Pricing carbon consumption: synthesizing an emerging trend

Nearly every carbon price regulates the production of carbon emissions, typically at midstream points of compliance such as power plants, consistent with typical advice from the literature. Since the early 2010s however, policymakers in Australia, California, China, Japan and Korea have implemented carbon prices that regulate the consumption of carbon emissions, where points of compliance are further downstream, such as distributors or final consumers. This article identifies the pivot towards placing the point of compliance for carbon prices further downstream as an emerging international trend, describes the designs of different prices on carbon consumption around the world, and explains the various motivations of the policymakers implementing them. Findings reveal that policymakers tend to layer prices on carbon consumption on top of prices on carbon production in an effort to improve economic outcomes by addressing incomplete pass-through of the carbon price from producer to consumer, thereby facilitating more cost-effective abatement. Policymakers also use prices on carbon consumption to reduce emissions leakage or because large producers of carbon are not within their jurisdiction. The prevalence of prices on carbon consumption will likely increase as evidenced by proposals in China and Europe.Key policy insights The recent surge in the number of jurisdictions implementing prices on carbon consumption represents an emerging international trend.Policymakers use prices on carbon consumption in an effort to improve economic outcomes and capture environmental benefits.While this article offers insights that detail initial challenges and successes, whether these prices on carbon consumption actually achieve their intended goals is an academically rich topic that requires further research on individual policies.