Lessons from three countries on carbon pricing

At a recent conference on public finances in London, practitioners who had been involved in the design, approval, and implementation of carbon pricing reflected on their countries’ experiences highlighting the following lessons:

• The importance of preparation and persistence: In two early adopter countries, it took years to prepare and gain sufficient support for carbon pricing legislation;
• Carbon prices are not a ‘one-off’ reform :
  • Initial prices have been relatively low - thus requiring subsequent decisions on expanding coverage and increasing prices;
  •  As prices rise and their impact is felt, this can trigger resistance. Substantial revenue (while emissions are still high) can make be attractive for governments to sustain, while spending on supporting citizens’ energy access, efficiency and transition is important to build and sustain broad-based buy-in.

In Poland, a first minor carbon tax ($0.08 per ton of CO₂) with limited coverage was introduced in 1990, earmarked for environmental spending. From 2005 onwards, a wider share of emissions has been covered by the EU's Emissions Trading System (ETS) scheme, with prices hovering below $10 per ton of CO₂ for many years. Since 2019, the price for emissions covered by the ETS has risen substantially, reaching over 100 euros per ton for the first time in early 2023. This triggered a backlash against the ETS from power utilities, but yielded substantial revenue for the Government. The price jump also increased incentives for accelerating the decrease in dependency on coal in power generation which declined gradually from over 95 to 70 per cent so far. Given the high-carbon intensity and  increasing prices, Poland is one of the largest recipients of revenues from ETS auctions, with 5.6 billion Euros or 5.2% of total budget revenues in 2021, a slightly lower level was received in 2022. The revenues, combined with other EU transfers, have allowed the government to invest in the country’s energy transition, including equity dimensions such as addressing energy poverty and safety nets for those working in coal industries; gradually moving towards a consensus on the country’s path. While Poland’s economy remains emission-intensive due to high reliance on coal-based power, substantial GDP growth has taken place without additional emissions. 

Mexico adopted a carbon tax in 2013 as one of the first emerging markets to do so. The possibility of a carbon tax had been debated among environmental and economic experts since the 1990s, without initial success. Given fiscal considerations, as well as the extensive background efforts by proponents inside and outside of government, and after hosting the COP16 in 2010, the government decided to gradually phase-out fuel subsidies in the 2010s. Moreover, a window of opportunity to introduce a carbon tax emerged when a newly elected government prepared a wider overhaul of the tax system in 2013.

Success built on an alliance between the Ministries of Finance and Environment, that required difficult compromises. The initially proposed rate of $26 per metric ton of CO₂e was lowered to $5.7 per metric ton of CO₂e by the Ministry of Finance, and further revised to $3.5 per ton of CO₂e (and natural gas kept exempt) following pressure by business associations representing energy-intensive industries. This compromise finally enabled approval and turned out to be sustainable over the years. While the initial rate and coverage were low, the combined effect of phasing out fuel subsidies and introducing a low-rate carbon tax was supposed to help the Mexican economy to gradually reduce CO₂ emissions per unit of GDP by about one third since 2013 but the carbon tax was never increased so far.

As the first adopter of carbon pricing on the continent, building a coalition to adopt a carbon tax was similarly if not more challenging in South Africa. Discussions started in the early 2010s. It took proponents eight years  to prepare a carbon tax bill  and submit it to parliament for approval. The bill included generous exemptions –to ensure sufficient support as a framework law – which would then open opportunities for increasing the tax's coverage and rates over time. The government started gradually increasing carbon tax rates – while also seeking to protect consumers and offering tax credits to companies investing in energy efficiency.

Overall, the experiences of these three early adopters of carbon pricing demonstrate that design as well as implementation are politically challenging processes. As international interest, pressure, and incentives continue to grow, more countries are likely to consider carbon pricing. Reformers pursuing carbon pricing may need strategic support and some patience, rather than an expectation of rapid success.  Moreover, introducing carbon pricing is unlikely to be a one-off reform, but rather a process of gradual ramping up that will play out over some years.