It’ll be set too low and with exemptions

In practice, however, there's a problem with the idea of slashing carbon emissions by putting a price on them: it isn't doing much about climate change. More governments than ever are imposing prices on carbon, even as U.S. President Donald Trump backpedals on efforts to combat global warming, yet more carbon than ever is wafting up into the air. Last year, the world's energy-related greenhouse gas output, which had been flat for three years, rose to an all-time high. Absent effective new policies, the International Energy Agency has projected, energy-related greenhouse gas emissions will continue rising through at least 2040.

If governments proved willing to impose carbon prices that were sufficiently high and affected a broad enough swath of the economy, those prices could make a real environmental difference. But political concerns have kept governments from doing so, resulting in carbon prices that are too low and too narrowly applied to meaningfully curb emissions. The existing carbon-pricing schemes tend to squeeze only certain sectors of the economy, leaving others essentially free to pollute. And even in those sectors in which carbon pricing might have a significant effect, policymakers have lacked the spine to impose a high enough price. The result is that a policy prescription widely billed as a panacea is acting as a narcotic. It's giving politicians and the public the warm feeling that they're fighting climate change even as the problem continues to grow.

Sometime this century, global temperatures are all but certain to cross what scientists warn is a perilous threshold: two degrees Celsius above their preindustrial levels. The two-degree line, a notion introduced in 1975 by the economist William Nordhaus, is less an environmental cliff than a political rallying cry. But beyond it, a range of problems will grow worse, including extreme weather events, coastal flooding, and, in tropical and temperate regions, a reduction in the yields of crucial crops such as wheat and rice. So the world needs solutions that do more than merely chip away at the problem. What's required are more targeted moves--ones that are politically difficult but possible and environmentally effective. These include phasing out coal as a fuel for electricity, except where coal is paired with technology to capture its carbon emissions; keeping nuclear power plants up and running; slashing fossil fuel subsidies; raising gasoline taxes; reducing the cost of renewable power; and toughening energy-efficiency requirements.

Carbon pricing need not be abandoned. It can, at least at the margins and in concert with these more direct carbon-cutting policies, help channel money into cleaner energy options. But there is little evidence for what has become an article of faith in the climate fight: that carbon pricing should be society's main tool to keep the planet cool.

PERMISSION TO POLLUTE

The roots of the notion of curbing pollution by pricing it go back nearly a century. In 1920, the British economist Arthur Pigou developed the concept of an economic "externality": a benefit or cost that is not priced into a given activity but can be, through what would come to be called a Pigouvian tax. Nearly 50 years later, in the late 1960s, two economists working separately--Thomas Crocker and John Dales--proposed a different sort of pricing mechanism to limit emissions: a combination of government-mandated caps and tradable emission allowances, a one-two punch that would come to be known as "cap and trade."

Under a cap-and-trade system, a government imposes a limit on the amount of carbon that the economy, or specified sectors of it, may emit. It apportions responsibility for curbing emissions in line with that cap to individual players, such as companies. At the same time, it creates a tradable currency called a carbon permit; each permit allows its bearer to emit one metric ton of carbon dioxide. In some cap-and-trade systems, the original permits are given away for free, whereas in others, they are sold--creating revenue for governments. If a polluter's expected emissions exceed the cap, it must either curb its emissions--say, by installing more efficient manufacturing equipment or shifting to cleaner energy sources--or buy more permits on the market. A polluter whose emissions are trending below its cap can sell its excess permits on the market. In some systems, the market alone sets the price; in others, the government imposes a floor and a ceiling on the permit price.

The basic idea behind a cap-and-trade system is twofold. First, by forcing polluters to pay for the carbon they emit, the system incentivizes them to invest in lower-carbon solutions, thus directing more private capital--and, in turn, more research and innovation--toward clean technology. Second, by spreading the burden for cutting carbon across an entire sector--or, ideally, across an entire economy--the system helps each regulated player find the lowest-cost way to reduce its carbon output.

The first major use of emission trading was in the United States, to fight local air pollution. The federal government used it to phase out leaded gasoline starting in the 1980s and to combat acid rain, an effect of power plant emissions, starting in the early 1990s. Both campaigns succeeded, but limiting pollution from tailpipes and smokestacks in a single city or region is infinitely easier than slashing emissions of invisible carbon dioxide around the planet.

