Limits of carbon pricing in a climate-changing world/Limites da precificação de carbono num mundo em mudança climática.
| Autor | Gonçalves, Veronica Korber |
Introduction
Carbon pricing is among the main carbon policy instruments nowadays. The Kyoto Protocol to the United Nations Framework Convention on Climate Change (1997) established the basis of the international debate about carbon pricing when it settled economic instruments (the "flexible mechanisms") as a response to climate change. At the domestic and regional levels, several States have made efforts to design direct or indirect mechanisms to internalize the cost of GHG emission--as the European Union Emission Trading System (EU ETS), one of the most structured carbon pricing policies. Besides the national and subnational carbon market systems, numerous experiences of private mechanisms and voluntary carbon trading markets involving non-state actors have been developed (HAMRICK E GOLDSTEIN, 2016). In Brazil, carbon pricing policies are taken under consideration once in a while: first with the Clean Development Mechanism--one of the flexible mechanisms of the Kyoto Protocol--,then with the possibility of conducting projects related to forestry and reforest and the negotiation of carbon credits under the Brazilian stock exchange. Despite the sporadic domestic debate, no national or regional pricing policy has been instituted in Brazil yet.
However, the diffusion of carbon pricing did not necessarily result in emission reductions. The climate regime--which includes carbon markets and carbon pricing--has been failing to respond to the climate challenge. As the IPCC reports to states, it is necessary to do much more if we want to avoid drastic and dramatic environmental changes (IPCC, 2018). The current Nationally Determined Contributions--representing the Paris Agreement Parties' commitments--are knowingly insufficient for achieving the goal of a 1.5[degrees] to 2[degrees] global warming. Notwithstanding the implementation and compliance challenges, the attempt to create carbon markets and carbon pricing pilot projects around the world in the last two decades has contributed consolidating a normative consensus of responding to the problem of climate change with economic instruments (MECKLING, 2011; GREEN, 2013). This consensus about carbon pricing involves assuming that market mechanisms can provide adequate solutions to environmental problems because governments are supposedly inoperative and markets are allegedly efficient--which is the expression of neoliberal rationality.
This article aims to explore this consensus about carbon pricing and its neoliberal rationality. We take the critical literature of the commodification of nature (BUMPUS AND LIVERMAN, 2008; LIVERMAN, 2009) and the economic rationality to deal with environmental issues (DEMPSEY, 2016) to address the dissonance between the consensual response of carbon pricing and its meager results. Our argument follows the idea that this turn to economics defines the climate regime, and may help to explain its limited results as it ties climate policies to private interests, despite of its poor outcomes. Methodologically, the article is based on a qualitative analysis that involves interpretative analysis of textual data. We take the explanation on carbon pricing proposed by the World Bank--which is recognized as one of the main knowledge-based experts in this debate--in order to interpret carbon pricing rationality according to the critical theory on neoliberalism.
In the next section, we present the two main policy instruments to reduce carbon emissions: Carbon Tax and Cap and Trade. Then, we approach private instruments of carbon pricing and how they operate. In the second section, we address the main criticisms of carbon pricing and we explore our argument: that the economic rationality limits the climate policy results, despite the climatic urgency. Finally, the perspectives of carbon pricing are pointed out considering the pandemic of Covid-19 and its economic impacts.
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Policy instruments for reducing carbon emissions
The two main policy instruments to control greenhouse gas emissions are Command and Control and also carbon pricing instruments. The Command and Control instruments refer to the establishment of limits for a given activity, with enforcement and sanctions for non-compliance (i.e., regulation that defines the amount of CO2 allowed to be emitted per km by newly produced cars).
Carbon pricing instruments refer to the establishment of a price in the volume of emissions encouraging polluters to be less dependent on fossil fuel energies (particularly coal, which is the most intensive of the fossils), as it becomes less costly to promote technological innovation than business-as-usual emissions. In this case, the reduction does not result of a defined limit of emissions, but of the cost from emitting carbon. The premise of carbon pricing is that it drives technological innovation, research, and technological development, making it possible to change industrial processes by less polluting ones (WORLD BANK, 2020a).
