can enable government investments in critical public priorities like healthcare, education or infrastructure. Alternatively, revenue can be returned directly to citizens through tax cuts or rebates. Or the revenue could be used for a combination of these measures. By using these measures to support the poor or other groups who are disproportionately affected by structural changes associated with the low-carbon transition, carbon pricing systems can be a powerful tool for supporting a just transition.

Momentum on Carbon Pricing is Growing. So, Too, Are Uses of the Revenues

Today, as many as 70 countries, states and provinces have carbon-pricing systems in place or plan  to introduce them shortly, covering  as much as 20 percent of global greenhouse gas emissions. This reflects a remarkable increase from 2004, when just 1 percent of emissions were covered under carbon pricing. Many places are designing innovative approaches to use the revenues in ways that address economic and social needs, as well as environmental goals. Here are just a few examples:

Chile

Chile passed a carbon tax in 2014 as part of broader tax reforms to reduce air pollution associated with fossil fuels. The tax was designed to meet the country’s target of reducing emissions 20 percent below 2007 levels by 2020. The carbon tax of $5 per ton of carbon dioxide equivalent (tCO2e) for thermal power plants raised $145 million in government revenues in 2017. While the carbon tax increased taxes on big businesses, it was recycled in a way that lowered the tax burden for consumers.

Colombia

Colombia launched its carbon tax in 2017 at a price of $5/tCO2e. The tax generated $172 million in government revenues in 2017, which the government plans to use to support environmental and rural development projects. For sellers and importers of fossil fuels liable for the tax, they can choose to instead comply through the purchase of accredited emission offset projects located in Colombia, further directing low-carbon investments in the country. For example, one of Colombia’s largest concrete producers, Cemex, is now funding a reforestation project that will plant 500,000 trees in the country to offset its fleet of 1,200 diesel-powered trucks. Colombia also recently approved legislation to create an emissions trading system (ETS). The government will conduct economic impact studies on various ETS designs over the next three years.

Canada

Canada is a global leader in carbon pricing. Several successful systems have been in place at the provincial level for many years, and next year, the government will expand nationwide. On April 1, 2019, all provinces that do not already have a carbon price in place that meets the federal standard will be subject to a federal carbon tax of $15/tCO2e, increasing by $7.50 each year to reach $37.50/tCO2e in 2022.

The revenues collected from the federal tax will be redistributed to citizens in provinces under the federal system (including Ontario, New Brunswick, Manitoba, Saskatchewan, and Nunavut). According to the government, a majority of households in these provinces can expect to receive more in rebates than they will pay in higher energy prices. For example, the average household in Manitoba would expect to see a cost of $174, but a rebate of $252, for a net benefit of $78.

The federal standard builds on successes at the provincial level. For example, British Colombia implemented a revenue-neutral carbon tax in 2008, returning $962 million in revenues to citizens in 2017 in the form of tax rebates. Analysis has shown that low and middle-income households are better off under that tax than they would be without it. Moving forward, the province will redirect some of the revenues towards climate initiatives such as energy-efficiency retrofits. The province has also committed to reach $37.50/tCO2e in 2021, a more ambitious timetable than the federal standard.

United States

Despite inaction at the federal level, there have been some exciting carbon-pricing developments at the subnational level in the United States. For example, the Regional Greenhouse Gas Initiative (RGGI), the mandatory cap-and-trade system covering CO2 emissions from large power plants in the Northeast and Mid-Atlantic, is expanding to 10 states for its 10th anniversary next year. RGGI states raise revenues through quarterly auctions of permits for CO2 emissions. The RGGI states have consistently reinvested the majority of revenues raised through the program into energy efficiency, clean energy, greenhouse gas abatement and direct energy bill assistance for consumers. Not only have these investments made the power system cleaner and more efficient, but, by design, they have also reduced electricity bills for businesses and consumers, including low-income households.

The economic and social benefits to the region have been significant. Between 2015-2017, RGGI added $1.4 billion in net economic value to participating states, produced $220 million in energy savings, and reduced expenditure on out-of-state fossil fuels by $1.37 billion.  Improvements to air quality and public health over RGGI’s first six years were valued at $8.3 billion. The RGGI states have increased the ambition of the program by tightening the emissions cap by an additional 30 percent in 2020-2030 and extending the program to 2030.

California’s 2012 cap-and-trade program covers 85 percent of statewide emissions from industry, power, transport and buildings. The program raised $2.03 billion in revenues in 2017. California spends this money on a variety of climate-related projects including electric car rebates, affordable housing units, energy-efficient home improvements, planting trees and fire risk- reduction. By law, 25 percent of funds must be allocated to projects in low-income and polluted communities. These state-financed funds have also attracted more than $8.2 billion in co-funding, leveraging an average of $6 for every dollar invested. Oregon is expected to enact a similar system in 2019, and other U.S. states committed to the goals of the Paris Agreement are considering a variety of carbon pricing initiatives as well. At the federal level, activists are calling for a “Green New Deal” that includes carbon pricing embedded in a broader agenda of economic reform, public investment, job creation and social justice.

Growing Momentum for Carbon Prices

Momentum for carbon pricing continues to grow. Eighty-eight countries have stated that they are planning or considering the use of carbon pricing as a tool to meet their commitments under the international Paris Agreement on climate change. Nearly 1,400 companies are applying internal or implicit carbon prices to guide their own investment decisions, and many more have called on governments to step-up ambition on carbon pricing to send a clear, stable policy signal.

As some of the above examples demonstrate, a carbon pricing system that is both well-designed and implemented can serve both environmental and social objectives. Countries looking to increase their climate ambitions and support a just transition cannot afford to ignore carbon pricing. But they do need to ensure they learn both from the recent successes and the failures.

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