Pricing carbon during the economic recovery from the COVID-19 pandemic
- The global recovery from COVID-19 has to make society less vulnerable to future climate, ecological or public health risks.
- Careful implementation of carbon pricing with reductions in fossil fuel subsidies should be included in the economic recovery in all countries.
- Any revenues raised can support the COVID-19 recovery by boosting consumption and investment or softening the hit on fiscal deficits.
This brief argues that once the immediate rescue has been secured and countries move towards recovery from COVID-19, carefully implementing carbon pricing while reducing fossil fuel subsidies should be at the core of any stimulus package. This carbon price need not be uniform, but may reflect sectoral differences in investment costs, price sensitivity and distributional effects.
There are two strong arguments to support this:
(i) To prevent a distorted recovery: If the post-COVID-19 recovery is distorted in favour of a high-carbon economy, we will rebuild economies that are more vulnerable to future risks and lock in a high-carbon path that is more costly to reverse later. The COVID-19 recession has significantly lowered the price of oil. A strong carbon price is needed to prevent a recovery in demand for oil driven by the lower price and to incentivise the shift to cleaner sources of energy.
(ii) To raise revenues to soften the hit on fiscal deficits or support consumption and investment: Governments have responded to the pandemic with an unprecedented increase in public spending. This is sound economic stewardship but eventually debt levels will need to be brought down. Policymakers must avoid 2010s-style austerity. Carbon pricing raises revenue in a better way than labour or income taxes. However, most carbon price revenues should be recycled. A ‘citizen dividend’ can help build popular support for carbon pricing and would help to keep up consumer spending.