Carbon pricing is the method of charging an amount that must be paid for the right to emit one tonne of carbon dioxide (CO2) into the atmosphere. This amount can either be paid as a carbon tax which is a tax levied on the carbon content of fuels or a requirement to purchase permits (Allowances) to emit which is known as cap-and-trade. Cap-and-Trade is a system which helps set an upper limit on the amount for a business or other organization may produce but which allows further capacity to be bought from other organizations that have not used their full allowance or permit. 

Patricia Espinosa, Executive Secretary of the United Nations Framework Convention on Climate Change, recently pointed out that carbon pricing reinforces the full realization of the nationally determined contributions and is an essential key for a strong, real, useful implementation of the Paris Agreement.

The Paris Agreement entered into force on November 4, 2016, less than one year after it was adopted. Negotiations are now underway to develop the Paris Agreement guidelines. Country level pledges to reduce Greenhouse Gas (GHG) emissions under the Paris Agreement are formalized through Nationally Determined Contributions (NDCs). Carbon pricing plays a prominent role in many of these NDCs, with 81 Parties planning or considering its use to drive GHG mitigation.

Among other functions, the Paris Agreement guidelines will provide operational guidance on cooperative approaches to emissions mitigation under Article 6, thereby shaping the way forward for international market mechanisms and the linking of domestic carbon pricing initiatives under the new international climate accord. However, negotiations to date have yielded little progress; there is substantial pressure to move rapidly toward consensus, given that the provisions of the Paris Agreement are scheduled to finalize at the end of 2018.

The key priorities for action are:

  1. Expanding coverage through the development of new initiatives and the broadening of GHG emissions coverage in existing initiatives;
  2. Deepening impact by raising carbon prices, which will send a stronger price signal, triggering more investments in low-carbon technologies;
  3. Aligning carbon pricing with complementary and enabling policies at the domestic level to ensure coherence with the broader policy framework;
  4. Progressing the guidelines of the Paris Agreement to pave the way towards linking domestic pricing schemes and enabling usage of international market mechanisms; and
  5. Using climate finance in a more strategic and integrated way to catalyze climate markets that support transformative climate change mitigation policies and investments.

According to the recent report published by the World Bank Group, Climate Change, on the subject of State and Trends of Carbon Pricing 2017, carbon pricing plays an important role in tackling climate change as it requires the cost of GHG emissions to be considered in financial decisions. This levels the playing field between emission-intensive and low carbon economic activities triggering more investments in low-carbon technologies carbon pricing is therefore key to mobilizing the USD700 billion of incremental investments needed annually by 2030 to transition to a low-carbon economy.

Carbon pricing initiatives continue to spread. At the national and subnational level, new initiatives can build on substantial progress and experience with carbon pricing over the last 25 years. As of 2017, over 40 national and 25 subnational jurisdictions are putting a price on carbon. Over the past decade, the number of jurisdictions with carbon pricing initiatives has doubled. These jurisdictions are responsible for about a quarter of global GHG emissions. On average, carbon pricing initiatives implemented and scheduled for implementation cover about half of the emissions in these jurisdictions. These numbers translate to a total coverage of about 8 gigatons of carbon dioxide equivalent (GtCO2e) or about 15 percent of global GHG emissions. Emissions covered by carbon pricing have increased almost fourfold over the past decade.

Since 2016, the following eight new carbon pricing initiatives have been implemented, highlighting the continued momentum for carbon pricing:

In 2016:

  1. The Greenhouse Gas Industrial Reporting and Control Act in British Columbia, Canada, establishing a baseline-and-credit system in addition to the province’s existing revenue neutral carbon tax;
  2. The safeguard mechanism to the Emissions Reduction Fund in Australia, launching a baseline-and-offset system; and
  3. A pilot Emission Trading System (ETS) in Fujian which covers GHG emissions in 2016, in preparation for the introduction of the Chinese national ETS later in 2017.

