Around the world, more and more governments are implementing various forms of carbon pricing, but so far most prices languish below USD10. While it is impossible to put an accurate price tag on all the damage that climate change causes, the High-Level Commission on Carbon Prices found that a price of at least USD40-80/tCO2 by 2020 and USD50-100/tCO2 by 2030 is needed to achieve the Paris climate goals.
In an effort to price carbon, governments, sub-national and supranational institutions have set up various schemes. At UNFCCC level, a global carbon market was set up under the Kyoto Protocol, and the Paris Agreement sets the basis for a whole new generation of mechanisms, commonly referred to as “Article 6”. A cap-and-trade system is in operation throughout the EU, as well as some US States, South Korea. Canada and China both are kicking off national pricing schemes, and many other regions are pricing carbon through taxes.
Global carbon markets, therefore, reflect the variety of goals pursued in climate policy. While some systems, such as UNFCCC markets focus on the voluntary participation of countries to help them meet their climate targets, other systems such as ETS’ in the EU or North America set a binding limit on emissions over a specific region.
Unfortunately, many of these mechanisms are riddled with problems. The main UNFCCC global market -Clean Development Mechanism- has severely affected indigenous communities, ecosystems, and local communities, while failing to truly reduce emissions. National or supranational ETS’ have also run into problems, leading to significant windfall profits for private companies despite very low prices which did not succeed in incentivising sufficient emission reductions.
Implementing a carbon price or global carbon market should be done as part of a portfolio of measures to address various barriers such as split incentives or high-cost measures that are likely not overcome with a carbon price. Further, in the case of a cap and trade system, a minimum auction price is important to avoid the so-called “waterbed effect” that can greatly undermine prices and the effectiveness of the system. Carbon markets should move away from offsetting and pursue an objective of overall mitigation, to ensure that they truly contribute to reducing emissions rather than simply trade pollution from one country to another.
If implemented correctly, carbon pricing can offer significant co-benefits including reducing air pollutants, generating revenues for climate measures and a just transition, fighting energy poverty or reducing other taxes. Wise reinvestment of revenues can lead to a double dividend of economic growth.
The design of effective carbon pricing policies and carbon markets need broad support from civil society. Environmental Non-Governmental Organizations (NGOs) and other civil society groups play an important role in robust climate policy as a vital counterweight to the interests of emitting industries. To achieve a long term rising carbon price, policymaking should not be a complicated elitist project but should be informed by input from civil society.