Why The World Should Set a Carbon Price

TThe 90,000 people and nearly 200 countries attending the UN COP28 climate conference in Dubai this month missed a historic opportunity. To move beyond the lack of adequate levels of climate action since the 2015 Paris Accords, the world must agree to put a global price on carbon. In one stroke, it will recalibrate consumer demand, move the market, reduce emissions, and spur innovation. If only world leaders remembered the immortal words of legendary investor Charlie Munger: Show me the incentive, and I’ll show you the outcome.

A carbon price will accelerate the march toward net-zero emissions because it recognizes the profit incentive of free markets to efficiently allocate capital within our rules-based global economic system. This can cause businesses to phase out fossil fuels and investors to redeploy capital to clean energy solutions. The tools available today are sustainability reports, voluntary commitments, or naming and blaming are not incentives; they are nudges, and they cannot make the necessary changes in size. Denying the market a fixed carbon price point is like tying one hand behind our back in the most important fight of our lives.

It’s time to level with the public and start creating a new narrative. Yes, the once-in-a-century energy transition will require a temporary increase in prices for everything from transportation and supplier costs to heating and electricity bills while the world still uses fossil fuels; but carbon pricing will shift business practice and consumer behavior, making lower-carbon alternatives more accessible and reliable in the near future. Carbon pricing will make green products cheaper than fossil fuel-based products in energy, transportation, agriculture, and construction.

Over time, the price curve of green solutions will go down and energy will make up a smaller part of individual income than it does now. At that magical inflexion point, the price of carbon becomes irrelevant. The market is the strongest weapon available to move away from dependence on fossil fuels, but it requires countries to pull the trigger on carbon pricing.

Why hasn’t carbon pricing happened? The answer is simple: Politics, stupidity. Politicians, especially in the United States, are afraid to tell voters that protecting our planet costs money. This collective avoidance must stop. My challenge to climate campaigners is to start calling out politicians who refuse to put a price on carbon. This will create the change we desire.

There is some good news: The world is starting to take some steps in the right direction. More than 70 countries have already implemented a carbon price, in various forms and at different levels including taxes, credits, or emissions trading systems. And the technical expertise is in place to legitimately measure carbon and its sources.

But there is much work to be done. The COP28 focused on fiscal reforms to cut support for high-emitting industries, such as methane and coal, and create subsidies for clean energy, such as green hydrogen and solar generation, all positive. But they fall short of the mark. Thanks to the Inflation Reduction Act, the United States is pushing renewables through subsidies, but this policy does not match the scale of the climate problem. Government funding alone cannot subsidize the world’s needs for clean energy. In addition, such an industrial policy rightly inflames sensitivities over high public debt and raises concerns of a global subsidy war, at a time when the world is dangerously facing fragmentation. in politics and supply chains.

Experts and world leaders also continue to debate the best price to put on carbon emissions. At the COP28 meeting last week, I moderated a roundtable of business, investment, and public government leaders, who recommended starting with a global baseline of $50-per-ton. In the United States, a plan by the Climate Leadership Council, which has the support of Nobel laureates, Republicans, and Democrats, proposes an initial carbon price of $40-per-ton. The proceeds will be used to provide approximately $2,000 per year to the average American household to offset their carbon costs until renewable markets become cost competitive. This plan is pro-growth and pro-green and will reduce economic inequality.

Despite its design, carbon pricing stands as a unifying model, aligning the incentives of investors, businesses, and governments to decarbonize industry and finance green technology. This means that carbon appears on all company balance sheets, income statements, income reports, and strategic plans. From there, the social cost of carbon from environmental damage to health effects will be priced into financial risk and investment decisions in ways that the market can understand, ultimately changing the way the world works in our worst external threat.

By going beyond traditional policy limits, carbon pricing emerges as not only a market basis for reducing emissions, but also a necessary tool for a rational transition; one who listens to the cry of the earth and the cry of the poor, as Pope Francis wrote in his 2015 encyclical, Laudato si. A tangible carbon cost is the world’s most effective incentive to shift demand and align market forces for a clean energy transition toward a healthier, more prosperous world.

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Image Source : time.com

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