The flexibilization mechanisms included in the Kyoto Protocol (1997) (1) have spread carbon pricing logic among the Protocol's Parties, including the ones with no emission reduction obligations. The agreement has aided the path for the creation of the international, regional, domestic and subnational carbon markets. Paterson, Hoffmann, Betsill and Bernstein (2014) refer to the diffusion of markets through networks of individuals and organizations in various governance processes. The authors use the polycentric diffusion approach applied to climate change to analyze the political and social outcomes resulting from networks formed around the carbon market (PATERSON, HOFFMANN, BETSILL AND BERNSTEIN, 2014, p. 423). In applying meso-level analysis to carbon markets, the authors examined the networks of individuals and organizations that collaborate to promote carbon markets around the world, and how these have changed over time (p. 425). Some of the elements that characterize the networks around the carbon market, according to Paterson et. al (2014) are the diffusion of ideas, in the sense of systems of thought concerning economic instruments, especially in the USA and in the EU, and the transnationality of these networks that are formed by fragmented and unrelated experiences.
Another key factor to the structuring of carbon markets was the creation of a metric unit, the carbon equivalent, to match emissions of various greenhouse gases based on their global warming potential, according to indexes released by the Intergovernmental Panel on Climate Change (IPCC). The carbon equivalent unit was essential to enable gas accounting and is present in virtually every carbon pricing system and project in the world (2).
The main economic instruments for pricing the tone of carbon emitted are carbon tax and cap and trade. According to a 2020 World Bank report, there are 61 initiatives about 46 countries and 32 subnational jurisdictions in developed and developing countries that have or are considering implementing carbon pricing policies (WORLD BANK, 2020b).
1.1 Carbon pricing
The carbon tax is a tributary mechanism in which the State sets a price for the emission of the ton of carbon. The government directly controls the amounts involved and, consequently, the results of the policy. Its main obstacle is its political cost, which explains the relatively few countries have introduced the tax. According to the World Bank (2018), carbon taxation in very limited proportions has occurred since the early 1990s in countries such as Denmark, Norway and Sweden, and there is some degree of evidence that carbon taxation leads to emissions below the expected without the mechanism (WORLD BANK, ECOFYS, 2018).
One example of a carbon tax is the British Columbia Carbon Tax (Canada), created in 2008. The guidelines for the tax involve a gradual implementation, to allow the adaptation of people and companies; the protection of poor people through tax credits; as well as the adequacy of other taxes to avoid double taxation. In 2020, it covers 70% of the jurisdiction emissions' share and some of the industry, aviation, transport, and agriculture sectors are excepted (WORLD BANK, 2020). After more than ten years of its implementation, the carbon tax is still part of the political debate (WHERRY, 2019), and British Columbia has fallen short of meeting its emission reduction targets, mainly because of the fossil fuel subsidies (CORKAL, GASS, 2019; KARAPIN, 2020). In 2019, Canada established a federal carbon pollution pricing system on oil, gas, and coal. The idea is to tax burning fossil fuels emissions and to distribute the revenues as rebates for taxpayers. The carbon tax applies to all provinces, although the ones that already have some kind of carbon pricing that meet the federal Act standards can be considered in compliance with the new law (NUCCITELLI, 2019). In 2020, during the pandemic, the Canadian carbon tax has been on the frontline of the election debate (FARAND, 2020), and the Conservative Party platform includes abolishing it, because "A carbon tax is not an Environmental Plan, it is a Tax Plan" (LOURIE, 2020).
The Cap and Trade mechanism is generally structured by an emissions trading system--or scheme--,and it has as core elements: the cap, which will point out the degree of politics' ambition, and a license allocation mechanism. Emission allowances must be distributed for a certain period of compliance. The allocation of these may be due to the political strategy of protection on a specific industrial sector, accountability of more polluting sectors, etc.; and combined with a monitoring, reporting and verification system. The monitoring system needs to be consistent, transparent, and accurate as it ensures the reliability of the entire system and discourages fraud.
Cap and Trade systems can be designed in different ways, depending on the objectives and desired limits of the measure. Among the differences, we highlight:
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