After over a decade of testing carbon pricing schemes, countries should explore lessons learned and start working on a collective implementation of carbon pricing through the Paris agreement.
A new report from the International Monetary Fund (IMF) supports price floors for carbon markets and suggests that the Paris agreement should constitute a basis for starting discussions on how to implement them on a global scale.
For decades, economists have been advocating for carbon pricing to tackle the climate crisis. Over the past ten years, governments around the world have started showing increasing support for such policies.
However, the measures implemented so far fall short of the Paris climate agreement’s ambition. Around 20% of the world’s greenhouse gas emissions are subject to some form of pricing, but the prices are generally not high enough to incentivise the kind of emission reductions needed to keep climate change at safe levels. The High-Level Commission on Carbon Prices has calculated that a price of at least USD40-80/tCO2 by 2020 and USD50-100/tCO2 by 2030 would be needed to achieve the Paris climate goals.
A snapshot of carbon pricing around the world
In Europe, a recent surge has seen prices under the EU Emissions Trading System (EU ETS) reach over 25€/tCO2e, but this increase is not guaranteed over the long term.
The short-term rise was spurred by expectations that there would be fewer allowances available over the coming years. This is due to the supply control mechanism (the “Market Stability Reserve” or MSR) having started taking allowances off the market this year. However, the rate of the MSR intake will slow down after 2023, unless the planned 2021 review corrects this.
At the same time, the closure of coal plants around Europe will lead to a large number of unused allowances flooding the market again. The combination of these two effects could significantly reduce prices.
On the other side of the Atlantic, carbon pricing continues to be a hot topic. In Canada, several provinces have sued the federal government because of its plan to impose a country-wide carbon price. Though an initial ruling earlier this month confirmed that the plan was constitutional, both the legal and political battles are likely to continue.
In the US, several states have had carbon pricing bills on the agenda, but with generally little success so far. Furthermore, California that has a cap and trade scheme in place has been criticised for its reliance on forestry offsets. Last month, Members of the European Parliament urged the state regulator not to endorse a controversial forest standard, on the grounds that it could end up undermining global and European climate efforts. At the same time, a new study found that 82% of California’s existing forest offsets likely do not represent real emission reductions. This is a significant blow to the scheme and its environmental integrity since forestry credits constitute 80% of all offsets used under the Californian carbon market.
In China, the government recently released a draft regulation for its national carbon market, and it is expected that the market will start (initially covering only the power sector) in 2020. With the scheduled start of China’s national ETS, the share of emissions covered by carbon markets globally will jump from 8% this year to 14% in 2020.
Farther south, Australia witnessed a climate policy setback as the outcome of recent national elections could mean the end to the possibility of establishing a true cap and trade system in the country. In addition, the Australian government might end up using worthless pre-2020 surplus credits to meet the country’s objective under the Paris agreement.
Many other regions are considering or have scheduled the implementation of carbon pricing mechanisms. On the one hand, this is great news for the climate. On the other hand, many of these policies lack stringency and risk to delay climate action. Furthermore, many large industrial polluters continue to undermine these schemes and ask for exemptions.
Global carbon pricing through the Paris agreement?
There is a great potential in harmonising and strengthening existing and future carbon pricing systems, including through the adoption of regional price floors. This could be done under the Paris agreement and would bring us one step closer to global carbon pricing.
Improved coordination would avoid any potential competitiveness impacts from carbon pricing. Such alleged impacts have until now been grossly exaggerated by industry players and have led to them being exempted from paying the carbon price, generating large profits for the biggest polluters.
Globally coordinated pricing efforts would also help eradicate the fear of ‘free-riding’ that pushes governments towards a ‘wait and see’ position rather than effective action.
The Paris agreement implementation provides a unique opportunity for countries to work together towards strong carbon prices that incentivise enough emissions cuts to help avoid the worst impacts of climate change. While countries can, and should, develop domestic pricing systems even in the absence of international partnerships, such cooperation would reinforce the overall system.