Pricing Carbon

What Is Carbon Pricing?

The phrase put a price on carbon has now become well known with momentum growing among countries and business to put a price on carbon pollution as a means of bringing down emissions and drive investment into cleaner options.

So what does it mean to put a price on carbon, and why do many government and business leaders support it?

There are several paths governments can take to price carbon, all leading to the same result. They begin to capture what are known as the external costs of carbon emissions – costs that the public pays for in other ways, such as damage to crops and health care costs from heat waves and droughts or to property from flooding and sea level rise – and tie them to their sources through a price on carbon.

A price on carbon helps shift the burden for the damage back to those who are responsible for it, and who can reduce it. Instead of dictating who should reduce emissions where and how, a carbon price gives an economic signal and polluters decide for themselves whether to discontinue their polluting activity, reduce emissions, or continue polluting and pay for it. In this way, the overall environmental goal is achieved in the most flexible and least-cost way to society. The carbon price also stimulates clean technology and market innovation, fuelling new, low-carbon drivers of economic growth.

There are two main types of carbon pricing: emissions trading systems (ETS) and carbon taxes.

An ETS – sometimes referred to as a cap-and-trade system – caps the total level of greenhouse gas emissions and allows those industries with low emissions to sell their extra allowances to larger emitters. By creating supply and demand for emissions allowances, an ETS establishes a market price for greenhouse gas emissions. The cap helps ensure that the required emission reductions will take place to keep the emitters (in aggregate) within their pre-allocated carbon budget.

A carbon tax directly sets a price on carbon by defining a tax rate on greenhouse gas emissions or – more commonly – on the carbon content of fossil fuels. It is different from an ETS in that the emission reduction outcome of a carbon tax is not pre-defined but the carbon price is.

The choice of the instrument will depend on national and economic circumstances. There are also more indirect ways of more accurately pricing carbon, such as through fuel taxes, the removal of fossil fuel subsidies, and regulations that may incorporate a “social cost of carbon.” Greenhouse gas emissions can also be priced through payments for emission reductions. Private entities or sovereigns can purchase emission reductions to compensate for their own emissions (so-called offsets) or to support mitigation activities through results-based finance.

Some 40 countries and more than 20 cities, states and provinces already use carbon pricing mechanisms, with more planning to implement them in the future.  Together the carbon pricing schemes now in place cover about half their emissions, which translates to about 13 percent of annual global greenhouse gas emissions. 

Carbon Pricing Leadership Coalition

The Carbon Pricing Leadership Coalition is a voluntary partnership of national and sub-national governments, businesses, and civil society organizations that agree to advance the carbon pricing agenda by working with each other towards the long-term objective of a carbon price applied throughout the global economy by:

  • strengthening carbon pricing policies to redirect investment commensurate with the scale of the climate challenge; 
  • bringing forward and strengthening the implementation of existing carbon pricing policies to better manage investment risks and opportunities; and 
  • enhancing cooperation to share information, expertise and lessons learned on developing and implementing carbon pricing through various "readiness" platforms.

The Coalition will collect the evidence base, benefiting from experience around the world in designing and using carbon pricing, and use this input to help inform successful carbon pricing policy development and use of carbon pricing in businesses. It will also deepen understanding of the business and economic case for carbon pricing. In that role, it is developing pathways for use by companies, investors and governments that will illustrate plausible outlooks under a variety of carbon pricing policies and timelines. Finally, the coalition will work to bring together government and business in leadership dialogues that identify and address the most pressing issues, and in doing so, accelerate the use of carbon pricing around the world.

Learn more at the Carbon Pricing Leadership Coalition website.

Why Price Carbon?

Climate change is one of the greatest global challenges of our time. It threatens to roll back decades of development progress and puts lives, livelihoods, and economic growth at risk.

Today, the science is unequivocal: Humans have been driving global warming through the extensive burning of fossil fuels. We are already seeing changes in the climate that our current economies were built on. Fourteen of the 15 hottest years since record keeping began over 130 years ago have been since the turn of this century. The intensity of extreme weather-related events has also increased.