Carbon pricing started in the 1990s in Scandinavia and expanded in the following decade throughout Europe. More recently, it has taken hold in California, the Northeast of the United States, much of Canada, and many other places. Today, according to the World Bank, 42 countries and 25 subnational jurisdictions--together representing about half of global GDP and a quarter of global greenhouse gas emissions --have imposed or are pursuing a price on carbon, through either a cap-and-trade system or a carbon tax.

Why does carbon pricing squeeze certain sectors more than others? The answer is that it works well for industries that use a lot of fossil energy, that have technologies available to them to reduce that energy use, and that can't easily relocate to places where energy is cheaper. In other words, it works well in the power and heating sector, which produces about 25 percent of global emissions. That industry is dominated by localized utilities that can curb their carbon emissions in a number of ways: by switching to more efficient equipment for burning fossil fuels, by shifting from higher-carbon fossil fuels such as coal to lower-carbon ones such as natural gas, by increasing their use of renewable energy, by capturing the carbon dioxide they produce and sequestering it, or by incentivizing their customers to waste less electricity.

Carbon pricing tends not to work well for curbing emissions from buildings, which generate about six percent of global emissions. Builders rarely occupy the buildings they build, which means they don't pay the energy bills and thus have little incentive to foot the capital cost of more efficient buildings. Nor does carbon pricing work well to curb emissions from transportation, which account for about 14 percent of the global total. Studies show that drivers are usually unresponsive to modest increases in gasoline and diesel taxes. And although they do respond to big hikes, taxes that high tend to be political nonstarters. No wonder, then, that carbon-pricing regimes tend not to tamp down emissions from buildings and vehicles.

Just as the breadth of a carbon-pricing system matters, so does the price it puts on each metric ton of carbon dioxide. In 2017, a group of leading economists known as the High-Level Commission on Carbon Prices concluded that carbon prices would have to be between $40 and $80 per metric ton by 2020, and between $50 and $100 by 2030, to achieve the emission cuts called for in the Paris climate accord. (Even in the unlikely event that the 195 nations that have agreed under the accord to voluntarily constrain their carbon outputs met their promises, that wouldn't stop global temperatures from surpassing the two-degree threshold.) But of the global emissions now subject to a carbon price, just one percent are priced at or above the commission's $40 floor of ecological relevance. Three-quarters are priced below $10. The upshot: more than two years after the ostensible watershed moment of Paris, a mere 0.15 per cent of global greenhouse gas emissions are subject to a carbon price that economists deem high enough to make much of an environmental difference.

Four countries have priced carbon at or above that $40 floor, according to the World Bank: Finland, Liechtenstein, Sweden, and Switzerland. These are rich nations with a deep-seated culture of environmental protection. They also have, by global standards, comparatively low-carbon electricity systems, thanks in large part to plentiful hydropower and, in the cases of Finland, Sweden, and Switzerland, a great deal of nuclear power, too. All told, they couldn't be more different from the sorts of places--China, India, Africa, and the rest of the developing world--that most matter in the fight against climate change.

The same is true of most of the U.S. states, including California, Maine, New York, and Vermont, that have chosen to price at least some of their carbon either on their own or through a regional cap-and-trade program for power plant emissions. Compared with other U.S. states, these tend to have ample solar power, wind power, or hydropower, and they are less reliant on high-carbon coal.

It's not just governments that are joining the carbon-pricing stampede. More than 1,400 companies globally, including some of the world's largest multinationals, are voluntarily integrating carbon prices into their investment decisions, according to CDP, a nonprofit that gathers environmental data from companies and governments. When, say, an oil company decides whether to drill in a certain field or a bank decides whether to loan to a certain project, it first tries to calculate what would happen to its profits if the government imposed a particular carbon price. In theory, doing this should lead companies to favor less carbon-intensive investments.

Here, too, however, the reality is underwhelming. To decarbonize the energy system enough to meet even the limited goals set in Paris, annual global investment in low-carbon technologies would have to rise by about $700 billion by 2030, according to the World Bank. The bank also estimates that an international carbon market could incentivize about one-third of that--about $220 billion annually. That figure in itself is telling: even under the rosiest of circumstances, carbon pricing will produce only a fraction of the emission cuts needed to put the world onto a sufficiently low-carbon path.