The IMF has said “carbon pricing is the least-cost option to deliver deep emissions cuts”.
The World Bank estimates that 45 countries and 34 subnational jurisdictions have adopted some form of carbon pricing – from taxes to ETSs – covering c.20% of GHG emissions.
A recent paper by the Centre for Economic Policy Research (CEPR) has analysed data on more than 2m loan tranches involving banks doing cross-border lending between 1988 and 2021 (during which time many countries imposed carbon pricing). The authors find that carbon taxes at home led banks to reduce lending to coal, oil and gas companies domestically. However, it also had the perverse consequence of causing them to increase such lending abroad. The shift was most pronounced for banks with big fossil-fuel-lending portfolios where loans were most likely to be directed towards countries lacking a carbon tax. A related CEPR paper found that banks increase cross-border lending in response to stricter climate policies at home.
Such lending practices mirror concerns about carbon leakage in industrial markets (which the EU is aiming to address with its CBAM). However, the CEPR concludes that, even after accounting for their efforts to shift dirty lending overseas, carbon taxes do somewhat reduce net fossil-fuel lending by the banks studied, because they lower domestic lending by more. Some critics have called for greater transparency. Others believe the best option is a worldwide carbon price.
