5 measures economists are debating for reducing carbon emissions
1. Make carbon pricing fair
Exactly 30 years ago in 1991, Sweden was one of the first countries to implement a carbon tax. At the time, the move to leverage market influence was seen as a departure from the mainstream policy approach of regulation. During the period of 1990-2018, Sweden's annual emissions of greenhouse gases fell by 27 percent and there was no discernible negative effect on economic growth from the carbon tax. Despite this success, few other countries have yet to adopt carbon pricing measures.
Why aren’t more countries implementing carbon pricing? A major hurdle for implementation is the delicate political economy of environmental taxation. There are political risks related to concerns from voters that a carbon tax would put a relatively larger tax burden on low-income households. To increase fairness and the political acceptability of carbon pricing, economists therefore recommend that the tax revenue should be returned to households as equal lump-sum rebates, or "dividends", which would enable low-income households to benefit – on average - from the tax policy.
2. Create "climate clubs"
Besides the challenges of political acceptability, there is the issue of "free-riding" linked to carbon pricing. Since carbon emissions and climate change are global in their cause and effect, economists recommend a global carbon price. However, increasing the cost of using fossil fuels could reduce competitiveness and create an incentive for each individual country to "free-ride" – receiving the benefits from the efforts of other countries to reduce emissions but not contributing to the costs. A way to overcome the issue is to implement border adjustment taxes, or "climate clubs". Members agree on a minimum carbon price that each country will implement, and non-members are penalized by a carbon border tariff on imports. The EU is currently considering a tax such as this on imports from countries without a carbon price in place.
3. Tax on meat
The discussion of carbon pricing has so far focused mainly on reducing the use of fossil fuels and resulting carbon dioxide emissions. However, one major source of global greenhouse gas emissions comes from food production. In particular, emissions of methane and nitrous oxide from meat production. A greenhouse gas tax on meat in Sweden was recommended in a report by the Swedish Board of Agriculture (Jordbruksverket) with support from the Swedish University of Agricultural Sciences (SLU) and as far back as 2013. In a more recent study from the Swedish Environmental Protection Agency (Naturvårdsverket), economists and researchers at SLU analysed the effects of implementing such a tax on food in Sweden. Findings indicate that extending the current Swedish carbon tax to include food products would reduce greenhouse gas emissions from this sector by around 10 percent. Beef would see the largest price increase of 18 percent, and with only modest price changes for other food products.
4. Subsidise green technology
If increasing the price of fossil fuels is not politically viable, reducing the costs of low-carbon alternatives may similarly lead to emission reductions. For example, generous incentives for electric vehicles have been in place in Norway since the early 1990s, which have successfully increased the share of electric in the total vehicle fleet. In 2020, more than 50 percent of new sales in Norway were from battery electric vehicles. Similarly, incentives to increase the adoption of solar energy have significantly increased the share of solar in energy production in Europe and the US, and rapidly pushed down the production costs of solar panels. Some economists also recommend subsidies for more unproven technologies, such as carbon capture and storage (CCS).
5. What about nuclear energy?
The first nuclear power reactors were built in the 1950s, and nuclear energy is today a major global source of low-carbon energy production. However, opposite to the cost-trend of other low-carbon energy sources, such as solar and wind, nuclear technology has seen an increasing trend in costs. This trend is peculiar as the costs of new technologies usually drops as they are more widely deployed and used. Economists have linked this unusual cost pattern to an increase in average construction time, lack of economies of scale, few learning effects, and an increase in safety regulations. Taken together, the deployment of new reactors has turned out costly and slow, and the role of nuclear energy as an efficient tool to mitigate climate change remains contentious.
Whilst global emissions curve needs bending further and faster, accelerating debate on all these five measures can help progress towards a net zero global economy.
Julius Andersson PhD.
Researcher, Stockholm Institute of Transition Economics
Affiliated Researcher, Mistra Center for Sustainable Markets at Stockholm School of Economics