Business Insights

Humanity is headed for a climate disaster. Based on current policies and actions, the world is on track for an average global temperature rise of 2.7C above pre- industrial times, a level that would be catastrophic for life on earth. Without significant and sustained emissions reductions, the window of opportunity to keep global warming below disastrous levels will be closed permanently. Economic concepts can play an

important role in reducing emissions, with carbon taxes being among the most cost- effective measures. This is because they force companies to internalize the cost of their actions and galvanize climate action. The full implementation of all announced carbon emissions targets would keep the average temperature at 1.8C, within the goal of the Paris Climate Agreement. Carbon taxes can help us achieve this goal.

The problem for policymakers is that carbon taxes can be unpopular, and therefore they are often toothless, with some countries exempting entire categories of polluters, and only a very small share of global emissions actually covered by carbon prices. A key yardstick for setting the ‘ideal’ rate for carbon tax is a metric called the social cost of carbon (SCC), which is an attempt to capture the cost to society of an additional ton of carbon dioxide pollution in a single number.


Carbon taxes will play a crucial role in guiding business and government in their efforts to mitigate climate change and adapt to the irreversible damage it may cause.

KARL SCHMEDDERS Professor of Finance



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