Carbon pricing and COVID-19

ABSTRACT

A question arising from the COVID-19 crisis is whether the merits of cases for climate policies have been affected. This article focuses on carbon pricing, in the form of either carbon taxes or emissions trading. It discusses the extent to which relative costs and benefits of introducing carbon pricing may have changed in the context of COVID-19, during both the crisis and the recovery period to follow. In several ways, the case for introducing a carbon price is stronger during the COVID-19 crisis than under normal conditions. Oil costs are lower than normal, so we would expect less harm to consumers compared to normal conditions. Governments have immediate need for diversified new revenue streams in light of both decreased tax receipts and greater use of social safety nets. Finally, supply and demand shocks have led to already destabilized supply-side activities, and carbon pricing would allow this destabilization to equilibrate around greener production for the long-term. The strengthening of the case for introducing carbon pricing now is highly relevant to discussions about recovery measures, especially in the context of policy announcements from the European Union and United States House of Representatives.

Key policy insights

• Persistently low oil prices mean that consumers will face lower pain from carbon pricing than under normal conditions.

• Many consumers are more price-sensitive during the COVID-19 context, which suggests that a greater relative burden from carbon prices would fall upon producers as opposed to consumers than under normal conditions.

• Carbon prices in the COVID-19 context can introduce new revenue streams, assisting with fiscal holes or with other green priorities.

• Carbon pricing would contribute to a more sustainable COVID-19 recovery period, since many of the costs of revamping supply chains are already being felt while idled labour capacity can be incorporated into firms with lower carbon-intensity.

KEYWORDS:

• Carbon price
• carbon tax
• climate policy
• COVID-19
• emissions trading
• green recovery

Acknowledgements

Thanks for comments and discussion from Mark Budolfson, Ewan Kingston, Maddalena Ferranna, Ulrike Kornek, Helen Mintz, Peter Singer and Rob Socolow. Thanks also to the editors and two anonymous reviewers.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 UN climate change news, 4 May 2020. https://unfccc.int/news/support-grows-for-a-better-recovery-from-covid-19.

2 In regions where fossil fuels are subsidized, parity of reasoning suggests that the subsidies should be withdrawn and the same arguments for introduction of a carbon price apply, albeit with greater force (Basri et al., 2020). Such counterproductive subsidies have not been limited directly to fossil fuels. They include subsidies that apply to, for instance, housing and commuting.

3 For a review of quantity-based instruments, see Narassimhan et al. (2018). For a discussion of relative costs and benefits between these systems see Haites (2018).

4 As Helm (2020) notes, the oil glut that precipitated the price crash during the COVID-19 crisis, when prices even turned negative in some cases, occurred before many of the economic effects of the crisis were felt. Low energy prices are therefore partially independent of the demand shock.

5 See, for instance, the levelized cost of energy estimates at https://www.lazard.com/perspective/lcoe2019.

6 Government support in recovery packages can be found at https://www.energypolicytracker.org/. Thanks to the editor for pointing to this source.

7 While the discussion here tracks carbon taxes, similar considerations apply to emissions trading schemes. They are less discussed because the political pushback against emissions trading scheme revenue is lower than for carbon taxes – trading schemes are less likely to be seen as taxes on consumers, even if they do have the effect of raising energy prices (Rabe, 2018). On the emissions trading schemes side, Narassimhan et al. (2018) discuss various uses for trading scheme revenues. They discuss three categories: supporting emissions-intensive and trade-exposed sectors, funding green projects, and supporting distributional equity. While they do not pronounce on the relative merits of these different uses of trading scheme revenues, similar considerations and comparisons to those given here could be adduced.

8 Pizer and Sexton (2019) point to different national characteristics indicating that the tax incidence depends on both the region and the form of energy is being taxed. For instance, with respect to transportation fuel taxes, the direct impacts of these taxes could be progressive in Turkey, where car ownership is heavily weighted by wealth.

9 This simple transfer scheme also has the political benefit of being promoted by prominent conservative thinkers (Baker et al., 2017).

10 Thanks to Ewan Kingston for suggesting this line of reasoning.

11 Of course, we also see preferences for use of private transportation instead of public transportation, due to fears over virus transmission. In a recovery period where oil prices may rebound, carbon prices could add to the opportunity costs of using private transportation with fossil fuels. Incentivizing purchases of electric vehicles, for example, could have significant value in reducing emissions, regardless of region (Knobloch et al., 2020).