Recent reports from the Intergovernmental Panel on Climate Change (IPCC) and the Turn Down the Heat reports, prepared for the Word Bank by the Potsdam Institute for Climate Impact Research, provide snapshots of the science. They warn of dangerous effects on agriculture, water resources, ecosystems, and human health if countries do not take action. If the world warms by just 2°C (3.6°F)—warming which may be reached in 20 to 30 years—we could see widespread food shortages, unprecedented heat-waves, and more intense storms. Already, studies suggest that about 1.5°C warming is locked in.

To stay below 2°C, the IPCC says the world will need to get to zero net emissions before the end of this century. That means action now. Carbon pricing is an essential part of the solution.

The economic arguments for action are also compelling. Action now can open doors to opportunity, as the Adding Up the Benefits, New Climate Economy and Risky Business reports all reflect. Delaying action, the IPCC warns, will only raise the costs.

 
 

LEADERS UNITE IN CALLING FOR A PRICE ON CARBON

For the first time Heads of State, city and provincial leaders have come together with the support of leading companies to urge countries and companies around the world to put a price on carbon pollution. 

These global leaders have taken steps to price carbon, through emissions trading programs, carbon taxes and fees, and other pricing mechanisms, that provide incentives to invest in a greener economy.

Strong public policy gives the private sector the certainty and predictability to make the necessary long-term investments in climate smart development and prevent catastrophic impacts from climate change.

Convened by World Bank Group President Jim Yong Kim and the International Monetary Fund’s Managing Director Christine Lagarde, the Carbon Pricing Panel is calling on their peers to follow their lead and put a price on carbon. The call comes ahead of the Paris climate talks this December with the aim to spur further, faster action towards the necessary low carbon, productive, competitive economy of the future. They are joined in this effort by OECD Secretary General Angel Gurria.

Members of the Carbon Pricing Panel include German Chancellor Angela Merkel, Chilean President Michelle Bachelet, French President François Hollande, Ethiopian Prime Minister Hailemariam Desalegn, Mexican President Enrique Peña Nieto, Canadian Prime Minister Justin Trudeau, Governor Jerry Brown of California, and Mayor Eduardo Paes of Rio de Janeiro.

The panel provides political momentum to complement the voices of government and industry leaders in the Carbon Pricing Leadership Coalition – an action based platform set up on the back of support for carbon pricing from 74 countries and 1,000 companies at the United Nations Climate Summit in September 2014.

Private sector support comes from US Institutional Investor Calpers, Engie of France, Mahindra Group of India, and Netherlands based Royal DSM who, with other leading businesses, work to link business needs with public policies through the Carbon Pricing Leadership Coalition.

States and Trends of Carbon Pricing 2015

FASTER Principles for Successful Carbon Pricing

 

COMPETITIVENESS AND CARBON LEAKAGE

What is the Impact of Carbon Pricing on Competitiveness?
(Carbon Pricing Leadership Coalition, 2016)

Carbon pricing, Competitiveness and Carbon Leakage: theory, evidence and policy design
(World Bank, 2015)

Impacts of Carbon Prices on Indicators of Competitiveness: A Review of Empirical Findings
(OECD, 2015)

Carbon Pricing & Addressing Competitiveness
(IETA, 2015)

Environment and trade: Do stricter environmental policies hurt export competitiveness?
(OECD, 2016)

Empirical Evidence on the Effects of Environmental Policy Stringency on Productivity Growth
(OCED, 2014)


USE OF REVENUES

What are the Options for Using Carbon-Pricing Revenues
(Carbon Pricing Leadership Coalition, 2016)

Carbon pricing: how best to use the revenue?
(Grantham Institute, GGGI, 2015)

Two World Views on Carbon Revenues
(Resources for the Future, 2013) 

Carbon Fee and Dividend Explained  (Citizens Climate Lobby, 2016)

Better Growth Better Climate
(New Climate Economy, 2014)

How to Use Carbon Tax Revenues
(Tax Policy Center, 2016)

Choose Wisely: Options and Trade-Offs in Recycling Carbon Pricing Revenue 
(Canada Eco-Fiscal Commission)

British Columbia’s Revenue-Neutral Carbon Tax: A Review of the Latest “Grand Experiment"
(Nicholas Institute and University of Ottawa Institute of the Environment, 2015)  

