Carbon pricing is widely regarded as the most efficient instrument for climate mitigation, and the carbon prices of individual countries are often used as the primary indicator of climate policy strength. However, in practice, both advanced and developing countries implement a combination of carbon pricing and non-pricing measures to reduce carbon emissions. Many countries, especially those in the developing world, favor non-pricing policies because traditional pricing instruments can be difficult to implement due to domestic political, institutional and social constraints.
The International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) have made initial efforts to document and compare carbon pricing and non-pricing mitigation policies. A new technical paper from He Xiaobei, Ma Jun and Guo Fang for the Task Force on Climate, Development and the International Financial Architecture builds on existing studies by conducting a pilot study on China’s non-pricing policies. The authors use a recursive dynamic CGE model to study the emission impact of non-pricing measures and estimate the carbon price level required to achieve the same amount of emission reduction for the period between 2018-2023.
Main findings:
Simulation results suggest that the accumulated emission reductions driven by China’s transition to non-fossil fuels in the power sector from 2018 to 2023 amount to 1.43 gigatons (Gt). A carbon price of $7/ton during this period would achieve the same level of emission reductions.
Simulation results suggest that enhancing energy efficiency in the industrial sector leads to an economy-wide emission reduction of 0.53 Gt between 2018 and 2023. A carbon price of $2.5/ton during this period would achieve the same level of emission reductions as measures aimed at enhancing energy efficiency in the industrial sector.
When non-pricing measures are in place in both sectors, the economy-wide emission reduction amounts to 1.97 Gt, or 2.8 percent of the baseline level. This is equivalent to a carbon price of $10/ton during this period.
The price equivalent of $10 is higher than the carbon prices in the US, Japan and many G20 countries for the period 2018-2023. This finding indicates that non-pricing mitigation measures have significantly contributed to emission reductions in China.
Policy recommendations:
Relying solely on carbon prices or carbon tax rates for mechanisms like the Carbon Border Adjustment Mechanism or the international carbon price floors proposed by the IMF can underestimate the efforts by countries that prefer non-pricing mitigation instruments. Failure to recognize the importance of diverse mitigation instruments therefore disincentivizes international cooperation.
Second, non-pricing mitigation policies can achieve meaningful carbon reductions. While non-pricing measures may not be as economically efficient as carbon pricing, they often encounter less political and social constraints and are generally easier to implement.
To ensure equitable and effective international climate cooperation, it is crucial for the IMF and international organizations to develop more inclusive assessment framework that adequately considers the emission effects of non-pricing policies.