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Could global carbon pricing pay for itself?

By Carol Stubbings, Global Tax and Legal Services Leader, Partner, PwC UK

Global carbon pricing could pay for itself while cutting emissions by 12%, according to a new analysis by the World Economic Forum and PwC.

What would it take to decarbonise fast enough to avoid the worst effects of climate change?¹ One tool we can use to speed decarbonisation is carbon pricing. Many economists and businesspeople - including business leaders in high-emitting industries like cement and shipping² - support carbon pricing as a way to incentivise choices that reduce emissions. At PwC, we see the value of carbon pricing as an efficient, market-based lever to decrease emissions and level the playing field within sectors.

Carbon pricing is already used in various forms in more than 60 localised schemes across the world. But these schemes cover a limited percentage of carbon emissions, and their prices for a ton of carbon range widely, creating an uneven playing field. What if we could implement a coordinated, international carbon price floor instead? 

“At PwC, we see the value of carbon pricing as an efficient, market-based lever to decrease emissions and level the playing field within sectors.”

The International Monetary Fund has proposed exactly this³. But how effectively would the proposed international carbon price floor reduce emissions? And what would be the economic impact? In collaboration with the World Economic Forum, we set out to answer these questions. 

The results are intriguing:

  • An international carbon price could pay for itself. If the revenues raised by the price are returned to households, GDP would decrease by less than 1% across all scenarios tested. Over the longer term, much if not all of the GDP loss would be offset by reducing economic losses due to warming: sea level rise, losses in labour and agricultural productivity, and damage to human health. 
  • An international carbon price could effectively reduce emissions by up to 12.3%. When combined with countries’ existing pledges for emission reductions in their Nationally Determined Contributions, this would help keep temperatures from rising above 2 degrees C -- the top of the Paris Agreement range of 1.5 to 2 degrees C.
  • Naturally, an international price floor comes with challenges. It would be politically challenging to gain global agreement (though 134 countries recently signed up to the OECD framework on corporate taxation, showing such agreement is possible). To succeed, the price floor would require the participation of middle income countries like China. A major economic transition would need to be managed in a just way, both within and between countries (our analysis suggests some ways to do this). 

Our analysis underlines the value of carbon pricing and provides perspective to concerns about its economic impact at a crucial moment for the world. We hope the report assists governments, business, and COP26 decision makers as they navigate a path towards a carbon free future.

¹ The PwC Net Zero Economy Index 2021 shows that the world is decarbonising at less than a fifth of the rate needed to avoid the worst effects of climate change.

² ‘Shippers want a carbon tax so everyone pays to go green,’ Bloomberg News Daily Tax Report, 1 October, 2021. ‘Cement makers pledge large cut in emissions by 2030.’ Guardian October 2021

³ The IMF has proposed a carbon price floor of $75 per ton of CO2 with lower rates of $50 and $25 for middle- and low-income countries, respectively. Countries could choose to implement this through a tax on emissions, a cap and trade system like in the EU, or equivalent measures.

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Carol Stubbings

Carol Stubbings

Global Tax and Legal Services Leader, Partner, PwC United Kingdom