Putting a price on carbon dioxide and other greenhouse gases to curb emissions must be the centrepiece of any comprehensive climate-change policy. We know it works: pricing carbon creates broad incentives to cut emissions. Yet the current price of carbon remains much too low relative to the hidden environmental, health and societal costs of burning a tonne of coal or a barrel of oil1. The global average price is below zero, once half a trillion dollars of fossil-fuel subsidies are factored in.
Momentum towards effective carbon pricing is building. California, joined by the Canadian province of Quebec, leads by pricing 85% of such emissions at around US$12 per tonne. Sweden applies the highest value globally on half of its carbon dioxide emissions, at up to $125 per tonne. The European Union has the largest system in terms of tonnes covered, pricing 45% of its greenhouse-gas emissions at about $8 per tonne. China is experimenting with regional cap-and-trade systems. And the US Clean Power Plan encourages states to meet emissions-reduction targets through market-based mechanisms. Yet global emissions continue to climb.
The current inadequacy of carbon pricing stems from a catch-22. Policymakers are more likely to price carbon appropriately if it is cheaper to move onto a low-carbon path. But reducing the cost of renewable energies requires investment, and thus a carbon price.
In our view, the best hope of ending this logjam rests with tuning policies to drive down the cost of renewable power sources even further and faster than in the past five years. The cost of crystalline silicon photovoltaic (PV) modules has fallen by 99% since 1978 and by 80% since 2008; installation costs for wind power have also dropped, and solar and wind capacity has grown2 (see 'The rise of renewables'). Prices will continue to fall, but — without more help — the decrease will not be fast enough to make a dent in the climate problem.
Some obstacles are technological; many are policy-driven3, 4. Most energy regulations were set with the fossil-fuel industry in mind, and energy providers fight to preserve their existing assets rather than adapt to new conditions. More strategic coordination of energy resources, grid operation and climate policy is needed, keeping in mind trade-offs.