Carbon pricing can support the COVID-19 recovery by boosting consumption and investment and softening the hit on fiscal deficits
Careful implementation of carbon pricing with reductions in fossil fuel subsidies can raise revenues to support the COVID-19 recovery and make society less vulnerable to future climate, ecological or public health risks, according to a new policy brief published today (May 15th) by the Grantham Research Institute on Climate Change and Environment at the London School of Economics and Political Science (LSE).
While the immediate focus of rescue packages has rightly been on the public health emergency, the ‘carbon pricing’ policy brief presents the case for the role of carbon pricing in the post-rescue phase, and has been developed in response to increasing calls to focus on the importance of clean investment in stimulating a sustainable economic recovery.
While businesses require government assistance during the economic crisis caused by COVID-19, the brief argues that it is the wrong moment to slow down the global progress in carbon pricing or to delay the removal of fossil fuel subsidies. Carbon pricing removes the implicit subsidy for greenhouse gas emissions, yet less than 5 per cent of global emissions covered under carbon pricing initiatives are priced at a level consistent with achieving the goals of the Paris Agreement and global fossil fuel subsidies remain large.
“Carbon pricing is fair and efficient and sends a clear message that the polluter must pay. But if carbon is not priced and fossil fuels are subsidised, the post-COVID-19 recovery will be distorted in favour of a high-carbon economy which will leave society more vulnerable to future risks and lock in a high-carbon path that is more costly to reverse later” said author and Grantham Institute Policy Fellow, Josh Burke.
“Putting a price on carbon can achieve both economic and environmental objectives as carbon pricing with complementary measures will encourage the substitution of high-carbon goods and services with lower carbon technologies, stimulating sustainable growth rather than driving down economic activity,” he added.
The brief stresses that the carbon price need not be uniform, but may reflect sectoral differences in investment costs, price sensitivity and distributional effects. It also warns that without a strong carbon price, a recovery in demand for oil driven by the lower price could act as a disincentive to make the shift to cleaner sources of energy. While the brief describes the massive deployment of automatic stabilisers by many governments to the pandemic as sound economic stewardship, it cautions policymakers against imposing any kind of subsequent 2010s-style austerity.
Heading off any criticism of introducing carbon pricing during a recession, the brief argues that taxes could be moved from people to polluters as carbon pricing raises revenue in a better way than labour or income taxes. However, it notes that most carbon price revenues should be recycled.
“A carbon tax or permit auctions are a temporary revenue source because the tax base is eroded over time, but structurally they can provide a large source of revenue. In the UK, this could be in the region of £15 billion a year over the next 10 years, equating to roughly three-quarters of annual public spending on adult social care. And a ‘citizen dividend’ can help build popular support for carbon pricing and would help to keep up consumer spending,” he concluded.
Read the brief, “Pricing carbon during the economic recovery from the COVID-19 pandemic”. The link will be live once the embargo has lifted.
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Notes for editors
About The Grantham Research Institute on Climate Change and the Environment
Established in 2008 at the London School of Economics and Political Science, the Institute brings together international expertise on economics, as well as finance, geography, the environment, international development and political economy to establish a world-leading centre for policy-relevant research, teaching and training in climate change and the environment. It is funded by the Grantham Foundation for the Protection of the Environment.