Carbon Pricing: What It Is And Its Implication On Energy Sourcing

By Martin Ochieng’

Carbon pricing

Sometimes referred to as a form of tax, is a cost levied on the carbon content of fuels. The concept draws from the need to encourage industries most involved in pollution to reduce the amount of greenhouse gasses they liberate into the atmosphere [1]. All these efforts aim at reducing the current and potential effects of climate change.Economists regard this phenomenon (Climate change) as a market failure.

The implication of this definition draws from the realization that climate change poses significant risks and costs to future generations who will suffer the consequences with the same risks and consequences failing to reflect in current market prices [1]. Scholars suggest that the current society needs to account for the future costs of climate change by putting a price on the thing that causes it.

The World Bank [2] identifies two main types of carbon pricing. These are emissions trading systems (ETS) and carbon taxes.

The ETS system

Sometimes described as the cap and trade system places a cap on the total allowable greenhouse gas emissions and allows industries with low emission to sell their extra allowances to larger emitters. This particular approach has been highly beneficial to Tesla, the electric car company which has been able to raise up to two billion dollars in carbon trading with car manufacturers dealing in high fuel consumption vehicles [3].


Emissions Trading System

Carbon taxes

As the name suggests, means the government institutes a carbon tax levied on the distribution, use, and sale of fossil fuels basing the cost on their respective carbon content [1]. The basis of these approaches remains the same. Therefor, carbon pricing makes environmental pollution via carbon emissions increasingly expensive.

Carbon Tax System

What are some of the effects or carbon taxing?

The effects of such approaches are evident in countries that took up this initiative. For instance, the UK ranked 20th out of a list of 33 wealthy countries in 2012 in terms of low carbon electricity use. In 2017, the country rose through the ranking to 7th a fete unheard of before according to a study by Imperial College London [3]. This occurrence was a direct result of carbon pricing introduced by the country in 2013 at £18 per ton. This change made it more expensive to burn coal which produces twice the emissions per unit as natural gas [3].

Figure 1: The UK’s Electricity generation from fossil fuels

Has carbon pricing been tried before?

Currently, carbon pricing is still a relatively foreign concept to most African countries including Kenya.

However, Nyavaya [4] reports on a different approach taken by some African countries with Kenya being one of them. This approach is referred to by proponents as Carbon Credits. In a nutshell, this involves the planting of trees and maintenance of forests to offset the effects of greenhouse gas emissions, particularly through industrial activities.

This approach is in line with the United Nations’ Sustainable Development Goals (SDGs). However, this method is not without its challenges as the market for carbon credits both locally and internationally is still a little slim. However, success cases exist especially along the coastal region with villagers planting mangroves for carbon credits with the help of foreign organizations.

I know what you’re thinking. This can’t be as fool proof as advertised or everyone would be immediately in on it. However, Carbon pricing has its flaws including concerns such as consumers bearing the increased cost as a result of carbon pricing. Such concerns have made this concept’s proliferation a little slower with politicians lobbied by industries exploiting this concern.

However, a few countries have shown great progress in combating this issue with Canada going as far as recommending the redistribution of revenue collected through carbon pricing to its citizens based on household income in a new carbon pricing bill.

Studies find that their approach leads to a net cost of at least zero to a majority of households [5]. It is important to note, however, that other studies find ambiguous results in other scenarios [6].

Conclusion

Clearly, the world is increasingly becoming aware of the implications of climate change. This is especially exemplified by the occurrence in the United States where an ambitious bill championing changes to offset the effects of climate change was voted down but elicited a conversation about the serious implications of apathy towards the same [5]. The price of pollution will be heavy in the coming decades. Therefor, industries need to understand these costs today through carbon pricing to reduce the rate of global warming. This will fuel the shift to cleaner energy.

Works Cited

[1] London School of Economics, “What is a carbon price and why do we need one?,” 17 May 2018. [Online]. Available: http://www.lse.ac.uk/GranthamInstitute/faqs/what-is-a-carbon-price-and-why-do-we-need-one/.
[2] The World Bank, “Pricing Carbon,” 15 May 2019. [Online]. Available: http://www.worldbank.org/en/programs/pricing-carbon#CarbonPricing.
[3] Transport Evolved, “SUVs and Pickup Trucks are Helping Tesla’s Balance Sheet — Just Not How You Might Think,” Transport Evolved, 10 May 2019. [Online]. Available: https://www.youtube.com/watch?v=_nBYEHPH8RQ. [Accessed 16 May 2019].
[4] A. Rathi, 1 February 2018. [Online]. Available: https://qz.com/1192753/a-carbon-tax-killed-coal-in-the-uk-natural-gas-is-next/.
[5] K. Nyavaya, “Carbon credit: A lesson from Kenya,” 14 January 2018. [Online]. Available: https://www.thestandard.co.zw/2018/01/14/carbon-credit-lesson-kenya/.
[6] J. Oliver, “Green New Deal: Last Week Tonight with John Oliver (HBO),” HBO, 12 May 2019. [Online]. Available: https://www.youtube.com/watch?v=JDcro7dPqpA. [Accessed 16 May 2019].
[7] I. I. Dorband, M. Jakob, M. Kalkuhl and J. C. Steckel, “Poverty and distributional effects of carbon pricing in low- and middleincome countries – A global comparative analysis,” World Development, vol. 115, pp. 246-257, 2019.

1 Comment

  1. Stehen Okello

    A great piece Mr. Ochieng. I enjoyed reading it.

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