There are many worthwhile uses for revenues for carbon pricing. In practice a mixture of uses is likely to be found.
My previous post estimated that carbon pricing will raise around $22 billion worldwide this year, and suggested that this has the potential to grow by an order of magnitude. This post looks at how revenues might be used.
Revenues from carbon pricing can be used for both climate change related purposes and more general purposes. The main categories are summarised in the table, and described briefly below.
Summary of potential uses of revenue raised by carbon pricing
|General fiscal and social goals||Climate change related purposes|
|Support for vulnerable groups||Adaptation|
|Reduction of other taxes||Distribution to those affected by climate change|
|Government retention of revenues||Support for further emissions reduction, including for innovation|
|Returned to citizens|
Support for vulnerable groups
The introduction of carbon pricing is often accompanied by concerns about the effects on energy prices on lower income households. Rises in electricity prices to households due to pricing of power sector emissions are of concern even under schemes such as the EUETS which do not directly cover households.
Some proportion of revenue can be set aside to compensate vulnerable households. This was a feature of the now repealed Australian scheme.
Reduction of other taxes
Other taxes can be reduced by an amount equal to the revenue raised from carbon pricing. If this is done in full the carbon pricing scheme is usually referred to as revenue neutral. This is a feature of the British Columbia carbon tax.
Government retention of revenues.
Governments can retain some or all of the revenue for general expenditure or deficit reduction. This is, for example, the case in the UK, where the Treasury has a long history of viewing taxation and expenditure as a whole, and there is resistance to earmarking (“hypothecation”) of funds.
Returned to citizens.
An equal payment can be made to all citizens in a jurisdiction (see previous post). The Swiss carbon tax currently returns a portion of revenue equally to all citizens. Such an approach has been proposed as part of bills at federal and state level in the USA.
Measures to adapt to climate change can be funded either within the jurisdiction that raised the revenue or internationally. For example, in its July proposals for the next phase of the EUETS, the European Commission included provisions for Member States to use some of the revenues from the EUETS to finance actions to help other countries adapt to the impacts of climate change.
Funds could be channelled through international institutions to provide funds to match national expenditure, potentially making a substantial contribution to meeting any funding shortfalls.
Distribution to those affected by climate change
Funds could be provided to those adversely affected by climate change. There is a continuing debate on this issue and how it relates the “loss and damage” agenda within the UNFCCC process, including the large overlap with the issue of adaptation. However there has been little practical progress on this to date.
Support for further emissions reduction and for innovation
Funds may be provided for measures such as retrofitting homes and businesses for greater energy efficiency, and the installation of renewable energy technologies. Revenues may also be used to fund research, development and deployment of new low carbon technologies. A number of schemes in North America include provisions of this type, including California, RGGI and Alberta. The EUETS has also included support for new technology from the sale of 300 million allowances from the new entrant reserve (the “NER 300”). However funds raised from this were less than originally expected due to lower allowance prices, and the allocation process has been delayed. The EU is now planning an Innovation Fund in the 2020s, again to be funded by the sale of allowances.
So which should be preferred?
Many uses of funds have merit, and the choice will depend on local political and economic circumstances. However some seem to have particular arguments in their favour, with a mixture of often likely to be preferred.
Supporting adaptation and potentially also providing recompense to those adversely affected by climate change has a strong appeal on grounds of justice, and may form a valuable element of some programmes.
Returning funds equally to citizens has advantages covered in my previous post. This could be accompanied by providing additional support to some vulnerable groups.
Finally, using revenue to fund additional emissions reductions, especially with a component of assistance for the disadvantaged, has proved understandably attractive in a number of jurisdictions in North America and to some extent in the EU. Deeper emissions cuts will require new technologies and large-scale investment. This in turn requires progress to be made now, increasing in scope and extent over time. Increased use of funds from carbon pricing to support such efforts seems likely to prove worthwhile.
Adam Whitmore – 10th November 2015
Material in this post, as well as my previous one, can also be found in the Carbon Markets Investment Association (CMIA) paper at http://cmia.net/forums/climate-finance-forum/climate-finance-forum-docs