Time to put a price on carbon emissions

Subject : Environment

Section: Climate Change

Concept :

Seeing the increase in carbon emission, it is time, starting with the biggest economies of the G20, to agree on valuing nature, including by pricing carbon events.
India can take the lead, as president of the G20 this year, in carbon pricing, which will open unexpected avenues of decarbonisation.

Carbon Pricing Mechanisms:

Three major carbon pricing mechanisms are as follows:
A carbon tax can be established domestically, like in Singapore and Korea.
The European Union (EU) and China use emissions trading system (ETS).
The EU has also proposed the application of an import tariff on carbon content.
Around 46 countries price carbon. However, it covers only 30% of global greenhouse gas (GHG) emissions at an average price of only $6 per ton of carbon.
The International Monetary Fund has proposed price floors of $75, $50, and $25 a ton of carbon for the United States, China, and India, respectively. It can help in achieving a 23% reduction in global emissions by 2030.
It should be noted that carbon pricing encourages investment in renewable energy like solar and wind energy.

Carbon Pricing

Carbon pricing is the value ascribed to the external costs – usually social costs – of pollution emitted by an industry.
Carbon pricing is done either through a carbon tax or an emission trading system.

Ways of pricing

Defining rate: A carbon tax directly sets a price on carbon by defining an explicit tax rate on GHG emissions or—more commonly—on the carbon content of fossil fuels.
Market price for GHG emissions: An emissions trading system (ETS) is a system where emitters can trade emission units to meet their emission targets. To comply with their emission targets at least cost, regulated entities can either implement internal abatement measures or acquire emission units in the carbon market, depending on the relative costs of these options. By creating supply and demand for emissions units, an ETS establishes a market price for GHG emissions
Carbon credits: Crediting Mechanisms issue carbon credits, these credits can be used to meet compliance under an international agreement, domestic policies or corporate citizenship objectives related to GHG mitigation.

Understanding carbon pricing

Captures the external costs of GHG: Carbon pricing captures the external costs of greenhouse gas (GHG) emissions—the costs of emissions that the public pays for (crop damage, health care costs from heat waves and droughts, and property loss from flooding and sea level rise) and ties them to their sources through a price, usually in the form of a price on the carbon dioxide (CO2) emitted.
Shifting the burden of damage: It helps shift the burden for the damage from GHG emissions back to those who are responsible for it and who can avoid it.
Economic signal- Instead of dictating who should reduce emissions where and how, a carbon price provides an economic signal to emitters, and allows them to decide to either transform their activities and lower their emissions, or continue emitting and paying for their emissions.

Impact on India:

Benefits of a carbon tax in India:
It is more appealing as it discourages fossil fuels.
It will raise revenue which can be further invested in cleaner sources of energy.
It would replace the inefficient scheme of petroleum taxes which are not directly aimed at emissions.
Many countries including India have established the basic structure needed to implement a carbon tax in their fiscal policy.
However, policymakers should choose the tax rate which can range from $2.65 a ton of CO2 (in Japan) to $165 a ton (set by Denmark for 2030).
India can start with the IMF-prescribed figure of $25 a ton.

Associated Concerns:

It should be noted that carbon pricing faces stiff political opposition. For instance:
Australia repealed the 2012 tax just two years after it was introduced.
Rising energy prices in the EU led to the selling of millions of emission permits. It caused a 10% fall in carbon prices.
One of the major issues in this regard is that industrial firms might lose their competitive advantage to exporters from countries with lower carbon prices.

For further notes on Carbon Pricing, refer – https://optimizeias.com/carbon-pricing/