Carbon pricing : Past, Present, Future

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Title: Carbon pricing : Past, Present, Future
Author: Nissinen, Sari
Other contributor: Helsingin yliopisto, Valtiotieteellinen tiedekunta, Politiikan ja talouden tutkimuksen laitos
University of Helsinki, Faculty of Social Sciences, Department of Political and Economic Studies (2010-2017)
Helsingfors universitet, Statsvetenskapliga fakulteten, Institutionen för politik och ekonomi
Publisher: Helsingin yliopisto
Date: 2020
Language: eng
Thesis level: master's thesis
Discipline: Taloustiede
Abstract: Greenhouse gases can be considered as negative externalities that harm the climate. Externalities can be internalized by setting a tax equal to the marginal damage from the externality; a lesson taught by Pigou already a hundred years ago. Carbon pricing has long been seen as the most prominent tool to fight climate change. In recent decades there have been efforts to agree on a global carbon emission reductions. Although international agreements have been implemented, most of those have lacked either effective quantity goals or adopting of global carbon price. The failure of global agreements is ambiguous, but a tendency to trust on countries altruism in agreeing on costly emission reductions has hardly helped. There are already numerous scientists who have suggested that adopting a single global carbon price would be both relatively easily agreed and sufficient as a tool to restrict global carbon emissions. By adopting a mutual price for carbon, the national authorities would be left with implementing the emission reductive policies. As some countries and unions have adopted carbon pricing schemes, knowledge on the effectivity of those instruments are beginning to emerge. Carbon taxes and cap and trade systems are common mechanisms to implement carbon pricing and in optimal settings, the outcomes of the instruments will be identical. Nevertheless, in practise the outcomes of the instruments depend on the regulative authority’s capability in estimating an effective level for the tax or the emission cap. It is suggested that it is easier to reach an international agreement of a price rather than quantity measure. Although a global single carbon price would likely represent a compromise, having a shadow value of carbon can help in knowing price ranges given by modern models that combine climate science with economical approaches. With carbon taxes the national authorities gain tax revenue, which is a specific benefit with taxes over emission caps. This revenue recycling makes interactions of carbon taxes and specifically labor taxes especially important to investigate. This study goes through the backgrounds of carbon pricing in the perspectives of international agreements, efficiency, modern integrated assessment models and their estimates for the social cost of carbon. Further, we will go through a simple model which shows the interactions of environmental taxation and the economy. The guiding light of the study is especially Weitzman’s (2014) idea of the single carbon price. The study aims on combining the knowledge on carbon pricing and pointing to the urgency for emission mitigative actions to be made.

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