Recycling carbon revenues: Transforming costs into opportunities
(I4CE, 2016) 

Carbon Pricing Revenues
(CMIA, 2015) 

 

POLICY ALIGNMENT

Climate and Carbon: Aligning prices and Policies
(OECD, 2013)

Aligning Policies for a Low-carbon Economy
(OECD/IEA/NEA/ITF, 2015)

The FASTER Principles for Successful Carbon Pricing: An approach based on initial experience
(OECD/World Bank Group, 2015)


BUSINESS & CARBON PRICING

Internal carbon pricing – An increasingly widespread corporate practice
(French, I4CE, 2016)

Embedding a Carbon Price Into Business Strategy (CDP, 2016)

Executive Guide to Carbon Pricing Leadership
(UN Global Compact, WRI, 2015)

Shifting the carbon pricing debate: Emerging business attitudes fuel momentum for global climate action
(EY, 2015)

Putting a price on risk: Carbon pricing in the corporate world
(CDP, 2015)

Emerging Practices in Internal Carbon Pricing
(WBCSD, 2016)

Investing in a Time of Climate Change  
(Mercer, 2015)

Corporate Use of Carbon Prices: Commentary from Corporations, Investors and Thought Leaders 
(CDP, 2014)

Preparing for Carbon Pricing: Case Studies from Company Experience - Royal Dutch Shell, Rio Tinto, and Pacific Gas and Electric Company 
(Partnership for Market Readiness, 2015)

Climate Action and Profitability: CDP S&P 500 Climate Change Report 2014 
(CDP, 2014) 

Markets Matter: Greenhouse Gas Markets 2014 
(IETA, 2014)

Caring for Climate Business Leadership Criteria on Carbon Pricing 
(UN Global Compact, 2014)

 

LINKING/NETWORKING

Towards global carbon pricing: direct and indirect linking of carbon markets
(OECD, 2014)

Carbon Market Clubs and the New Paris Regime
(Climate Strategies, 2016) 

Towards a global price on carbon: Pathways for linking carbon pricing instruments
(Adelphi, 2015)

Networking Carbon Markets – Key Elements of the Process
(World Bank, 2016)

Toward a club of carbon markets
(EDF, 2015)

Creating a club of carbon markets: Implications of the trade system
(ICTSD, WEF, 2015)

Addressing Climate Change: A WTO Exception to Incorporate Climate Clubs
(ICTSD, WEF, 2015)

Lessons Learned from Linking Emissions Trading Systems: General Principles and Applications 
(World Bank, 2014)

Towards A Global Carbon Market Prospects for Linking the EU ETS to Other Carbon Markets
(Carbon Market Watch, 2015)

Linking Emissions Trading Schemes: Considerations and Recommendations for a Joint EU-Korean Carbon Market
(ICTSD)

Linking Emissions Trading System: A Summary of Current Research
(ICAP, 2015)

Options and Issues for Restricted Linking of Emissions Trading Systems
(ICAP, 2015)

 

OTHER 

The Sustainable Infrastructure Imperative: Financing for Better Growth and Development. (The New Climate Economy , 2016)

 

BACKGROUND NOTES

Background Note: Carbon Pricing Readiness

As countries construct their 2030, 2040, and 2050 greenhouse gas mitigation scenarios, they have increasingly identified cost-efficient policies, including carbon pricing instruments, as essential elements of proposed climate action. Countries’ activities in this regard differ based on their unique circumstances, and range from improving “carbon pricing readiness”  to designing and piloting various carbon pricing instruments. This note provides updates on countries' activities.  

Background Note: Corporate Action for Putting a Price on Carbon

Companies in a diverse range of sectors see carbon pricing as the most efficient and cost-effective means of tackling the climate challenge. Many companies are voicing support for government action to put a price on carbon. Many also assign a price on carbon internally.

Background Note: ETS

An ETS is an explicit carbon pricing instrument that limits or caps the allowed amount of greenhouse gas emissions and lets market forces disclose the carbon price through emitters trading emissions allowances.

Emissions Trading 101 Library 
(IETA, 2015)

 


Statement
Putting a Price on Carbon
June 3, 2014


Climate change poses one of the greatest global challenges and threatens to roll back decades of development and prosperity. 

