Norges Bank should set carbon price

Our political authorities have committed to cutting 90-95 percent of our emissions from 1990, but the carbon price is far too low to achieve the target. The mismatch between ambition and means is bad climate policy. It is also a democratic problem. A simple, but effective, solution is to give an independent agency the authority to set the carbon price in line with adopted climate targets, as Norges Bank has the authority to set interest rates in line with the inflation target.

The carbon price is the most central climate policy instrument we have. It leads to effective and gentle cuts in emissions, provides better competitive conditions for renewables, and tax revenues that can be used to promote climate change.

But the carbon price also has a price in the form of increased costs for business and increased prices for consumers. The short-term political gain of keeping the carbon price low therefore trumps the consideration of achieving our long-term objectives.

How can we get a carbon price that matches climate targets? Here's what we can learn from inflation management. In order to ensure stable price growth, politicians have relinquished the power to control interest rates to Norges Bank. Namely, it is always tempting for the incumbent majority to reduce interest rates to appease voters and it can be terribly unpopular to cut into people's purchasing power when prices rise. Since Norges Bank is not up for election, they can make short-term unpopular choices to secure cross-party goals.

The same model could fit for the carbon price. The job of politicians would be to set the objectives. Norges Bank or another independent trade body could manage the carbon price to ensure that the targets are more than empty promises.

This would ensure a better alignment of ambition and means, Climate Committee recently requested. It would also strengthen the green transition. As Norges Bank ensures predictability for business and citizens by announcing the interest rate path, the subject agency could have done the same for the carbon price path. Predictability is the alpha and omega of bringing about the green transition. If business knew that the carbon price would increase and how much it is expected to increase, it would be business economically profitable to introduce more costly measures today to cut emissions.

Some would argue that it is undemocratic to give up the carbon price to an unelected body. But as long as Parliament sets the climate targets and gives the authority to the agency, people's sovereignty is safeguarded. The elected officials will also retain a range of climate policy instruments, such as investing more in research and development, financing green transition in other countries and concluding international agreements.

Tying to the mast can also strengthen democracy. One way to understand the current gap between objectives and means is that politicians and voters struggle to take the actions they know are necessary to achieve our long-term goals. As we struggle to cut out high-calorie foods despite the goal of losing a few pounds, we are tempted to prioritize low prices today even if it comes at the expense of more important goals. Giving an independent agency control of the carbon price would therefore better realise the wishes of the political majority than the current model.

Another concern is that the high carbon price that will follow as the subject agency tries to reach the climate targets will inflict excessive costs on business and consumers. However, this would show that the climate targets are unrealistic and force a rethink of climate targets. It will make politics more realistic, strengthen the public conversation and democracy.

By giving up the carbon price, politicians will be forced to use other means to get the people involved in climate change. For example, the revenue from the carbon price can be used to reduce economically unfavorable taxes and fees, or one can distribute an equal sum to all citizens in the form of a citizen's salary. It could secure increased popular support for higher carbon prices and enable people to go the plus financially by not buying high-carbon goods.

It is not obvious which agency might skirt such a responsibility. There is a lot of talk that Norges Bank's interest rate committee should be followed by a carbon price committee. The central bank has the legitimacy and the professional economic competence. But other considerations speak against. Perhaps we simply need a new institution with solid climate-economic expertise.

If we are to solve the climate problem, we need institutional reforms that ensure more long-term political governance. Giving an independent agency the power to manage the carbon price in line with the national climate targets is the remedy we need.

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