Political Economy Determinants of Carbon Pricing

Abstract

Carbon pricing is widely considered a key policy instrument for achieving substantial climate change mitigation. However, implementation remains patchy and price levels vary significantly across countries and regions. In this article, we analyze the structural social, political, and economic conditions under which carbon prices have been implemented so far. We estimate a Tobit regression model to investigate variations in explicit carbon prices over 262 national and subnational jurisdictions. Our results highlight well-governed institutions and public attitudes as the most important conditions for carbon pricing and characterize fossil fuel consumption as a barrier to the implementation of carbon prices. The results suggest that governance and public attitude need to be integrated into political economy analysis. Policy makers should take regulatory capacities and public attitudes seriously when designing carbon pricing policies.

Governance of Emissions Trading Systems

“…Empirical research has, for instance, revealed that perceptions of weak governance coincide with weaker climate policies (Rafaty 2018). Investigating the political economy of carbon pricing -including, specifically, emissions trading -another empirical study of 167 national and 95 subnational jurisdictions identified well-governed institutions as one of two conditions for successful implementation (Levi, Flachsland, and Jakob 2020). In particular, it found that three governance indicators -perception of corruption, lack of technical capacity, and the absence of independent institutions -affect the likelihood that a carbon price is adopted, and also have a bearing on the level of the carbon price in that jurisdiction.…”

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“…Deliberative learning processes could help to improve the outcome of government processes and increase trust in government decisions. Empirically, there is a significant positive correlation between trust in governments and the quality of institutions, on the one hand, and carbon price levels, on the other (Klenert et al 2018 ; Levi et al 2020 ).…”

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“…Time remains a problem: Krausmann et al (2020) show that the majority of emissions comes from maintenance and use of infrastructures, leading to low price elasticity. Regulatory capacity also contributes to effective implementation (Levi et al, 2020). Moreover, carbon pricing may drive efficiency improvements and fuel switching but have a limited effect on decarbonization (J. F. Green, 2021).…”