How Much Carbon Pricing is in Countries' Own Interests? The Critical Role of Co-Benefits

37 Pages Posted: 19 Oct 2014

See all articles by Ian Parry

Ian Parry

International Monetary Fund (IMF)

Chandara Veung

International Monetary Fund (IMF)

Dirk Heine

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics; University of Hamburg - Institute of Law and Economics; University of Bologna - Department of Economics; World Bank, Macroeconomics, Trade and Investment Global Practice

Date Written: September 2014

Abstract

This paper calculates, for the top twenty emitting countries, how much pricing of carbon dioxide (CO2) emissions is in their own national interests due to domestic co-benefits(leaving aside the global climate benefits). On average, nationally efficient prices are substantial, $57.5 per ton of CO2 (for year 2010), reflecting primarily health co-benefits from reduced air pollution at coal plants and, in some cases, reductions in automobile externalities (net of fuel taxes/subsidies). Pricing co-benefits reduces CO2 emissions from the top twenty emitters by 13.5 percent (a 10.8 percent reduction in global emissions). However, co-benefits vary dramatically across countries (e.g., with population exposure to pollution) and differentiated pricing of CO2 emissions therefore yields higher net benefits(by 23 percent) than uniform pricing. Importantly, the efficiency case for pricing carbon’s co-benefits hinges critically on (i) weak prospects for internalizing other externalities through other pricing instruments and (ii) productive use of carbon pricing revenues.

Keywords: Greenhouse gas emissions, Fossil fuels, Energy pricing policy, Energy taxes, Climate policy, carbon pricing, co-benefits, air pollution, fuel taxes, top twenty emitters, natural gas, air emissions, fuel price, health benefits, congestion costs, nitrogen oxide, fuel consumption, fine particulate matter, fuel economy, vehicle use, carbon dioxide, diesel fuel, gas prices, clean fuel, wage, fuel burning, payrolls, emission levels, vehicle emission, emission rate, fuel alternatives, ambient pollution concentrations, fuel storage, labor income, air pollutants, gasoline price, gas consumption

JEL Classification: H23, Q48, Q54, Q58

Suggested Citation

Parry, Ian and Veung, Chandara and Heine, Dirk, How Much Carbon Pricing is in Countries' Own Interests? The Critical Role of Co-Benefits (September 2014). IMF Working Paper No. 14/174. Available at SSRN: https://ssrn.com/abstract=2511732

Ian Parry (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Chandara Veung

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dirk Heine

Erasmus University Rotterdam (EUR) - Rotterdam Institute of Law and Economics ( email )

Burgemeester Oudlaan 50
PO box 1738
Rotterdam, 3000 DR
Netherlands

University of Hamburg - Institute of Law and Economics ( email )

Johnsallee 35
Hamburg, 20148
Germany

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

World Bank, Macroeconomics, Trade and Investment Global Practice ( email )

1818 H Street, NW
Washington, DC 20433
United States

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