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The Transatlantic Carbon-Pricing Clash

America’s approach to carbon pricing makes use of carrots (subsidies), while Europe’s approach emphasizes sticks (taxes). It is difficult to say which approach is better for the climate, but it is easy to foresee major trade and political frictions resulting from these opposing approaches.

SOFIA/MILAN – Economists have long argued that regulation alone cannot bring about the reduction in global greenhouse-gas emissions that is needed to curb climate change; a carbon price is also essential. So far, dozens of carbon-pricing arrangements, mostly tax-based schemes, have been implemented around the world. But, when it comes to impact, the devil is in the details.

The US Inflation Reduction Act, passed last year, highlighted just how complicated carbon pricing can be. The IRA includes a little-noticed subsidy of $85 per ton of carbon dioxide captured from industrial processes, paid to any new facility for 12 years. Whether the provision will lead to a significant reduction in emissions is impossible to predict. What can be expected is a test of the viability of carbon capture and storage (CCS) technology.

As it stands, only a few industrial CCS facilities exist globally, and they remove only small amounts of CO2. While the potential cost of CCS varies widely, many estimates put it below $85 per ton. The guarantee of a generous subsidy, which investors can count on for a long period, could thus give the sector a major boost.

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