Pricing Carbon

 

What Is Carbon Pricing?

The phrase “put a price on carbon” has become increasingly common as discussions of how to address climate change move from concern to action. The World Bank Group, business groups, and investors have called on governments and corporations around the world to support carbon pricing to bring 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.

Who Is Putting a Price on Carbon? 

Almost 40 countries and more than 20 cities, states and provinces already use carbon pricing mechanisms or are planning to implement them [map]. These jurisdictions are responsible for more than 22 percent of global emissions. Others are developing or considering systems that will put a price on carbon in the future. Altogether, these actions will encompass almost half of global CO2 emissions. Examples include:

China launched pilot emissions trading systems in seven cities and provinces in 2013 and 2014 and plans to create to a national system in 2016. It has a goal to reduce emissions intensity by 40-45 percent compared with 2005 levels by 2020.

Mexico has a national climate change law and a target to reduce greenhouse gas emissions 30 percent below a business-as-usual (BAU) scenario by 2020. It started a carbon tax in 2014, has a voluntary carbon market, and is exploring innovative approaches to carbon pricing as a member of the Partnership for Market Readiness, a group of 31 countries helping to develop the carbon pricing systems of the future.

Chile approved a carbon tax to start in 2018 that will target large thermal power plants and charge US$5 per metric ton of CO2 emitted. The country has a target of cutting greenhouse gas emissions to 20 percent below 2007 levels by 2020. 

British Columbia created a revenue-neutral carbon tax that directs the C$30 per ton of CO2-equivalent charged back to taxpayers through lowered personal and business income taxes and into targeted support for low-income individuals and families.

South Korea launched its ETS in January 2015, covering 525 businesses from 23 sectors that account for about two-thirds of the country's national emissions. South Korea has a target to reduce emissions 30 percent below business as usual by 2020.

• The European Union pioneered international carbon emissions trading in 2005. The system, currently the world's largest, covers more than 11,000 power stations and industrial plants, along with airlines, in the 28 EU countries plus three other countries. It has struggled with low prices and excess allowances and has been developing plans for reform.

California and Quebec both launched emissions trading systems in 2013 and formally linked their systems in 2014, allowing the two systems to trade each other's carbon allowances. Linking markets expands the pool of participants and can broaden emission reduction opportunities and reduce volatility.

Private Sector Support Is Growing

The private sector has been increasingly outspoken in its support for consistent carbon pricing. Many companies operate in countries that have carbon pricing system in place now, and they are developing the expertise in both managing their emissions and incorporating a real or shadow carbon price in their planning and investments.

In 2014, more than 1,000 companies and investors spoke up in support of carbon pricing through a series of initiatives led by the World Bank and other organizations, including the Prince of Wales's Corporate Leaders Group, whose Carbon Price Communiqué began expanding corporate support for carbon pricing in 2012; the 2014 Global Investor Statement on Climate Change, signed by more than 360 investors with more than $24 trillion in assets, which included a call for "stable, reliable and economically meaningful carbon pricing that helps redirect investment commensurate with the scale of the climate change challenge"; and the Caring for Climate Initiative, created by the UN Global Compact, which encourages businesses to commit to its set of leadership criteria. Those initiatives led to the creation of a Carbon Pricing Leadership Coalition.

Individually, over 150 major companies are improving the sustainability of their own operations by instituting internal or "shadow" carbon pricing, according to surveys by CDP. Microsoft, for example, talks about using its internal carbon fee model to encourage innovation and resource efficiency that is reducing emissions and saving the company money. Other companies are testing carbon pricing models. In Brazil, 20 companies, including Braskem and Vale, have joined forces to run a carbon pricing simulation.  

Learn more about corporate and government carbon pricing efforts in these pages. In interviews and blog posts, executives and heads of state explains why carbon pricing is a smart solution to reduce the drivers of climate change.

 

Carbon Pricing Leadership Coalition

The Carbon Pricing Leadership Coalition brings together leaders from government, business, and civil society to share experiences and best practices in carbon pricing. By bringing diverse public and private sector backgrounds together, the coalition will help expand and improve the design and implementation of carbon pricing policies that can maintain competitiveness, create jobs, encourage innovation, and deliver meaningful emissions reductions.

Learn more at the Carbon Pricing Leadership Coalition website.


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

Learn More

Carbon Pricing Leadership Coalition Website

Learn more about carbon pricing, where and how it's used, and why leaders across business and government support it at the Carbon Pricing Leadership Coalition Website.


Contacts

Contacts Patrick Verkooijen
Email

Tom Kerr
Email