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Effective Carbon Prices

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Economic textbooks predict that taxes and emission trading systems are the cheapest way for societies to reduce emissions of CO2. This book shows that this is also the case in the real world. It estimates the costs to society of reducing CO2 emissions in 15 countries using a broad range of policy instruments in 5 of the sectors that generate most emissions: electricity generation, road transport, pulp & paper and cement, as well as households’ domestic energy use. It finds wide variations in the costs of abating each tonne of CO2 within and among countries, as well as in the sectors examined and across different types of policy instruments. Market-based approaches like taxes and trading systems consistently reduced CO2 at a lower cost than other instruments. Capital subsidies and feed-in tariffs were among the most expensive ways of reducing emissions.

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Estimated effective carbon prices

Comparisons of the effective price put on carbon by policies in difference sectors and countries provide valuable insights into the cost-effectiveness of alternative policies to reduce greenhouse emissions (GHGs), and their potential impacts on competiveness. The carbon prices can be explicit, such as carbon taxes or prices of emission allowances in GHG emission trading systems, or they can be implicit, reflecting the cost to society per tonne of CO2eq abated as a result of any type of policy measure that have an impact on GHG emissions. This chapter presents the estimates that have been elaborated in the project, covering electricity generation, road transport, pulp and paper and cement production and households’ domestic energy use. The chapter compares the estimates across countries, across sectors of the economy and across different types of policy instruments, finding large variations in each case.

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