Originally posted by the Enel Foundation
Enel Foundation has provided research guidance, scientific contributions and funding for an extensive comparative study conducted by the Earth Institute’s Research Program on Sustainability Policy and Management at Columbia University on the suitability of different carbon pricing mechanisms as policy instruments to mitigate climate change in different economic and institutional contexts. The study analyzed the jurisdictional characteristics of 37 countries where carbon pricing mechanisms – both carbon taxes and cap-and-trade schemes – have been implemented or proposed as a means to support decarbonization.
The analysis considered the effectiveness of carbon pricing in emissions reduction, regulatory stability, distributional effects, interactions with other policies and the impact on global trade. A set of stylistic facts are associated with the adoption of carbon pricing, with some differences between carbon tax and emissions-trading (ETS) policy regimes.
Carbon taxes may be favored in some jurisdictions because of lower cost and comparative ease of implementation and the potential to increase government revenue and offset reductions in income taxes.
Despite the slightly higher cost of implementation, due to the need to establish capacities for regulatory oversight, auctions, and monitoring, reporting, and verification (MRV) processes, ETSs are better able to set firm limits on emissions. ETSs are in principle able to reduce the marginal cost of abatement by using the market mechanism to allocate reductions to the least cost actors, but they require significant market depth and diversity of participants. ETSs may also be natural corollaries of broader socio-economic goals, such as energy market development and cross-border integration.
Revenue-neutrality and transparent/socially accepted use of proceeds are key drivers of social acceptance of carbon pricing where they have a significant regressive impact. A well-publicized implementation schedule, including a multi-phased approach to pricing, is needed to reduce economic or social shocks. Public perceptions of government effectiveness can impact the ability of a policy to be adopted, implemented, and sustained over time. Regardless of whether the burden of carbon pricing policies is real or perceived, the willingness of firms or households to accept additional taxation or emissions caps is critical for policy success.
Carbon leakage does not appear to represent an economically significant obstacle. Jurisdictions that have chosen to implement carbon pricing have higher overall export intensity than the global average, suggesting that carbon leakage is not a significant concern for export-oriented economies.
Carbon pricing policies can catalyze resource efficiency, green technology development, low-carbon intensity industries, electricity generation from renewables, and low-carbon transportation, provided that the policy objective is clear.
Chile and Colombia, which are in the process of implementing carbon pricing policies, were analyzed as case studies. They both present characteristics which could favor effective and stable implementation.
The table below summarizes the main features of ETS and Carbon Tax with reference to the key parameters analyzed in the study.
