Discussion Paper

Pricing Carbon Consumption: A Review of an Emerging Trend

Nov 22, 2016 | Clayton Munnings, William Acworth, Oliver Sartor, Yong-Gun Kim, Karsten Neuhoff

Summary

Policymakers have begun imposing prices, via a tax or emissions trading system, on the consumption of carbon emissions. Our survey suggests that such policies can be designed to help improve economic efficiency and potentially ameliorate emissions leakage.

Key Findings

  • Policymakers have started pricing the consumption of carbon emissions—typically layered on top of more conventional prices on the production of emissions—to more fully pass costs along to consumers and thereby improve the economic efficiency of mitigation
  • Some policymakers have introduced prices on carbon consumption in an attempt to reduce emissions leakage caused by prices on the production of those emissions.
  • We expect the trend of pricing the consumption of carbon emissions to continue as policymakers increasingly view such policies as viable complements to enhance the effectiveness of prices on carbon production.

Abstract

Nearly every carbon price regulates the production of carbon emissions, typically at midstream points of compliance, such as a power plant. Over the last six years, however, policymakers in Australia, California, China, Japan, and Korea implemented carbon prices that regulate the consumption of carbon emissions, where points of compliance are further downstream, such as distributors or final consumers. This article aims to describe the design of these prices on carbon consumption, understand and explain the motivations of policymakers who have implemented them, and identify insights for policymakers considering whether to price carbon consumption. We find a clear trend of policymakers layering prices on carbon consumption on top of prices on carbon production in an effort to improve economic efficiency by facilitating additional downstream abatement. In these cases, prices on carbon consumption are used to overcome a shortcoming in the price on carbon production: incomplete pass-through of the carbon price from producers to consumers. We also find that some policymakers implement prices on carbon in an effort to reduce emissions leakage or because large producers of carbon are not within jurisdiction. Because policymakers are starting to view prices on carbon consumption as a strategy to improve economic efficiency and reduce emissions leakage in a way that is compatible with local and international law, we expect jurisdictions will increasingly implement and rely upon them.