Most emitters do not pay for the harm they are doing. Arguably, the single most important measure for decarbonisation is to introduce a carbon price that is high enough to curb emissions below internationally agreed thresholds for global warming. One of the big advantages of carbon pricing over other policies is the following: It creates an incentive for market actors to seek the lowest-cost solutions for any specific emissions challenge. While carbon prices cover an increasing part of the overall emissions, the current prices are far too low (Green, 2021). Policymakers thus need to find ways to increase prices against pressure from vested interests. This entails decisions about the economically, socially and politically most appropriate pricing mechanisms, e.g. weighing the pros and cons of carbon taxes vs. emissions trading systems, as well as about exceptions and necessarily sequenced introduction to allow industries and households to adapt (Edenhofer et al. 2021). At the same time, policy research suggests that pricing is not enough to enable the required change in “sociotechnical systems”, such as those of energy, transport or industrial production (Rosenbloom et al. 2020). This is due to a wide range of market failures and the need to change deeply entrenched socio-cultural practices. Complementary measures are thus needed, such as regulation of sector-specific maximum permissible emissions, technical standards, and R&D subsidies (Penasco, Anadón and Verdolini, 2021; Tvinnereim and Mehling 2018). Designing such policy packages, however, is anything but trivial, as industry-specific complementary incentives may distort the price signals of carbon markets (Martin/ van den Bergh 2019; van den Bergh et al. 2021). Furthermore, there are political economy issues, in particular opposition against additional taxes or policies to phase out carbon-intensive practices, as societal groups are affected differently and tend to prioritise immediate economic gains over long-term sustainability and intergenerational justice. Solutions thus need to be found to make carbon pricing politically acceptable for, or even garner support by, national citizens (Klenert et al. 2018), and enterprises. This need can be addressed through a second big advantage of carbon pricing, namely that it creates revenues to be used. For economies that are highly dependent on fossil fuels, such as the OPEC countries, strategies are needed to prepare for a low carbon economy with minimal disruptions while avoiding incentives to increase extraction in fear of rising carbon prices. Last but not least, climate policies need to be internationally harmonised to avoid carbon leakage – the shift of industries to countries with less stringent standards – which may occur when trading partners apply different carbon prices (Bataille et al., 2018; van den Bergh et al. 2020).

Overview of carbon pricing challenges

• Michael Grubb, University College London (UCL)
  
  

Challenges and opportunities of introducing a uniform, credible and durable carbon price across all sectors – the case of the EU

• Michael Pahle, Potsdam Institute for Climate Impact Research (PIK)
  
  

Carbon pricing and industrial transformation

• Olga Chiappinelli, German Institute for Economic Research (DIW)
  
  

Making carbon pricing socially acceptable: distributive effects and revenue recycling

• Daniele Malerba, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)
  
  

How can carbon pricing be harmonised internationally? Would “carbon clubs” work, and what is the role of measures that seek to address carbon leakage (CBAM)?

Clara Brandi, German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

Moderator

• Karsten Neuhoff, German Institute for Economic Research (DIW)