In recent years, the climate transition has risen ever higher on the global agenda. COP26, the most recent annual UN climate conference, was held in Glasgow on 31 October – 12 November 2021. The results of the meeting were that countries were encouraged to increase their climate targets in 2022, support for climate adaptation should be doubled by 2025, and that the role of fossil fuels in the climate transition was mentioned for the first time in the meeting’s final document. The results have been described as keeping alive the goal of the Paris Agreement to limit global warming to 1.5 degrees, but that further measures are required to succeed in this. See COP26 – The Glasgow Climate Pact, https://ukcop26.org/wp-content/uploads/2021/11/COP26-Presidency-Outcomes-The-Climate-Pact.pdf and press release from the Swedish Government Offices on 14 November 2021, https://www.government.se/press-releases/2021/11/conclusiouns-from-the-un-cop26-climate-change-conference/. An important part of the strategy to limit global warming is to make it more expensive to use fossil fuels. Products and services that contribute to greenhouse gas emissions will thus become more expensive than those that do not – their relative price will increase. In this way, demand and production are steered towards more environmentally friendly alternatives.
Making the use of fossil fuels more expensive can be achieved in different ways. The most commonly discussed methods are a tax on carbon emissions and other greenhouse gas emissions and emission rights trading. Carbon tax and emission rights are essentially two ways of achieving the same goal, but they function in slightly different ways.
A carbon tax is added to the market price and increases the price to consumers, who will therefore try to avoid paying this higher price by instead choosing less carbon-intensive alternatives that are not affected by the tax to the same extent.
Emission rights instead regulate the quantity of emissions. The number of emissions is limited, and traded on an open market, where the buyers are companies that have a need to emit more than their original allowance and the sellers are those that, for example, have undertaken energy-saving measures. By gradually reducing the number of emission rights, the price of these allowances will increase and thus also the price of goods produced with fossil-based energy.
Both of these methods thus redirect demand and production in an environmentally more sustainable direction. In this commentary, these two ways of achieving a climate transition are not discussed separately. The premise is instead that both will make it more expensive to emit greenhouse gases.