Understanding The $84 Billion Global Carbon Pricing Market

Global carbon pricing revenue in 2021 increased by almost 60 per cent from 2020 to around $84 billion, as per the latest “State and Trends of Carbon Pricing” report. The world needs funds to carry on with its efforts to shift to sustainable development, finance broader fiscal reforms, or invest in communities as part of the low-carbon transition future. Carbon pricing forms an integral part of the measures being taken by regions across the globe.

What is Carbon Pricing?

According to the World Bank, carbon pricing refers to initiatives that put an explicit price on GHG emissions, i.e. a price expressed as a value per ton of carbon dioxide equivalent (tCO2e). The costs of GHG emissions are the costs that the public pays for, such as damage to crops, health care costs from heat waves and droughts, and loss of property from flooding and sea level rise.

Need for Carbon Pricing

Putting a price on and procuring the cost of emissions helps shift the relevant burden of damage due to GHG emissions back to those responsible for it. Thus, instead of directing the emitting entities to curb the emission levels, carbon pricing allows them to either transform their activities and lower their emissions or continue emitting and paying for their emissions. Thus, it also considers the variations in the amount of carbon generated through various industrial activities. Even if any activity can’t be changed or emissions from it are reduced immediately, the emitters will pay for their part.

In addition, the shift in burden in monetary terms encourages the financial investments required to stimulate clean technology and market innovation, fueling new, low-carbon drivers of economic growth.

Businesses also use internal carbon pricing. It helps to evaluate the impact of mandatory carbon prices on their operations, while also can be used as a tool to identify potential climate risks and revenue opportunities. Further, long-term investors may use carbon pricing to analyze the potential impact of climate change policies on their investment portfolios. This allows them to reassess investment strategies and reallocate capital toward low-carbon or climate-resilient activities.

The revenue generated can be used for government spending on research and development of green technology. Governments equitably direct it toward helping vulnerable communities adapt to the effects of climate change, or even manage the economic impacts of the transition to a low-carbon economy.

Carbon Pricing Instruments

Carbon pricing can take different forms and shapes. They all aim to create a price signal on GHG emissions. Yet, how this is achieved differs across instruments. Emissions Trading System and Carbon tax are commonly used. Emission Reduction Funds, like that in Australia, and the Hybrid Approach that involves combining elements of an ETS and carbon tax are also considered.

Emission Trading System (ETS)

ETS, also known as cap and trade, is a tradable-permit system for GHG emissions. A limit is set (cap) on the GHG emissions. Entities need to hold one emission unit (allowance) for each tonne of GHG emission, while also having the flexibility of selling and buying emission units. The total number of emission units reflects the size of the cap in the ETS. Under this approach, the price of carbon will depend on the balance between demand (the total emissions) and supply (the emission units allocated and available).

Carbon Tax

A Carbon Tax on fossil fuel usage creates a price signal felt across an entire economy. This incentivizes a move away from carbon-intensive production. Unlike an ETS, a carbon tax cannot guarantee a minimum level of GHG reductions but instead ensures certainty around the size of the price signal on carbon.

Current Status of Carbon Pricing

The WB annual report states that there are a total of 68 direct carbon pricing instruments operating today – 36 carbon taxes and 32 Emissions Trading Systems (ETS) – in 46 national jurisdictions around the world. Four new carbon pricing instruments were implemented since the release of the 2021 State and Trends of Carbon Pricing report last year: one in Uruguay and three in North America (Ontario, Oregon, New Brunswick). Countries announcing plans for new carbon pricing policies include Israel, Malaysia, and Botswana.

In several jurisdictions – including the European Union, California, New Zealand, the Republic of Korea, Switzerland and Canada – carbon prices reached record highs. Unfortunately, less than  4 per cent of global emissions are currently covered by a direct carbon price in the range needed by 2030 to meet the temperature goal of the Paris Agreement.

Stance of World’s biggest CO2 Producers On Carbon Pricing

Carbon pricing is arguably one of the most powerful tools to help countries limit CO2 emissions and reach net-zero targets. Some of the world’s biggest emitters of CO2 will guide the world on the path to carbon neutrality. Their stance on carbon pricing and policies differ a lot.

European Union

The EU ETS is the largest multi-sector ETS in the world. It includes 11,000 power stations and industrial plants across the EU and operates in all member states as well as the UK, Norway, Iceland, and Liechtenstein. The Danish parliament approved a new corporate carbon tax which is going to become the highest in Europe.

China

China is the world’s largest emitter of CO2. To curb its emissions and go green, China launched the world’s largest carbon market in 2021. It is about three times the size of the European Union’s carbon market. China’s ETS initially involves coal- and gas-fired energy plants. It will further expand as the country plans to soon add heavy industry and manufacturing to the scheme. This would cover more emissions than the rest of the world’s carbon markets put together.

United States

Despite being one of the biggest emitters, the US currently doesn’t have a carbon tax at a national level. The US government described the concept of a carbon tax as politically risky and difficult to get passed in the US Congress. Yet, several states have shown some activity to tackle emissions within their territories. The states of California, Oregon, Washington, Hawaii, Pennsylvania and Massachusetts, have introduced carbon pricing schemes.

India

The 7 per cent share of the world’s total emissions by India is the third highest in the world after China and the US. It has not yet placed a direct tax on emissions. Though, the South Asian leader is taxing both imported and domestically produced coal since 2010. Notably, Coal powers more than half of the country’s electricity generation.