World turns to carbon pricing to curb emissions and save the planet

Some of the world’s largest economies are putting a price on pollution as they struggle to fulfill grand promises to control planet-warming emissions.

Things are coming to a head.

In recent weeks, China, Japan and South Korea have all joined the European Union (EU) in committing to reduce emissions to ‘net zero,’ where they only emit as much as they remove from the air. In his election campaign, US President-elect Joe Biden made the same promise.

The first realistic steps to achieve these goals are due to be laid out next year as part of agreements under the Paris Climate Agreement and putting a price on carbon will be widely implemented, experts say.

“Each country will have to come up with its own path to reaching net zero, but the expectation is carbon pricing is going to be a very important part,” said Wendy Hughes, Carbon Markets and Innovation Manager at the World Bank.

Carbon pricing

The idea is simple – a carbon price established how much businesses need to pay for their emissions. The higher the price, the greater the incentive to invest in low-carbon technology and to pollute less.

These payments can be imposed by governments through a carbon tax which is the fee businesses have to pay when they pollute or through an emissions trading system (ETS). An ETS sets a maximum limit on the amount of pollution that can be generated by a sector or a group of sectors. It creates “carbon permits” for those emissions, which companies can buy for each ton of CO2 (carbon-dioxide) they emit.

Already underway

Several nations, ranging from Europe and South Korea to China and Kazakhstan, have already implemented schemes of various scopes.

More than fifth of global emissions are covered by 46 national carbon-pricing schemes operating today or in the planning stage, as well as 32 regional systems within countries, according to the World Bank.

A significant reform is being planned for the biggest of those, which is the EU carbon market.

EU has made major headway

Emissions from participating power plants and factories have dropped by 35 percent since the European system was implemented in 2005, a sharper decline than seen in industries not included in the scheme. “The ETS has proven its efficiency,” said Frans Timmermans, head of EU climate policy. “The ETS shows how carbon pricing is a strong driver for immediate change in energy consumption.”

In the power sector, the scheme helped make coal plants uneconomic, compared with less-polluting gas plants or renewables. But getting the carbon price right is the trick for these markets. There is little motivation for businesses to rein in emissions if it is too low and when it is too high, you risk affecting the entire industry.

The EU will propose to extend and reform its ETS from next year, seeking a steeper reduction in emissions to achieve its updated 2030 climate goals.

Including more sectors such as shipping, and curbing the free permits granted to EU industry to help it compete with overseas companies that do not pay carbon costs is likely to be included in the reforms.

The carbon price needs to hit levels that push industry toward investing in emissions-cutting technologies like hydrogen, analysts say.

“The carbon price has to reach high enough to enable the European Union to reach net zero by 2050. On this basis, I think around 90 euros a tonne is a reasonable expectation by 2030,” they added.

World’s leading emitter takes small steps

Other big economies are catching up. China, now the world’s leading emitter of greenhouse gases, is planning to launch its own national ETS, perhaps as early as next year. This system is anticipated to become the world’s largest, covering several billion tons of CO2 from power plants each year.

Experts say China’s preparations for launching its ETS have intensified since the announcement by President Xi Jinping in September that by 2060 China would become carbon neutral.

“There is a sense of urgency that hasn’t been seen for quite a long time,” said Beijing-based lawyer Shawn He, who assists companies with carbon compliance.

For more than a decade, the EU has collaborated with the country on the implementation of carbon pricing policies, both on the pilot regional markets currently operating in China and on the national scheme.

Former senior EU climate policymaker Jos Delbeke, who led the development of the bloc’s trading scheme, said his advice to China was to create a mechanism that could be reformed progressively over time and resist economic shocks.

A single, global carbon price?

However, establishing a single, global price on carbon remains a distant prospect.

“The idea of a global carbon price was built on the assumption there would be dozens of linked trading systems. That hasn’t happened,” said David Hone, chief climate adviser at oil energy company Shell, which uses an internal carbon price to help meet its own sustainability goals.

Internal carbon prices also help to protect investments from any future carbon-pricing policies.

Talks at the Unite Nations have failed for two years to agree a common set of rules for international carbon markets.

The lack of global coordination has led the EU to start drafting a carbon border-tax policy – a levy on imports into Europe of polluting goods like steel and cement. The aim is to protect European industry from cheaper imports from regions with lax climate policies.
In the United States, Mr. Biden has pledged to do the same, with a $2 trillion plan to cut emissions.

Making access to some of the world’s biggest markets conditional on paying a CO2 price should prod countries with weak climate policies “to begin figuring out how they are going to move in a low-carbon direction to remain competitive”, said analysts.

“It is possible to create linkages across domestic trading systems,” they added. “In the longer term, a global carbon price is desirable the fact we don’t see one immediately doesn’t mean it’s not moving in the right direction.