In 2017:

  1. A carbon tax in Alberta, Canada, covering all GHG emissions from combustion that are not covered by its existing carbon pricing initiative for large emitters;
  2. A carbon tax in Chile, which applies to CO2  emissions from large emitters from the power and industrial sector;
  3. An economy-wide carbon tax in Colombia on all liquid and gaseous fossil fuels used for combustion;
  4. An ETS in Ontario, Canada, covering GHG emissions from industry, electricity generators and importers, natural gas distributors and fuel suppliers; and
  5. The Clean Air Rule in Washington State, USA, establishing a baseline-and-credit system which initially covers fuel distributors and industrial companies that are not considered to be energy intensive nor trade exposed.

Here is an overview of carbon pricing according to the report:

  1. Prices in the implemented initiatives range: USD 1 – 140/ Ton of Carbon Dioxide Equivalent(tCO2e)
    However, three quarters of the emissions covered are priced < USD 10/ tCO2e
  2. Carbon pricing revenues raised by governments in:
    o 2015 USD 26 Billion
    o 2016 USD 22 Billion
  3. Annual value of carbon pricing initiatives in:
    o 2016 USD 49 Billion
    o 2017 USD 52 Billion
  4. Internal carbon pricing initiatives:
    o 1,300 companies are using or planning to use internal carbon pricing in the coming two years;
    o 83 percent of these companies are located in jurisdictions with carbon pricing initiatives implemented or scheduled for implementation; and
    o Internal corporate carbon prices are in the range of USD 0.01 – 909/ tCO2e.

As far as Canada is concerned, the government put forward a pan-Canadian approach to carbon pricing in 2016, requiring all provinces and territories to have a carbon price initiative in place by 2018 that meets a set of federal criteria:

  1. British Columbia had already launched a baseline-and-credit ETS in 2016, in addition to its preexisting carbon tax;
  2. Alberta and Ontario followed a year later, implementing a carbon tax and an ETS, respectively;
  3. Jurisdictions that do not already have existing carbon pricing initiatives have taken steps to implement the national carbon pricing requirement; and
  4. A national carbon pricing system—currently under development—will apply to provinces and territories that do not meet the federal criteria.

Here is a table which illustrates key carbon developments in the Canadian provinces and territories:

In October 2016, the Canadian federal government published a benchmark for ensuring that carbon pricing applies to a broad set of emission sources throughout Canada by 2018 with increasing stringency over time. This benchmark provides provinces and territories with flexibility to implement their own carbon pollution pricing systems. In the benchmark, the federal government also committed to implement a federal carbon pricing backstop system that will apply in any province or territory that does not have a carbon pricing system in place by 2018 that aligns with the benchmark.

It is recognized that several common issues need to be overcome to expand, deepen and accelerate carbon pricing initiatives.

  1. Domestically, one key concern is the potential impact of carbon pricing on the international competitiveness of some domestic industrial sectors:
    Related to this issue is the persisting focus on costs to regulated companies and consumers in the carbon pricing discourse. Equal consideration of the potential benefits of carbon pricing, such as the identification of investments that could benefit from the low-carbon transition and the number of jobs that could be created, would yield a more balanced debate;
  2. Carbon pricing is also held back by the uncertain standing of climate policy and carbon pricing initiatives in the long term:
    Due to policy changes such as those witnessed in the US. More broadly, carbon pricing can be most effective and acceptable to the public when it is well aligned with the broader context in a country. This challenges policymakers to balance multiple objectives, of which GHG emissions mitigation is just one; and
  3. At the international level, cooperation through international market mechanisms and linking of domestic carbon pricing initiatives will require the development of trust between parties: Accordingly, accounting rules (such as avoidance of “double counting”) will need to ensure that the generated mitigation outcomes correspond to mitigation actions.8 In the absence of such trust, trading and crediting would likely stall.

The bottom line is that an international carbon market implemented by 2030 has the potential to mobilize annual resource flows of USD220 billion, corresponding to about one third of the incremental investment needs of US$700 billion. International cooperation will also reduce the costs of achieving emission reduction targets.

However, It is true that there has been continued progress on carbon pricing initiatives over the last year at the all levels, further action is necessary for carbon pricing to make a substantial contribution to the Paris Agreement pledge, which aims to keep the global average temperature increase to well below 2°C and pursue efforts to hold the increase to 1.5°C.

1. State and Trends of carbon pricing 2017 – World Bank Group, Climate Change; and
2. Canadian Federal Carbon Pricing Backstop.