Putting a price on carbon
a challenge for governments and a request from companies
Carbon cap-and-trade, emissions trading schemes, carbon markets – nowadays the highest greenhouse gases (GHGs) emitting countries in the world use this economic instrument to regulate GHG emissions in their most polluting economic sectors. With almost 20 emissions trading systems around the world, the World Bank estimates that carbon markets generated $34 billion in 2014. These emissions trading schemes therefore now represent a key means of financing the transition to a low-carbon economy by providing public authorities with a new source of funding via auctions for CO2 emissions allowances, but even more by channelling public and private funding towards low-carbon investments. In 2015, with the conference COP21 expected to lead to the signing of a new global climate agreement for the post-2020 period, how can these first experiences of national carbon pricing policies be extended to other countries in the world? How can these dynamics be linked to ongoing international climate negotiations to provide to companies a comprehensible framework to support their transition towards low-carbon business models?
Financing the transition to a low-carbon economy: carbon pricing one of the economic solutions
At a global level, achieving the objectives of the transition to a low-carbon economy – i.e. satisfying energy and economic needs while limiting global warming to 2°C – requires estimated investments of some $1,000 billion a year (World Energy Outlook 2014 by the International Energy Agency, World Economic Forum; New Climate Economy Report, 2014). At the time of international climate negotiations in Paris in December 2015, it is vital that this international climate agreement signed in the framework of the UNFCCC for the post-2020 period provides a favourable framework to develop economic and financial solutions for funding this global transition towards a low-carbon economy. However, the quest has to be extended beyond the UN negotiating process and involve all financial and business communities.
Carbon pricing is one of the economic solutions for making GHG emission reduction measures more competitive and increasing the number of financing sources to support the transition to a low-carbon economy. After years of resistance, many major companies are now endorsing carbon pricing in their investment strategies, recognizing this new value as a way to drive efficiency and profitable new business opportunities. In September 2014, more than 1,000 businesses and investors signalled their support for carbon pricing at the UN Climate Summit. In May 2015, at the Business & Climate Summit 2015 in Paris, 25 global business networks representing more than 6.5 million companies called for robust and effective carbon pricing mechanisms. In addition, at least 150 companies use an internal shadow carbon price in assessing investments. For instance, major oil companies such as Shell, BP and Exxon-Mobil use a price of US$40 per tonne of CO2 or more.
Developing a patchwork of carbon prices around the world
In 2015, according to the World Bank, some 40 States and Provinces representing almost 40% of global GDP had established a carbon pricing policy, covering almost 12% of global GHG emissions. Around 20 cap-and-trade systems are currently operating or being set up around the world in which prices range from €2.7/tCO2 in Kazakhstan, €3.7 to €7.4/tCO2 in China, around €7/tCO2 in Europe and up to €11/tCO2 in California and Quebec.
The European Union was pioneering with the first carbon cap-and-trade system implemented in 2005. Having begun with a learning period up to 2007, followed by a second phase from 2008 to 2012, it is now undergoing a third phase leading up to 2020. With a low carbon price since 2011, reflecting the acceleration in the reduction in GHG emissions as a result of the rise in renewable energies and the economic crisis, the EU Emissions Trading System (EU ETS) is currently being reformed to send a price signal in line with the GHG emissions reduction target by 40% by 2030.
In North America, although no federal legislation has been adopted in the United States and Canada, numerous regional initiatives have sprung up. Following the launch of the Regional Greenhouse Gas Initiative in 2009 by nine States in the North-East of the United States to regulate GHG emissions in their electricity sectors, California launched its system in 2012 before linking it to Quebec's nascent system in 2014. Since, further US States and Canadian Provinces such as Washington State and the Province of Ontario have announced their desire to implement similar systems in 2016. This new trend could gather momentum as a result of the Clean Power Plan proposed by President Obama and the potential commitment, in addition to California and Quebec, of the seven other Federal US States and Canadian Provinces which have signed up to the Western Climate Initiative. However, the US Presidential elections scheduled for 2016 are generating uncertainty regarding the future of this political ambition.
In Asia, China has been experimenting since 2013 with pilot carbon trading systems in five provinces and two cities in preparation for a national carbon market planned for 2016. Since 1st January 2015, South Korea has similarly developed a system whose rules are closed to those of the EU ETS. Numerous emerging countries have also announced their desire to develop a carbon pricing policy. Not only China, but also Mexico, Chile, Brazil and South Africa are expected to launch national carbon prices in the coming months and years.
How could the 2015 Paris Climate Agreement facilitate the emergence of carbon pricing?
If, according to economic theory, a single, global carbon price, irrespective of the source or country in which the tonne of carbon is issued, is the fundamental requirement for effective global action, the Paris agreement won’t negotiate this objective. If it is to succeed, this Paris agreement should facilitate the emergence of national, regional and sectoral long-term economic signals to help public and private decision-makers to achieve and to finance their ecological and energy transition.
Several aspects of the Paris Climate agreement could facilitate the emergence of economic signals. Firstly, an international harmonised system of GHG emissions accounting for all States will be vital to confidently assess changes in each Party's GHG emissions. Secondly, to allow the development of national, regional and even sectoral carbon price signals, the Paris agreement must grant States flexibility in the choice of economic instruments to use to achieve their GHG reduction objectives. Thirdly, recognising each State's efforts by monitoring and reviewing its Intended Nationally Determined Contributions could eventually promote the convergence of use of some economic instruments such as carbon pricing.
In light of the growing number of carbon pricing policies, the issue of their coordination at the international level will be increasingly important to ensure their environmental integrity and to optimise their economic efficiency. How can the Paris agreement play a role in this coordination? How can carbon cap-and-trade schemes link up or be coordinated? How can CO2 allowances, credits, etc. become compatible? Although these political and technical questions are currently under discussion, it is unlikely that all the responses will have been found by the time of the COP21 conference. The path to negotiating this international collaboration still needs to be identified. Which discussion bodies would allow States to call for the launch of an internationally coordinated initiative: the G7, the G20, the Major Economies Forum or a coalition of countries forming a sort of "Climate Club"? After the COP21 and following the declarations by G7 countries in June 2015 in favour of decreasing carbon intensity over the coming century, the governance of carbon pricing policies is set to accelerate in 2016.
By Emilie Alberola, Affiliate Professor, will be moderating the panel discussion on Carbon Pricing at the 2° challenge: Climate is our Business on October 1st, 2015 at HEC Campus and Pierre Ducret, Climate and COP21 Advisor of the Caisse des Dépôts Group and President of the Association for the Research on Climate Economics.
Afriat M., Dahan L., Alberola E. and Vaiduyla M., 19 cases studies on emission trading schemes in the world, IETA/EDF/CDC Climat Research, May 2015.
Alberola E. and Leguet B, « Carbon pricing: a necessary tool on the agenda of solutions for climate funding», ClimasCOPe #1, CDC Climat Research, April 2015.
Carbon Disclosure Project, “A review of findings from CDP 2013 disclosure; Use of internal carbon price by companies as incentive and strategic planning tool”, December 2013.
Carbon Disclosure Project, “North America: corporate use of carbon prices white paper”, June 2014.
International Energy Agency World Energy Outlook 2014, November 2014.
New Climate Economy Report, 2014.
World Bank, “Carbon pricing watch 2015: an advance brief from the state and trends of carbon pricing 2015 report”, May 2015.