Worldwide emissions continue to rise. Despite years of effort and areas of progress, our global trajectory is far from reaching net zero by 2050—or even 2060. The private sector, which accounts for most global emissions, needs to play a central role in addressing climate change. But the pace of progress has not been sufficient.
The public sector is also mostly missing the mark. Governments, starting in the U.S., are becoming more skeptical about tackling climate change and the costs to do so. Solutions that require large checks will increasingly be resisted—a trend reflected in President-elect Donald Trump’s campaign speeches and the modest commitments that emerged from COP29 in Baku.
We need a different approach—and we need it fast, while a course correction is still possible. With the U.S. Congress set to debate major changes to the tax code early this year, we’re heading into a unique time to effect change. There are no silver bullets, but there is one practical approach that has the power to accelerate our progress and steer us in the right direction: carbon pricing.
A smart carbon-pricing plan would focus on industrial products—not energy directly reaching end consumers—and would offer a clear trajectory. With that approach, we can minimize the politics, speed progress, and stimulate economies and businesses.
Placing a cost on the carbon that companies emit would encourage reductions in emissions and a shift to cleaner technologies and operations. It’s the approach supported by economists Nicholas Stern and Nobel Prize winner Joseph Stiglitz in their report of the High-Level Commission on Carbon Prices.
But today, only 25% of global emissions are covered by regulated carbon pricing systems, such as cap-and-trade markets (whereby governments set a cap and companies can buy and sell carbon credits). Why? There’s widespread concern that carbon pricing will lead to higher taxes for business and disruptive cost increases for consumers, making it politically unpopular. And of course, some legacy players push hard to maintain the status quo, regardless of long-term consequences.
We believe there is a straightforward way to approach the design of a carbon-pricing market that works for everyone—businesses, consumers, and political leaders alike.
It’s not a consumer price on carbon, but an industrial one
BCG's consumer research shows that while consumers care about climate change, the vast majority, more than 90%, are unwilling to pay a “green premium.” That’s why we need to focus on pricing carbon in the industrial economy, which would have an impact on industrial supply chains, including carbon in imported products, and would only modestly touch consumers.
A price increase that takes place over years would add relatively little to incremental costs. BCG’s supply chain analyses suggest a 1% to 4% increase in costs for a fully “net zero” product relative to the end-consumer prices for leading product categories such as cars, food, apparel, and electronics. This increase, spread over 10 to 15 years, would minimally impact consumers, particularly as the first steps to reduce emissions are relatively inexpensive.
Separate carbon pricing from business taxation
One of the biggest misconceptions about carbon pricing is that it needs to be an additional business tax. In fact, a tax might not be necessary at all, as demonstrated by the cap-and-trade systems already in operation in some regions.
And when governments do raise revenue from pricing carbon, that money can be funneled to disadvantaged populations, invested in new technologies, and used in other ways to minimize the short- and long-term impact of decarbonizing the economy. Alternatively, governments can choose to lower other business taxes to offset revenue raised. The net taxation effect would be zero, but it would use taxes to encourage investments that decarbonize the economy in a balanced way.
By decoupling the source of taxes from overall business taxation, we can avoid turning this into a political debate about tax levels and instead focus on the urgent need to efficiently and quickly reduce emissions while giving companies long-term visibility so they can prepare for changes to come.
Price lower to start, then rise steadily and predictably
Businesses need time to adjust. That’s why carbon pricing should start low and increase gradually over time. For example, the price could start at $25 per ton and rise by $5 to $6 per year at first until it reaches $150 by 2045 or 2050. Companies can’t implement dramatic changes to their infrastructure overnight, but they can plan for medium- and long-term adjustments in capital allocation and operations if they know what’s coming.
By setting a predictable path for carbon pricing, we give businesses the opportunity to innovate, invest in cleaner technologies, and transform their operations in a sustainable and predictable way. They can account for their current carbon footprint, assess their carbon abatement needs, and fund the decarbonization effort over years. And a carbon price will level the playing field, so those choosing to be sustainable won’t be disadvantaged economically relative to those that choose not to act.
Carbon pricing needs to be about science and the economy, not politics
We know from our experience advising business leaders—and hearing their frustrations—that today’s economics aren’t making decarbonization efforts feasible at the pace we need. Some companies are still acting boldly, but even they will be challenged as they move to more costly emissions reductions to become fully net zero.
With the right approach to carbon pricing, we can start to dig ourselves out of this problem—without sacrificing economic growth or consumer well-being, all while leaving the politics out of it. It could very well be the smartest way to bring these critical goals within reach.
Read more:
- The winning fight against climate change lies at the intersection of environmentalism and economics
- Extreme weather nearly killed my business, and climate change means more of it. What I wish I’d known
- To help save the climate, CEOs need to become ‘Chief Coalition Builders ’
- Shell’s Pyrrhic victory may well set the stage for more corporate climate accountability
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