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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Executive summary

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 value of this type of analysis was demonstrated by a report by the Australian Productivity Commission, Carbon Emission Policies in Key Economies,** See www.pc.gov.au/projects/study/carbon-prices/report. which had a major impact on that country’s decision to introduce an explicit carbon pricing system on 1 July 2012.

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