- Here is My Take  - February 2017

  Will the Politics of Carbon pricing Save the Planet from an anthropogenic climate disaster ? 

Carbon pricing is often presented as one of the most effective strategy to tackle the threat of climate change by helping countries meet their emissions reduction goals in a way that is cost-effective, flexible and favorable to economic growth. For a growing number of countries around the globe, in the wake of the Paris Climate Agreement, carbon pricing policy instruments are now being front and center of their political agenda. Recently the Government of Canada has made the first move to implement a carbon pricing nationwide joining the vast group of countries that are planning to use a price signal as a key tool to achieve their international climate commitments. China has already announced its intention to implement a national carbon pricing in 2017 to become, if the promise is kept, the largest emissions trading market, surpassing the European Union Emissions Trading System (EU-ETS).  According to a World Bank-ICAP joint study published last October, about 40 national jurisdictions and over 20 cities, states and regions are explicitly putting a price on carbon covering approximately 7 gigatons of carbon dioxide equivalent or about 12% of global GHG emissions.  And this number could grow up to 25% by 2020 according to an IETA-EDF report. 

The idea of carbon pricing is to internalize the costs of carbon emission pollution, which is a negative externality on the climate system, in order to foster behavioral changes and encourage emissions reduction by moving away companies and consumers from fossil fuels towards cleaner and more efficient technologies. Carbon pricing can be done through carbon taxation or Emissions Trading Scheme (ETS), also referred to as Cap-and-Trade.
In 2016, The World Bank estimated the total value of carbon pricing initiatives to be just below US$ 50 billion, a figure quite similar to what was reported the previous year, when governments raised about US$ 26 billion in revenues. Meanwhile, companies that are not-at-all subject to any mandatory compliance on emissions reduction inside their jurisdictions are increasingly developing internal carbon pricing initiatives to generate or trade emission credits, with the goal of reducing their environmental footprint and to voluntarily contribute to the fight against global warming.

From a business perspective, ETS is by far the most favored climate change strategy as it provides an attractive incentive for governments and designated companies to reduce emissions with the optics of increasing revenues through trading of allowances and carbon credits. ETS is a market-based approach that relies on a strict cap on emissions and a trading scheme of emission allowances and certified carbon credits to decrease GHG emissions over time. As a market based-solution to climate change, it offers the potential for economic growth, business development and substantial jobs opportunities in the green industry, construction and technological innovation. By the end of 2016, from the latest account, ETSs were operating in 35 countries, 13 states or provinces and 7 cities worldwide, while many more countries have pledged to use ETS as a cornerstone component of their Climate Change Action Plan. Nonetheless, ETS are also criticized for their complexity and administrative burden, as it takes often more time and resources to implement. Another major issue with ETS is the supply demand imbalance in many cases driven by huge surplus of allowances and carbon credits leading to a price volatility and market failure with little trading taking place pushing participating companies to exit the market, creating even more instability. In addition, very often part or the totality of compliance costs are directly transferred to consumers who end up bearing the cost of pollution and not the big polluters, which is viewed as unfair despite rebates issued by governments to address this issue. 

Carbon taxation, the other major option more often utilized in carbon pricing, levies a fee on the production, distribution and use of fossil fuels depending on how much carbon their combustion emits. This levy for each ton of GHG emitted is meant to send a price signal that has the potential to trigger a market response, which presumably results in emissions reduction. By making the use of polluting fossil fuels more expensive for businesses and individuals, a carbon tax is intended to promote energy conservation, energy efficiency and more competitiveness in the marketplace for alternative energy sources. Those carbon taxes have been around for a long time, since the early nineties mainly in Scandinavian countries to motivate energy users to reduce their fossil fuels consumption for environmental quality purposes but also for energy security.  As of 2016, 18 jurisdictions around the world have explicitly implemented or scheduled a carbon tax policy. The main advantages of a carbon tax, as argued by proponents, are its simplicity in design contrary to ETS and that it is much easier to implement and administrate with less bureaucracy. However, carbon taxing remains very unpopular, because it is often considered to be detrimental particularly to businesses and low-income households, and ineffective when especially the money raised by governments is not spent wisely and totally to promote clean and low-carbon technologies.  

Despite the setbacks, when designed and implemented properly, carbon pricing policies have proven to deliver considerable amount of emission reductions overtime as shown with experiences worldwide, especially from EU-ETS, the Scandinavian countries or the Canadian British Columbia province. As suggested by experts and practitioners, for carbon pricing to be an effective climate change instrument, it is therefore critical to have first and foremost fairness in the system for businesses and individuals, reduce the bureaucratic burden for both participants and governments by simplifying the requirements for MRV programs, easing access to CO2 Trading registry and eliminating rules that are deemed to be unnecessary and disproportionate. Some global institutions such as the World Bank though PMR and the World Trade Organization among others have also suggested the development of an international carbon market would be a cost-effective way to deal efficiently with the prospect of a dangerously changing climate while boosting economic growth and fostering a transition to a low-carbon era. Because of the business, trade, investment, multilateral cooperation, and global development opportunities it represents, it is anticipated that an international carbon market could spur greater ambition for countries to meet and even surpass their climate goals in order to keep global warming below 2 degrees Celsius.

While carbon pricing may be an important policy instrument to mitigate climate risks, other instruments such as vigorous renewable energy policies and direct regulations focusing for instance on energy diversification and substitution, coal-power and heavy oil power stations phasing-out, low-carbon fuels and clean cars programs have proven to be way more effective in terms of emissions reduction overtime. Furthermore, renewable energies have a huge potential for economic growth, good paying jobs creation and offer great business opportunities in emerging global markets. According to a recent long-range scenario analysis from climate scientists at the University of Maryland, the goal should be to produce 50% of the global energy needs from renewables by 2060 to avoid a “moonshot”. As technologies become highly efficient over time, it will be more and more difficult and costly to achieve significant emissions reduction; therefore a massive push for renewable energy, only can save the planet from an anthropogenic climate disaster.  

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