The latest report from the United Nations Intergovernmental Panel on Climate Change makes clear the importance of putting a price on carbon to help limit the increase in global mean temperature to two degrees Celsius above pre-industrial levels.

Depending on each country’s different circumstances and priorities, various instruments can be used to price carbon to efficiently and cost effectively reduce emissions, such as domestic emissions trading systems, carbon taxes, use of a social cost of carbon and/or payments for emission reductions. 

Governments are taking action. In 2014, about 40 national and over 20 sub-national jurisdictions have already implemented or scheduled emissions trading schemes or carbon taxes. Together, these jurisdictions account for more than 22 percent of global emissions. Many more countries and jurisdictions are advancing preparation for pricing carbon. Together, these represent almost half of global GHG emissions. 

Corporations are responding. A growing number of companies are already working within carbon pricing systems and are developing expertise in managing their emissions. Others are incorporating greenhouse gas reduction targets in their business planning. In 2013, over 100 companies worldwide publicly disclosed to CDP that they already use carbon pricing as a tool to manage the risks and opportunities to their current operations and future profitability. Businesses see that carbon pricing is the most efficient and cost effective means of reducing emissions, leading them to voice support for carbon pricing.  

The momentum is growing. Pricing carbon is inevitable if we are to produce a package of effective and cost-efficient policies to support scaled up mitigation.  

Greater international cooperation is essential. Governments pledge to work with each other and companies pledge to work with governments towards the long-term objective of a carbon price applied throughout the global economy by:

• strengthening carbon pricing policies to redirect investment commensurate with the scale of the climate challenge;

• bringing forward and strengthening the implementation of existing carbon pricing policies to better manage investment risks and opportunities;

• enhancing cooperation to share information, expertise and lessons learned on developing and implementing carbon pricing through various “readiness” platforms. 

We invite all countries, companies and other stakeholders to join this growing coalition of the working.

Download the statement (pdf): English | Español | Français | 中文
Supporters list: English

Statement
Putting a Price on Carbon
June 3, 2014


Climate change poses one of the greatest global challenges and threatens to roll back decades of development and prosperity. 

The latest report from the United Nations Intergovernmental Panel on Climate Change makes clear the importance of putting a price on carbon to help limit the increase in global mean temperature to two degrees Celsius above pre-industrial levels.

Depending on each country’s different circumstances and priorities, various instruments can be used to price carbon to efficiently and cost effectively reduce emissions, such as domestic emissions trading systems, carbon taxes, use of a social cost of carbon and/or payments for emission reductions. 

Governments are taking action. In 2014, about 40 national and over 20 sub-national jurisdictions have already implemented or scheduled emissions trading schemes or carbon taxes. Together, these jurisdictions account for more than 22 percent of global emissions. Many more countries and jurisdictions are advancing preparation for pricing carbon. Together, these represent almost half of global GHG emissions. 

Corporations are responding. A growing number of companies are already working within carbon pricing systems and are developing expertise in managing their emissions. Others are incorporating greenhouse gas reduction targets in their business planning. In 2013, over 100 companies worldwide publicly disclosed to CDP that they already use carbon pricing as a tool to manage the risks and opportunities to their current operations and future profitability. Businesses see that carbon pricing is the most efficient and cost effective means of reducing emissions, leading them to voice support for carbon pricing.  

The momentum is growing. Pricing carbon is inevitable if we are to produce a package of effective and cost-efficient policies to support scaled up mitigation.  

Greater international cooperation is essential. Governments pledge to work with each other and companies pledge to work with governments towards the long-term objective of a carbon price applied throughout the global economy by:

• strengthening carbon pricing policies to redirect investment commensurate with the scale of the climate challenge;

• bringing forward and strengthening the implementation of existing carbon pricing policies to better manage investment risks and opportunities;

• enhancing cooperation to share information, expertise and lessons learned on developing and implementing carbon pricing through various “readiness” platforms. 

We invite all countries, companies and other stakeholders to join this growing coalition of the working.

Download the statement (pdf): English | Español | Français | 中文

 

Statement
Putting a Price on Carbon
June 3, 2014


Climate change poses one of the greatest global challenges and threatens to roll back decades of development and prosperity. 

