Carbon Pricing and COVID-19

Abstract

A question arising from the COVID-19 crisis is whether the merits of cases for climate policies have been affected. This article focuses on carbon pricing, in the form of either carbon taxes or emissions trading. It discusses the extent to which relative costs and benefits of introducing carbon pricing may have changed in the context of COVID-19, during both the crisis and the recovery period to follow. In several ways, the case for introducing a carbon price is stronger during the COVID-19 crisis than under normal conditions. Oil costs are lower than normal, so we would expect less harm to consumers compared to normal conditions. Governments have immediate need for diversified new revenue streams in light of both decreased tax receipts and greater use of social safety nets. Finally, supply and demand shocks have led to already destabilized supply-side activities, and carbon pricing would allow this destabilization to equilibrate around greener production for the long-term. The strengthening of the case for introducing carbon pricing now is highly relevant to discussions about recovery measures, especially in the context of policy announcements from the European Union and United States House of Representatives.

Key policy insights Persistently low oil prices mean that consumers will face lower pain from carbon pricing than under normal conditions. Many consumers are more price-sensitive during the COVID-19 context, which suggests that a greater relative burden from carbon prices would fall upon producers as opposed to consumers than under normal conditions. Carbon prices in the COVID-19 context can introduce new revenue streams, assisting with fiscal holes or with other green priorities.

Carbon pricing would contribute to a more sustainable COVID-19 recovery period, since many of the costs of revamping supply chains are already being felt while idled labour capacity can be incorporated into firms with lower carbon-intensity.