Global carbon pricing - How full is the glass?
Soon after the adoption of the Paris Agreement, Ecofys started the three-year Carbon Pricing Unlocked (CPU) partnership with the Generation Foundation. Together, we are exploring the role of carbon pricing along value chains from raw materials to end consumers. At the COP in Marrakech, we presented the first outcome of our research: a global greenhouse gas (GHG) productivity map, which maps value creation and GHG emissions along global value chains. This highlighted where efforts can be focused to decarbonise our economy.
Source: Generation Foundation and Ecofys. 2016. Impacts of a global carbon price on consumption and value creation – Implications for carbon pricing design, London, United Kingdom.
According to Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) scenarios, a global carbon price of about USD$100/ton CO2e is necessary to limit global warming to 2°C. Teaming up with the Norwegian University of Science and Technology and PBL Netherlands Environmental Assessment Agency, we showed that such a price applied to global GHG emissions would be equal to approximately 6 percent of global gross domestic product (GDP). The resulting carbon pricing revenues can be redistributed back to the economy, e.g. in proportion to the value creation by each consumption category. Revenue recycling is an important component of carbon pricing design. Obviously, significant differences exist between different consumption value chains.
What does a figure like 6% of global GDP really tell us?
It can be argued that 6 percent of global GDP is not exceedingly high. The low carbon transition that carbon pricing could help drive is most likely possible without major disruptions to the global economic system. At the same time, such a figure does represent a significant amount of money. Six percent of global GDP would translate into more than USD$4 trillion of surplus revenues generated by governments each year.
These revenues can be used to co-finance the necessary new energy infrastructure required for a low carbon economy. With our Navigant colleagues, we refer to this system as the Energy Cloud: a decentralized architecture based on intelligent network technology and two-way energy flows, encompassing a diverse suite of technologies that includes energy storage, virtual power plants, demand response, and advanced software that enables greater interoperability across heterogeneous grid elements.
Revenues can also be used to compensate for capital intensive assets that might become stranded, because they are no longer needed in a low carbon economy. Or they can help to mitigate unwanted impacts of a carbon price for vulnerable groups and stimulate the breakthrough innovations needed to decarbonise material value chains.
What is today’s carbon pricing reality?
Having mapped the global spread of carbon pricing schemes since 2013 in the State and Trends of Carbon Pricing report that Ecofys writes annually with the World Bank, we find the proverbial glass remains both half-full and half-empty: unarguably, a carbon pricing wave is going on, but it has not yet resulted in a low carbon tsunami.
On the upside, 101 of the national climate plans submitted in Paris (Nationally Determined Contributions [NDCs]) include carbon pricing. And with China preparing to launch a national emissions trading system this year, it means 25 percent of global emissions will be covered by carbon pricing in 2017. In addition to governmental action, more than 1,200 companies are using internal carbon pricing, a practice that continues to grow. Another encouraging development is that financial institutions are increasingly carrying out climate stress tests on their portfolios.
On the downside, how many of the carbon pricing strategies included in NDCs are already concrete? How many emission reductions can carbon pricing policies deliver if prices remain as low as currently observed in Europe and most other jurisdictions? And how many of the companies that use internal carbon pricing follow through with low carbon investments? Lastly, can we really conclude—despite climate stress tests—that non-Paris-compatible projects will not continue to be financed?
Calls to governments, the private sector, and, more specifically, the financial sector emerge from these queries
- To governments: Embed a carbon price in the long-term Paris-compatible trajectory you are crafting for your countries. Apply a comprehensive narrative that includes the intended use of carbon pricing revenues and mitigation strategies for vulnerable groups that will be affected the most.
- To the private sector: Design internal carbon pricing to support Paris-compatible targets. Make sure to engage with your supply chain in sharing and applying a carbon price signal.
- To the financial sector: Develop Paris-compatible carbon pricing-based climate stress tests and apply this to your loan and investment portfolios. It is absolutely vital for the financial sector to commit to financing the low carbon transition.
We at Ecofys, as a Navigant company and as a recent member of the Carbon Pricing Leadership Coalition (CPLC), remain committed to contributing to at least a doubling of the carbon pricing wave.
The Generation Foundation is committed to accelerating the transition to a more sustainable form of capitalism; one aligned with a low-carbon, prosperous, equitable, healthy and safe society. We believe that carbon pricing is a key element in the realisation of that ambition.
This blog is related to a presentation given by Maarten Neelis at the CPLC Doubling the Wave event in Zurich, 16 January 2017.
This blog post was first published at carbonpricingleadership.org.