The increasing effects of climate change highlight the need to rapidly transform the global economy to achieve the Paris Agreement goals and limit global warming this century to well below 2°C, while aiming for 1.5°C. Deeply decarbonizing the U.S. energy system by 2050 will require rapidly increasing energy efficiency, decarbonizing electricity supply, and electrifying energy end uses, including buildings, transportation, and industry.
A carbon price is needed to incorporate climate change costs into economic decision-making to significantly reduce U.S. greenhouse gas emissions, particularly in the electricity sector; however, a price is not a silver bullet for addressing climate change. Policies and programs that address externalities other than the cost of climate change and that provide incentives to develop and deploy long lead time mitigation options are needed in addition to a price on carbon so that deep emission reductions can be achieved in the longer term.
Measures are needed to bend the cost curve and remove the market barriers that hinder long-term emission reductions. Such measures should be evaluated based on their ability to minimize the cost of achieving long-term emission targets rather than on their cost in achieving near-term emission reductions.
This paper Putting a Price on Carbon: Evaluating A Carbon Price and Complementary Policies for a 1.5° World compares what recent empirical evidence and modeling efforts tell us about the effectiveness of a carbon price in reducing emissions and shifting to low-carbon technologies with what deep decarbonization studies state regarding the pathways for meeting climate goals.
The paper examines three lines of evidence to comprehend the opportunities and limits of carbon pricing to achieve a low-carbon future, as follows:
- Recent economic literature that examines the role of a carbon price to reduce greenhouse gas emissions, including studies of how current investments can affect the cost of future emission reduction options that are needed to pursue deep decarbonization.
- Recent studies that model a carbon price to make clear where and how the price can be effective.
- Recent deep decarbonization studies to understand the types of near-term changes needed to transform the economy, consistent with 1.5°C- and 2°C-degree pathways, and how carbon price emission pathways measure against those.