A barrel of oil sells for about $80 on the global market. Think about the power of oil prices: it inspiresPinballforsaleExtensive human efforts have been made, trillions of dollars have been invested in technological breakthroughs, and some of the world's largest companies have been created-all to extract fossil fuels from places on earth where they can be found.
In 2024, the burning of these fuels and other substances will release about 36 billion tons of carbon dioxide into the atmosphere. Policymakers want to bring that number down to zero. But to achieve the goal, strong incentives are needed-which is why the government must price carbon emissions as soon as possible.
A carbon tax is the most effective way. It can direct investment to green projects and allow the government to cut other distorting taxes. So far, however, political factors have proved insurmountable. Rich countries worry about rising energy costs and declining competitiveness. Developing countries with carbon-intensive economies worry that they will pay more than their fair share. By 2023, a full carbon tax accounted for less than 5% of global greenhouse gas emissions.
Another option is carbon trading, where emissions limits are set by the government and then priced by the market. Participants who have the ability to increase the amount of emission reductions can sell carbon credits to those who cannot. The EU's carbon trading system is the largest of its kind, covering nearly 1/5 of global emissions and setting a cost of up to $110per tonne (which has been reduced, in part because of the strong development of clean energy). In other, unregulated carbon compensation markets, environmentally conscious companies can fund carbon capture technologies in Denmark and forest conservation in Zimbabwe.
However, there is still a long way to go to unify these markets and reach something similar to a global uniform price. Carbon reductions are not as interchangeable as physical commodities: it may not cost much to reduce a tonne of carbon emissions in poorly regulated countries; carbon compensation achieved by forests may come to naught or even turn into outright fraud. The price of compensation for the most crude carbon production can be as low as $1 per tonne, but it can only be used for disorganized "green" behavior. Although the quality control of carbon compensation is commendable, there is still a long way to go. Unless carbon offsets are perfectly designed and aimed at the long term, offsetting actual emissions will move the world further away from net zero.
A feasible plan is on the horizon. For example, experts at the International Monetary Fund (IMF) have proposed a floor for carbon prices, which governments can set through taxes, carbon trading or equivalent measures. If the minimum carbon prices for the lowest-income and highest-income countries are set at $35 and $145, respectively, combined with sufficiently high emission targets, then this approach should be enough to put the world back on track to limit warming to no more than 2 degrees Celsius.
What is needed now is an agreement that allows a certain number of great powers to act together. For example, the new EU border adjustment mechanism imposes carbon tariffs on certain imports that do not meet EU environmental standards, providing impetus for cooperation among trading partners in the region. With effective incentives, people and enterprises will seek the best and fastest way to reduce emissions, and then it is possible to achieve huge economic benefits. The longer the procrastination, the harder the task will be.