FEATURE STORY

New Principles to Help Accelerate the Growing Global Momentum for Carbon Pricing

September 20, 2015

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© Dana Smillie /World Bank

STORY HIGHLIGHTS
  • New report shows the number of implemented or planned carbon pricing schemes around the world has almost doubled since 2012, with existing schemes now worth about $50 billion.
  • About 40 nations and 23 cities, states or regions are using a carbon price. This represents the equivalent of about 7 billion tons of carbon dioxide, or 12 percent of annual global greenhouse gas emissions.
  • And new report lays out six key principles to put a price on carbon – the FASTER principles – for putting a price on carbon based on economic principles and experience of what is already working around the world

The spotlight is on New York now with the upcoming United Nations meeting on the new Sustainable Development Goals, Climate Week New York, and in about two months, global leaders will meet again in Paris for COP 21.

The decisions made in New York and Paris will set the course for development for years to come. But while these are top level, pivotal meetings, actors around the world are not waiting for a global agreement to act. They are already putting a price on carbon dioxide and other greenhouse gas emissions to drive clean investment. This includes the private sector. And we’ve seen companies from the oil and gas industry – calling for widespread carbon pricing. Today, over 400 businesses worldwide are using an internal price on carbon to guide their investments.  


" The world needs to find effective ways to reduce carbon pollution. We must design the best ways to price carbon in order to help cut pollution, improve people’s health, and provide governments with a pool of funds to drive investment in a cleaner future and to protect poor people. "

Jim Yong Kim

World Bank Group President

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Around the world, about 40 national and 23 city, states and regions are using carbon pricing schemes, like emissions trading systems (ETS) or carbon taxes. These represent about 7 billion tons of carbon dioxide, or 12% of global greenhouse emissions, a threefold increase over the past decade.

To help countries navigate the waters, the World Bank Group, together with the OECD and with input from the IMF, also released a report today on the FASTER Principles, which helps governments and business develop efficient and cost-effective instruments to put a price on the social costs of emissions.

The FASTER principles are: F for fairness; A for alignment of policies and objectives; S for stability and predictability; T for transparency; E for efficiency and cost-effectiveness and R for reliability and environmental integrity.

With COP21 fast approaching, the need for meaningful carbon policies is more important than ever. Carbon pricing is central to the quest for a cost-effective transition towards zero net emissions in the second half of the century. These principles will help governments to incorporate carbon pricing as a key part of their policy toolkit,” said Angel Gurría, Secretary-General of the OECD.

The research draws on over a decade of experiences with carbon pricing initiatives around the world, such as emissions trading systems and taxes in places like the European Union, British Columbia, Denmark, Sweden, and the United Kingdom. It points to what’s been learnt to date: well-designed carbon pricing schemes are a powerful and flexible tool that can cut emissions that cause climate change and if adequately designed and implemented can play a key role in enhancing innovation and smoothing the transition to a prosperous, low-carbon global economy.

"Carbon pricing is effective in reducing emissions that cause climate change, is straightforward to administer, can raise valuable revenues for broader fiscal reforms, and can help address local pollution as well as global climate change. We welcome the opportunity to continue collaborating with the World Bank, OECD, and others on this critical policy tool,” said Christine Lagarde, Managing Director of the International Monetary Fund.

There is growing momentum: Since 2012, the number of implemented or scheduled carbon pricing instruments nearly doubled, from 20 to 38, and they are now worth about $50 billion. This progress is described in a new report, launched by the World Bank and Ecofys called the State and Trends of Carbon Pricing 2015 report.

Some examples:  

  • Last year, Chile approved a national carbon tax to start in 2017.
  • In January of this year, the Republic of Korea launched an ambitious carbon market.
  • Today, the EU ETS is the largest carbon instrument in terms of value, followed by the trading systems in Korea and California.
  • Ontario, Canada's most populous province, announced in April that it is joining California and Quebec’s emissions trading systems. And the EU and South Korea announced plans this week to explore linkage between their emissions trading systems.
  • The US and China – the world’s largest greenhouse gas emitters – host the two largest national carbon pricing initiatives in terms of volume covered, driven by initiatives in their states and provinces. In China, the carbon initiatives cover the equivalent of 1 billion tons of CO2, while in the US, they cover the equivalent of 0.5 billion tons of CO2.
  • China, which already has seven pilot carbon markets operating in major cities and provinces, announced plans to launch a national system in 2016. 

And it was just announced on Wednesday last week that more than two dozen cities in China and the US are making new pledges to lower emissions. This is welcome news. But the ambition and coverage of pricing needs to accelerate significantly for the world to meet international climate goals. Overall, these experiences with carbon pricing show little negative impact on economic growth but have a significant impact on energy intensity and diversification (or “greening”) of the energy mix.  

There have been concerns that carbon pricing will affect international competitiveness of some industries and lead them to move production, or even whole factories, to other countries or jurisdictions where emission costs are lower, a phenomenon called “carbon leakage”. The report notes that ex-post analysis of the EU ETS, the biggest cap-and-trade system in place today, shows that so far, the carbon leakage has not materialized on any significant scale.

In the future, the risk of carbon leakage is real as long as carbon price signals are strong and differ significantly between jurisdictions. Also, this risk tends to only affect a limited number of exposed sectors and can be effectively mitigated through policy design.

The State and Trends report also discusses the enormous savings that can be made through – cooperation between countries. Compared to domestic action alone, cooperation and linking of carbon pricing instruments across borders could significantly lower the cost of achieving a 2°C stabilization goal, because countries have more flexibility in choosing who undertakes emission reductions, and who pays for them.

Analysing several studies made over the years, the State and Trends report shows that this cooperation can mobilize resources and transfers between countries and investors, and result in net annual flows of financial resources of up to $400 billion by 2030 and up to $2.2 trillion by 2050.

The report also says that carbon prices that converge have a positive impact on competitiveness by favouring more efficient and cleaner sectors, leading to a more efficient economy.