Carbon pricing has long dominated climate debates around the world.1 Academics and the media have called it the single most important policy to combat climate change. We agree that a price on carbon is a critical component of a comprehensive national climate plan. It is, however, only one of many policies we need to eliminate emissions.

15 years of carbon pricing in 40 countries and 20 subnational governments (states, provinces, and cities)2 reveal that although some carbon prices are performing well, there’s a mismatch between theory and practice:

Nearly all carbon prices currently in place are too low to drive the ambitious decarbonization proponents have sought; Existing economic and regulatory conditions often prevent carbon pricing from excelling in practice; Some carbon prices are not delivering the price certainty that investors need; and Carbon pricing requires complementary policies to address hard-to-decarbonize sectors.

In fact, over the past 15 years, other climate policies have often resulted in the most emissions reductions. Such policies like clean energy and energy efficiency standards have proven to be more politically popular and effective at preventing the deployment of new fossil fuel assets that will run for decades.

Carbon pricing remains a crucial part of the climate puzzle. But the severity of the climate crisis requires a complete set of strong, innovative clean energy policies to get us to zero by 2050.3 We must implement policies now that incentivize and invest in clean energy in order to build support for more comprehensive and ambitious climate policies, like carbon pricing, in the future.4

What Is Carbon Pricing?

The goal of carbon pricing is to get polluters to change their behavior by imposing a cost on emitting greenhouse gases. To implement a carbon price, policymakers in principle identify the costs that greenhouse gases impose on society and put a price on emitting activities that harm the climate. This is what economists call “internalizing the externality.”

The price can either increase gradually or remain at a fixed rate to achieve the desired cost.5 But in practice, carbon prices do not always initially, or ever, capture the full external cost imposed by greenhouse gases.

Broadly, carbon pricing can take the form of a carbon tax or a cap-and-trade system. There are some noteworthy differences between the two, but they share the same goal.6 Real-world carbon pricing instruments often take elements from each.

Rationale for Support

Carbon pricing policies have many advantages. Some proponents even consider all other climate policies “second best”7 and argue for rolling back existing regulations to better accommodate an incoming carbon price.8 The core argument is that a carbon price is the most economically efficient, lowest-cost way to achieve emissions reductions.9

Other benefits include:

Relying on the market instead of the government to provide climate solutions, which can arguably lead to swifter action on climate change;

Using price signals to encourage long-term planning that favors the use of cleaner, more efficient alternatives;

Steering investors in innovation toward low-carbon technologies by signaling that future carbon prices will help offset the costs of investment; and

Creating new revenue for much-needed climate solutions and negating the regressive impact that rising energy prices may have on low- and middle-income families.10

How Has It Played Out?

To date, the impact of carbon pricing systems has varied dramatically. The United Kingdom’s carbon tax has exceeded expectations. Analysts have credited the policy with reducing the emissions of the British power sector by 22% in the period from 2012 to 2017, all at the low cost of about $25 per ton of CO 2 reduced.11That is an impressive performance for any climate policy. Moreover, the UK government effectively coupled the tax with complementary policies, for example the landfill tax.12 This added deeper emissions cuts and improvements for public health without compromising the carbon price signal.

But many carbon pricing policies are not as successful. In fact, the UK’s carbon tax came in response to the ineffectiveness of another policy: the European Union Emissions Trading System (EU ETS). The EU ETS, which covers 31 countries, is a cap-and-trade system that has struggled with low and volatile carbon prices, weak incentives for innovation, and only marginal reductions in emissions.13

Policy ideas often excel less in practice than expected. Implementers only learn of many limitations and drawbacks of policies after they are put into play. The lessons we’ve learned to date can instruct how to improve carbon prices and show that we need additional, complementary policies to address the climate crisis.

With carbon pricing, there are four important observations for us to consider moving forward:

Observation 1: Nearly all carbon prices are too low to drive the ambitious decarbonization proponents have sought

If the goal of carbon pricing is to capture the negative societal impacts of carbon pollution, then emitters should be paying at least ~$50 per ton of CO 2 e.14 Alternatively, if the goal is to reach net-zero emissions by mid-century, the Carbon Pricing Leadership Coalition estimates that polluters should be paying $40-80 per ton of CO 2 e.15 But if you look at carbon prices around the world, as shown in Figure 1, policymakers rarely peg them higher than $30. This means that the vast majority of today’s carbon prices are underperforming and unlikely to result in the necessary emissions reductions.

Today’s low oil and gas prices compound the problem. Higher oil and gas costs can outweigh or at least mitigate the added cost of a moderate carbon tax, while low gas prices serve to justify continued investments in carbon-emitting assets.16 Higher carbon prices would certainly help, but attempts to increase them have often resulted in backlash, in some cases even terminating the policy (like in Australia).17 Despite the allure of low-cost emission reductions, if voters won’t allow the carbon prices we truly need, then the mechanisms won’t hit the mark.

Figure 1: The price of carbon in different carbon pricing mechanisms implemented across the world. Only five fully internalize the low estimate of the social cost of carbon, $50 per ton of CO 2 e.

Observation 2: Existing economic and regulatory conditions often prevent carbon pricing from excelling in practice