Why The World Must Set a Price on Carbon

from Time.

BY LYNN FORESTER DE ROTHSCHILD | DECEMBER 20, 2023
De Rothschild is the founder and CEO of the Council for Inclusive Capitalism.

The 90,000 people and nearly 200 nations who attended the U.N. COP28 climate conference in Dubai this month missed an historic opportunity. To move beyond the woefully inadequate level of climate action since the 2015 Paris Accords, the world must agree to put a global price on carbon. In one stroke, this would recalibrate consumer demand, set the market in motion, reduce emissions, and spur innovation. If only world leaders had remembered the immortal words of legendary investor Charlie Munger: “Show me the incentive, and I’ll show you the outcome.”

A carbon price would supercharge the march toward net-zero emissions because it recognizes the profit incentive of free markets to efficiently allocate capital within our rules-based global economic system. It would cause businesses to write-off fossil fuels and investors to redeploy capital toward clean energy solutions. The tools available today—sustainability reports, voluntary commitments, or naming and blaming—are not incentives; they are nudges, and they will not create needed change at scale. To deny the market a definite price point for carbon is akin to tying one hand behind our back in the most significant fight of our lives

It is time to level with the public and start building a new narrative. Yes, the once-in-a-century energy transition will require prices to rise temporarily—on everything from transport and supplier costs to heating and electricity bills—while the world is still using fossil fuels; but carbon pricing will shift business practice and consumer behavior, making lower-carbon alternatives more accessible and reliable in the near future. A price on carbon will make green products increasingly more affordable than fossil fuel-based products in energy, transportation, agriculture, and construction.

Over time, the price curve of green solutions will come down and energy will make up a smaller portion of individual income than it does now. At that magical inflexion point, the price on carbon will become irrelevant. The market is the strongest weapon available to move away from fossil fuel dependency, but it needs countries to pull the trigger on a carbon price.

Why has carbon pricing not happened? The answer is simple: “It is the politics, stupid.” Politicians, particularly in the United States, are afraid to tell voters that protecting our planet costs money. This collective evasion has to stop. My challenge to climate campaigners is to start calling out politicians who refuse to put a price on carbon. This will create the change we all desire.

There is some good news: The world has started to take some steps in the right direction. Over 70 countries have already implemented a carbon price, in various forms and at different levels including as taxes, credit, or an emissions trading system. And the technical expertise is in place to legitimately measure carbon and its sources.

But there’s more work to do. COP28’s focus on fiscal reforms to cut support for high-emitting industries, such as methane and coal, and create subsidies for clean energy, such as green hydrogen and solar generation, are all positive. But they fall far short of the mark. Thanks to the Inflation Reduction Act, the United States has pushed renewables through subsidies, but this policy does not match the scale of the climate problem. Government funding alone is unable to subsidize the global requirements for clean energy. Moreover, such industrial policy rightfully inflames sensitivities over sky-high public debt and sparks concerns of a global subsidy war, at a time when the world is already precariously dealing with political division and tenuous supply chains.

Experts and world leaders also continue to debate the best price to assign to carbon emissions. At the COP28 meeting last week, I moderated a roundtable of business, investment, and public government leaders, which recommended starting with a global baseline of $50-per-ton. In the United States, a plan by the Climate Leadership Council, which has earned the support of Nobel laureates, Republicans, and Democrats alike, proposes an initial price on carbon of $40-per-ton. The revenue would be used to provide an estimated $2,000 annually to average American households to offset their carbon expenses until renewable markets become cost-competitive. This plan is pro-growth and pro-green and reduces economic inequality.

However it’s designed, carbon pricing stands out as a unifying model, which aligns the incentives of investors, business, and government to decarbonize industry and finance green technology. It will mean that carbon will be reflected in all company balance sheets, income statements, earnings reports, and strategic plans. From there, the societal costs of carbon—from environmental damage to health impacts—will be priced into financial risk and investment decisions in ways that the market understands, ultimately reshaping the world’s approach to our gravest external threat.

By transcending traditional policy constraints, carbon pricing emerges as not only a market basis for reducing emissions, but also a necessary tool for a just transition; one that listens to “the cry of the earth and the cry of the poor,” as Pope Francis wrote in his 2015 encyclical, the Laudato si’. A tangible cost of carbon is the world’s most effective incentive to shift demand and align market forces for the clean energy transition en route to a healthier, more prosperous world.