💸 Why Carbon Pricing Fails 💸

My Climate Journey Update 2

Serene golden hills bathed in mist and soft light😊

Welcome to My Essays

Hi! I’m Ahmed. I’m an analyst with a deep curiosity about the world.

I explore ideas. I break them down. I share what I learn in essays like this.

I hope you find them interesting.

What I’m Sharing Today

My analysis of the carbon capture industry.

If you missed why I’m looking into carbon capture, check out this essay.

How Should You Think About The Carbon Capture Industry?

The carbon capture industry centers around two questions:

1. How will you capture CO₂?

2. What will you do with the CO₂ once you capture it?

The first question is about the cost of capturing CO₂.

The second question is about how you will make money from it.

Your product or application decides what kind of capture system you need.

It is best to start by answering the second question.

What will you do with the CO₂ once you capture it?

There are 2 general paths you can take.

1. Store CO₂ Underground

2. Turn CO₂ into Products

Option 1: Store CO₂ Underground

Storing CO₂ underground can make money from carbon credits, carbon taxes, or tax credits.

Each of these depends on the economy, policy, and public opinion.

Here are some case studies to see if carbon pricing systems can work.

Case 1: Chicago Climate Exchange (CCX)

CCX was a voluntary carbon trading system.

Companies could pay money to offset their emissions.

This created a market to support emission-reduction projects.

In 2008, the financial crisis caused demand for carbon credits to collapse.

Case 2: Clean Development Mechanism (CDM)

The Clean Development Mechanism (CDM) was a global agreement between countries.

It let rich countries fund projects in poor countries to cut emissions.

In return, they got carbon credits for meeting their own emission targets.

They could also sell these credits in carbon markets.

When the agreement ended, the market for carbon credits disappeared.

There was no longer a system to make money from trading carbon credits.

Case 3: U.S. Renewable Energy Tax Credits (1990s)

The U.S. government introduced tax credits for renewable energy in the 1990s.

These credits helped fund many renewable energy projects.

The projects were planned based on the high value of the tax credits.

Over time, the tax credits were reduced or ended.

When the credits were removed, the projects became uneconomical.

This caused many projects to be canceled or go bankrupt.

If a carbon capture company relies on selling tax credits to customers, it faces the same risk.

The company could fail if the credits are reduced or expire.

Case 4: Australian Carbon Pricing Mechanism (2011-2014)

In 2011, Australia started a carbon tax to lower emissions.

The tax made everyone pay more for the same stuff.

Many people, industries, and political groups strongly opposed it.

In 2014, the new government repealed the tax.

The Lesson

The 4 cases above show different carbon pricing methods.

Case 1 showed a voluntary market where companies pay for CO₂.

Case 2 showed a global agreement where countries pay for CO₂.

Case 3 showed a tax credit system where governments lose tax revenue.

Case 4 showed a carbon tax system where companies and people pay for CO₂.

No carbon pricing method works because someone has to pay for the emissions.

They get nothing in return for paying.

People do not like spending money and getting nothing back.

Recessions make these systems even weaker.

During a recession, companies and countries do not have the luxury of paying for CO₂. Cash is tight.

Governments can’t afford to lose tax revenue. Cash is tight.

People get angry and protest high carbon taxes because they are struggling financially. Cash is tight.

During a recession, nobody has the luxury of paying for CO₂ and getting nothing back. Cash is tight.

This means carbon capture companies will lose most, if not all, their revenue during recessions.

If a company can’t make money during a recession, it is unlikely to succeed long term.

This is why any carbon capture revenue model that relies on a carbon pricing will not succeed.

What About Denmark, Norway, Sweden, and Finland?

These countries have used a carbon tax system for over 30 years.

They are successful, but they are likely the exception, not the rule.

These countries have no majority party in government.

Instead, they have 3 or more parties controlling government.

This means no single party can pass policies without help.

The only way to get help from other parties is to show that your policies provide a clear benefit for citizens.

Because of this, these countries rank in the top 10 least corrupt nations.

They make decisions like universal healthcare and free education.

They also created a carbon tax in the 1990s.

If any governments care about people and the earth, it is these countries.

Even if every country could become like the Scandinavian countries, 5 key countries are unlikely to get on board.

If these countries do not join, you can not make the progress needed.

These countries are the United States, China, India, Saudi Arabia, and Russia.

Together, they represent 41.5% of the world’s population, 50% of global GDP, and 59% of global CO₂.

China and India focus on economic development.

China and India focus on economic development.

Cheap energy is key to economic development.

Cheap energy lets you manufacture stuff cheaper than other countries.

For China and India, coal is the cheapest energy source.

A carbon tax raises the cost of energy and products.

Higher costs make businesses less profitable.

Less profit means less money to grow their economies.

Slower growth goes against their self-interest.

The United States, Saudi Arabia, and Russia are the top 3 crude oil producers.

A carbon tax would make their oil more expensive.

Higher costs would slow their economic growth.

Slower growth is also against their self-interest.

To think a global carbon system will stop climate change, you must believe these countries will act against their self-interest.

It is more realistic to think they will act in their own self-interest.

This is why any system that needs people to pay for CO₂ will not work on a global scale.

You need a different way to make money with carbon capture.

That’s what my next essay will be about. (Hint: It’s turning CO₂ into a product)

A Few Final Words

I hope you found this essay interesting! If you know someone who might enjoy it, feel free to share.

Got feedback? Email me at theahmedhassan1@gmail.com.

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Until next time,
Ahmed