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06-13-2024

Carbon pricing is effective in reducing emissions

A comprehensive study reveals that carbon pricing systems are effective in reducing greenhouse gas emissions by up to 21% in their early years of implementation. This finding is based on an extensive meta-analysis of 17 climate policies worldwide.

The researchers used artificial intelligence to analyze existing surveys and standardize their results using a novel calculation concept.

Evidence-based climate policy

The study was led by the Berlin-based climate research institute MCC (Mercator Research Institute on Global Commons and Climate Change). The ultimate goal of the research is to inform the debate on climate policy by providing empirical evidence of the effectiveness of carbon pricing.

“This research can help set to rights the debate on the fundamental orientation of climate policy. Politicians have repeatedly questioned the efficiency of curbing greenhouse gas emissions through pricing, and often focus excessively on bans and regulation instead,” noted Ottmar Edenhofer, Director of MCC and co-author of the study.

“A policy mix is certainly needed as a rule, but the conflict of beliefs over the optimal core instrument of climate policy can be resolved with facts.”

Analyzing the impact of carbon pricing

The meta-study began with a critical question: how did emissions change after the start of carbon pricing compared to a simulated business-as-usual scenario?

Through a thorough keyword search in literature databases, the research team identified nearly 17,000 studies.

Using machine learning methods, they narrowed their focus to 80 relevant studies. These included 35 studies on pilot systems in China, 13 on EU emissions trading, 7 on the British Columbia system in Canada, and 5 on the “Regional Greenhouse Gas Initiative” in the United States.

Key data from these studies were extracted and standardized, including statistical indicators on the impact of carbon pricing, the type of implementation (tax or emissions trading), and the observation period.

The research team corrected for weaknesses in the primary surveys, such as deviations from standard laboratory experiment settings and the tendency to only publish significant effects.

Effectiveness of carbon pricing

The empirical data shows that carbon pricing in some Chinese provinces had an above-average effect on emissions reduction.

An aggressive policy design and a favorable environment, such as low CO2 avoidance costs, further enhanced the effectiveness of carbon pricing.

Interestingly, the method of implementation (tax versus emissions trading) was less significant in the findings than in the political debate.

Study lead author Niklas Döbbeling-Hildebrandt, a PhD student in the MCC working group Applied Sustainability Science, emphasized the need for further research.

“The emissions impacts of more than 50 further carbon pricing systems have not yet been scientifically evaluated. Also, the recent significant rise in carbon prices has not yet been taken into account,” noted Niklas Döbbeling-Hildebrandt.

“Our systematic literature review furthermore highlights the potential for methodological improvement for precise and bias-free surveys.”

Advancing climate policy through research

The study underscores the importance of comprehensive and meaningful research syntheses to guide climate policymakers. It calls for new standards and further fieldwork to continuously update the effects of carbon pricing and other policy instruments.

This evidence-based approach will help ensure that climate policies are effective and well-informed.

More about carbon pricing

Carbon pricing is an economic strategy aimed at reducing greenhouse gas emissions by assigning a cost to emitting carbon dioxide (CO2).

The primary goal is to incentivize businesses and individuals to adopt cleaner practices by making the cost of emitting CO2 financially significant.

This approach relies on market mechanisms to encourage the reduction of carbon footprints and the adoption of sustainable technologies.

There are two main methods of CO2 pricing: carbon taxes and cap-and-trade systems. A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or the carbon content of fossil fuels. This tax incentivizes emitters to reduce their emissions to save costs.

On the other hand, a cap-and-trade system sets a limit (cap) on the total amount of greenhouse gases that can be emitted by covered entities. The government distributes or auctions off emissions permits, which companies can trade among themselves.

Companies that can reduce emissions at lower costs can sell their extra permits to those facing higher reduction costs, thus promoting cost-effective emissions reductions across the economy.

Both methods aim to internalize the external costs of carbon emissions, essentially making polluters pay for the environmental damage they cause. By doing so, CO2 pricing encourages innovation in green technologies and fosters a transition towards a low-carbon economy.

The study is published in the journal Nature Communications.

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