Carbon pricing adoption and implementation faces several practical challenges ranging from political constraints to negative consequences of poor policy design and challenges related to integration with existing policies. In particular, the distributional impacts of climate policy invariably collide with the political economy of a given jurisdiction to constrain the real-world implementation of carbon pricing. For example, in the simplest sense, carbon pricing creates direct, visible costs on carbon-intensive industries, which are generally politically powerful. It also imposes costs on consumers, in the form of higher energy prices. This combination of concentrated costs on key industries, visible costs to the general public, and diffuse and delayed benefits of reduced carbon emissions, makes it politically challenging to adopt carbon pricing, especially at the ambitious level—in terms of price and covered sectors—that is necessary to drive deep economy-wide emissions cuts. Even in sectors where low-carbon substitutes are readily available and cost-competitive, from a political economy perspective, it is not likely to be the most effective tool to achieve long-term deep decarbonization, at least not on its own.

Workshop Purpose

• In March 2020, we convened a workshop of academic and policy experts including economists, political scientists, energy innovation scholars and policy practitioners, seeking to synthesize collective expertise and academic research and to reflect on the role of carbon pricing and innovation in climate policy.

• Participants discussed the experience with carbon pricing around the world and the way forward for carbon pricing as a climate policy tool, including political feasibility, economic efficiency, and interaction and integration with other policy mechanisms. The workshop emphasized in particular the importance of political economy considerations on the design, implementation, and durability of climate policies.

Main Points of Discussion

• Carbon pricing has been an important pillar of climate policy discussions, facing no shortage of support from economists and policymakers favoring cost-effective reductions in carbon pollution. To date, around 15% of global carbon emissions are subject to carbon prices, most well under $50/tCO₂.

• Real-world experience with carbon pricing policies is mixed. In Sweden and British Columbia, carbon taxes have led to some emissions reductions, while many other places have low and ineffectual prices. Jurisdictions like Australia and Ontario, Canada have also rolled back policies. Broad-scale experience in California, the Northeast and mid-Atlantic (RGGI) states, and the EU has shown that carbon pricing systems should be seen in the context of wider climate policies and can be a source of revenues for other policy objectives.

• Key criteria for climate policy design are environmental efficacy, cost-effectiveness, and political feasibility as well as durability over time and the interaction of carbon pricing with broader climate, environmental, economic and social policies and political priorities.

• Political challenges in the form of wavering public support and interest group pressures can handicap carbon price policies as prices rise and benefits are perceived as diffuse. Research indicates this is particularly true in nations with higher income inequality.

• Carbon prices supported by complementary innovation and industrial policies can bring down technology and compliance costs and can potentially be sequenced to build political coalitions for more expansive climate policy over time.

Key Recommendations

• Well implemented carbon pricing policies are a potentially important tool in the climate policy toolkit. However, carbon pricing cannot stand alone. Politically feasible carbon pricing policies are not sufficient to drive emissions reductions or innovation at the scale and pace necessary.

• Carbon pricing should be implemented as part of a comprehensive suite of climate policies, such as clean energy standards, low or no-carbon transportation projects, government procurement and subsidy for market adoption of emerging technologies, and direct support for clean energy research, development, demonstration, and deployment (RDD&D).

• Using revenues from carbon pricing for clean energy RDD&D, public infrastructure projects, public procurement or subsidy, and alleviating distributional burdens associated with climate policy, may further decarbonization goals and increase public support.