Forget the politics, carbon pricing is an effective way to cut emissions, study shows

A new analysis of climate policies from around the world has confirmed that carbon pricing is an effective tool for cutting emissions.

The study led by Australian researchers and published in the journal Environmental and Resource Economics, reviewed data across 142 counties, including 43 countries that had some form of carbon pricing in place.

The study found that countries with a carbon price achieved substantially greater reductions in greenhouse gas emissions and that the higher the price that was set, the faster emissions reductions were achieved.

On average, a country with a carbon price in place saw emissions fall by around 2 per cent each year since 2007, while countries without a price on carbon saw emissions increase over the same period.

The research, undertaken by academics from the Australian National University and Macquarie University, found that carbon pricing schemes were responsible for around two-fifths of all emissions reductions since 2007, with the remainder attributable to other measures, such as renewable energy targets and feed-in tariffs.

“On average, carbon dioxide emissions fell by two per cent per year over the period 2007–2017 in countries with a carbon price and increased by three per cent per year in the others,” co-author and Australian National University associate professor Paul Burke said.

“This is a five percentage point difference. Our study finds that about two percentage points appear to be due to the carbon price and the remainder is attributable to other factors – including improving technologies, renewable energy policies and differences in fuel tax rates.”

“Using a variety of estimation approaches, we have found a statistically significant link between the adoption of a carbon price and reduced growth in carbon emissions.”

Economists and environmental policy experts have long argued that pricing carbon emissions, and pollution in general, is one of the most economically efficient ways to cut emissions.

However, Australia has become a hostile environment for the concept of carbon pricing, due to a decade long political fight that has seen carbon pricing used in scare campaigns against the adoption of meaningful climate change policies.

Australian National University’s professor Frank Jotzo, who was a co-author of the study, said its findings sent a clear message to governments that carbon pricing remained an effective tool for reducing emissions, even if the politics was less agreeable.

“The message to governments could not be clearer: carbon pricing works, and typically to great effect. Australia’s emissions from fossil fuel combustion fell during 2012–14 when the carbon pricing mechanism was in place, then rose again and flatlined to 2019,” professor Jotzo said.

“While a well-designed approach would include complementary policies such as support for low-carbon research and development, carbon pricing should ideally be the centrepiece of any serious emissions reduction strategy in a market-oriented economy,” associate professor Burke added.

“To get on a low-carbon development model, the evidence suggests that putting a price on carbon is a highly effective way to go.”

Between 2012 and 2014, Australia had an effective price on carbon in place, as was introduced by the Gillard government and which successfully drove substantial reductions in Australia’s greenhouse gas emissions while supporting the continued growth of the economy.

However, that carbon price was subsequently repealed by the Abbott government, and Australia’s emissions have remained stagnant without a meaningful policy in place to incentivise a more rapid transition away from fossil fuels.

The study found that politics remained a barrier to the effective use of carbon pricing mechanisms, which have been “limited by the political infeasibility of implementation in some countries.”

Co-author and Macquarie University academic Dr Rohan Best said that the study further underlined the sound theory behind the use of pricing mechanisms to reduce emissions.

“Putting a price on carbon should reduce emissions because it changes relative prices in favour of cleaner options. The economic theory is rock solid. And now we have found strong evidence that the theory works and that you can see this process in practice across many countries around the globe,” Dr Best added.

Australia has had a voluntary carbon price established under the Emissions Reduction Fund, allowing carbon reductions to be either sold to the federal government or purchased by corporate entities to offset their emissions.

A new analysis by carbon market advisory firm Reputex has shown that the price of voluntary emissions reductions has flatlined, and may not be sufficient to see Australia meet its international emissions reduction commitments.

“Under current policy, large emitting companies are unconstrained in increasing greenhouse gas emissions, meaning there is negligible incentive for industry to offset their emissions growth, or invest in their own emissions reductions activities,” Reputex said.

“This is a costly path for the government to take. Given Australia will ultimately need to reach net-zero emissions under the Paris Agreement, the Commonwealth will either need to increase its investment to offset the continued growth in industry emissions, or require industry to make that investment themselves.”