The sunflower
It bows down to the Sun
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Thursday, November 9, 2023

Absurdly low carbon prices compared to fossil subsidies

Many countries started introducing CO2 prices, either as taxes ranging between 2 $/t  in Japan and 155 $/t in Uruguay or in an emission trading system (ETS) between 1.12 $/t in Kazakhstan and 96 $/t in the EU (see current prices). Carbon prices are expected to be a main tool for decarbonizing our economy.

At the same time, fossil fuel subsidies remain large and keep growing. Have these subsidies been estimated to 4.4 Trillion $ in 2015 (which was 5.3% of global GDP), they have risen to over 7 trillion $ (7% of global GDP) in 2022. In 2015, fossil CO2 emissions amounted to 35.3 Gt/a. This means that governments around the world had effectively paid 125 $ to emit one tonne of CO2. In 2022, emissions raised to 37 Gt/a and subsidies to almost 200 $ per tonne. CO2 prices are thus in the range of explicit fossil fuel subsidies, but far smaller than explicit and implicit subsidies.

Own illustration based on data from IMF, Global carbon budget, and IPCC SR1.5°C

The IMF projects fossil fuel subsidies to remain more or less constant in relation to GDP until 2030. Depending on the transition pathway, CO2 emissions will shrink in this decade more or less strongly. As a consequence, CO2 subsidies per tonne will increase. In the case of pathways targeting to stay below 1.5°C (IPCC SR1.5), subsidies would increase up to 450$/t! 

Already today, carbon prices below 200$/t not even return the received explicit and implicit subsidies to society. Without these subsidies, fossil fuels would be much less competitive and the economic case for renewables much stronger (even despite these incredible subsidies, solar PV and wind are already the cheapest way to provide electricity today).

A real carbon price needs to be substantially larger than fossil subsidies at any moment. Otherwise, it is merely a (partial) refund of taxpayer's money and simply continues market distortion in favor of environmentally harmful technologies.