Climate change: Price carbon now, before low-cost oil says "ciao"

It’s easy to dream about holidays in far-off exotic islands, especially with current global petrol prices. A sustained low oil price has allowed many of us to put away a little more of that paycheck and think seriously about buying an iWatch or taking that much-deserved break.

As we fantasise about wriggling our toes in the sand or finally being able to wear a phone, big oil companies like BP and Exxon Mobil are scrambling to adjust to this loss in revenue. BP recently announced that it will freeze pay increases in 2015 for its 84,000 staff members and lay off 300 employees. Fossil-fuel giants have had to make drastic changes to reflect that oil is now worth US$50-$60 per barrel, rather than over US$100 per barrel.

This slide in oil prices did not come without warning. The former oil minister of Saudi Arabia, Sheikh Ahmed Zaki, predicted the end of the Oil Age 15 years ago, and in 2009 Fatih Birol of the International Energy Agency (IEA) urged us to "leave oil before it leaves us". Zaki said that discoveries of new oil fields and advancing technology in the energy sector will eventually wipe out the demand for oil. "I can tell you with a degree of confidence that after five years there will be a sharp drop in the price of oil" and his premonitions finally seem to be coming true.

We don’t know how long oil prices will stay low, so with energy bills bottoming out, it’s prime time to introduce a tax on carbon, along with policies that push energy innovation in cost-effective ways, and shift decisions about production and consumption towards low-carbon choices.

"Every government will need to explain how their policy settings are consistent with a pathway to eliminate emissions from fossil fuel combustion in the second half of the century," says OECD Secretary-General Angel Gurría. This means looking at all policy measures to assess if they are effective in reducing CO2 emissions and in line with governments’ climate change objectives. An OECD report, Climate and Carbon: Aligning Prices and Policies outlines specific actions:

Put an explicit price on carbon. Explicit carbon pricing mechanisms, such as carbon taxes and emissions trading systems, are generally more cost-effective than most alternative policy options in creating the incentive for economies to transition towards zero-carbon trajectories.

Identify other cost-effective policy instruments that put an implicit price on carbon. A number of other policies affect a country’s CO2 emissions and can effectively place an implicit price on carbon. Often these policies have been introduced to achieve objectives other than climate-related goals (such as combatting air pollution or raising revenue), with the result that the CO2 emissions abatement achieved may come at a relatively high cost.

Review broader fiscal policy to ensure that it is coherent with stated climate goals. Coherent carbon pricing should also include a review of the country’s fiscal policy to ensure that budgetary transfers and tax expenditures do not, directly or indirectly, encourage the production and use of fossil fuels.

Ensure that any regressive impacts of carbon pricing measures are alleviated through complementary measures and that a clear communication strategy is developed to explain them. A good communication strategy can raise awareness of the benefits of the reforms. It can reassure those most affected regarding any compensatory or other measures to mitigate the regressive impacts of reforms without losing the incentive to reduce emissions.

Ensure coherence between stated climate goals and domestic policies. Consumers, producers and investors must get a clear policy signal of a rising cost for CO2 emissions over time as a result of explicit and implicit carbon pricing policies.

It’s time for governments to ramp up the development of alternative energies and to nail a price onto every tonne of CO2 emitted. With COP21 taking place in Paris in November, sending the right message on climate change means gradually increasing the cost of CO2 emissions, and creating a strong economic incentive to reduce the carbon entanglement and to move towards a zero-carbon world.

More:

Carbon pricing Policy Perspectives on ISSU

Climate and carbon: aligning prices and policies

Price the carbon

©OECD Observer March 2015

This article originally appeared on oecdinsights.org on 12 March 2015.




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