The latest report from the United Nations Intergovernmental Panel on Climate Change makes clear the importance of putting a price on carbon to help limit the increase in global mean temperature to two degrees Celsius above pre-industrial levels.

Depending on each country’s different circumstances and priorities, various instruments can be used to price carbon to efficiently and cost effectively reduce emissions, such as domestic emissions trading systems, carbon taxes, use of a social cost of carbon and/or payments for emission reductions. 

Governments are taking action. In 2014, about 40 national and over 20 sub-national jurisdictions have already implemented or scheduled emissions trading schemes or carbon taxes. Together, these jurisdictions account for more than 22 percent of global emissions. Many more countries and jurisdictions are advancing preparation for pricing carbon. Together, these represent almost half of global GHG emissions. 

Corporations are responding. A growing number of companies are already working within carbon pricing systems and are developing expertise in managing their emissions. Others are incorporating greenhouse gas reduction targets in their business planning. In 2013, over 100 companies worldwide publicly disclosed to CDP that they already use carbon pricing as a tool to manage the risks and opportunities to their current operations and future profitability. Businesses see that carbon pricing is the most efficient and cost effective means of reducing emissions, leading them to voice support for carbon pricing.  

The momentum is growing. Pricing carbon is inevitable if we are to produce a package of effective and cost-efficient policies to support scaled up mitigation.  

Greater international cooperation is essential. Governments pledge to work with each other and companies pledge to work with governments towards the long-term objective of a carbon price applied throughout the global economy by:

• strengthening carbon pricing policies to redirect investment commensurate with the scale of the climate challenge;

• bringing forward and strengthening the implementation of existing carbon pricing policies to better manage investment risks and opportunities;

• enhancing cooperation to share information, expertise and lessons learned on developing and implementing carbon pricing through various “readiness” platforms. 

We invite all countries, companies and other stakeholders to join this growing coalition of the working.

Download the statement (pdf): English | Español | Français | 中文

 

Statement
Putting a Price on Carbon
June 3, 2014


Climate change poses one of the greatest global challenges and threatens to roll back decades of development and prosperity. 

The latest report from the United Nations Intergovernmental Panel on Climate Change makes clear the importance of putting a price on carbon to help limit the increase in global mean temperature to two degrees Celsius above pre-industrial levels.

Depending on each country’s different circumstances and priorities, various instruments can be used to price carbon to efficiently and cost effectively reduce emissions, such as domestic emissions trading systems, carbon taxes, use of a social cost of carbon and/or payments for emission reductions. 

Governments are taking action. In 2014, about 40 national and over 20 sub-national jurisdictions have already implemented or scheduled emissions trading schemes or carbon taxes. Together, these jurisdictions account for more than 22 percent of global emissions. Many more countries and jurisdictions are advancing preparation for pricing carbon. Together, these represent almost half of global GHG emissions. 

Corporations are responding. A growing number of companies are already working within carbon pricing systems and are developing expertise in managing their emissions. Others are incorporating greenhouse gas reduction targets in their business planning. In 2013, over 100 companies worldwide publicly disclosed to CDP that they already use carbon pricing as a tool to manage the risks and opportunities to their current operations and future profitability. Businesses see that carbon pricing is the most efficient and cost effective means of reducing emissions, leading them to voice support for carbon pricing.  

The momentum is growing. Pricing carbon is inevitable if we are to produce a package of effective and cost-efficient policies to support scaled up mitigation.  

Greater international cooperation is essential. Governments pledge to work with each other and companies pledge to work with governments towards the long-term objective of a carbon price applied throughout the global economy by:

• strengthening carbon pricing policies to redirect investment commensurate with the scale of the climate challenge;

• bringing forward and strengthening the implementation of existing carbon pricing policies to better manage investment risks and opportunities;

• enhancing cooperation to share information, expertise and lessons learned on developing and implementing carbon pricing through various “readiness” platforms. 

We invite all countries, companies and other stakeholders to join this growing coalition of the working.

Download the statement (pdf): English | Español | Français | 中文

 


Carbon Pricing in Action



Widespread Support


Contacts
Patrick Verkooijen
Email

Tom Kerr
Email