PRICE ON CARBON

Carbon pricing the method favored by

many economists for reducing global-
warming emissions charges those who
emit carbon dioxide (CO2) for their
emissions.

That charge, called a carbon price, is the

amount that must be paid for the right to emit
one tonne of CO2 into the atmosphere.
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.
 Carbon pricing helps lower overall emissions
while giving businesses the flexibility to find
their own most efficient solutions.

China leads a list of 73 countries, 22 states,

provinces and cities, and over 1,000
businesses and investors who signaled their
support for carbon pricing ahead of the UN
Climate Leadership Summit.
.
The science is clear.
The economics are compelling.

We are seeing a shift toward the economic architecture

that will be necessary to avoid a 2-degree-warmer world,
an architecture that supports green growth, jobs and
competitiveness,

. said World Bank Group Vice President and Special

Envoy for Climate Change Rachel Kyte.
Carbon pricing brings together two distinct groups
that have each spoken in favor of climate action but
rarely worked together to address climate change:

1. governments, which have been testing carbon

trading systems and carbon taxes,

2. and businesses that have started setting internal

shadow carbon prices to help guide decisions for
a cleaner future.
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
1. greenhouse gas emissions or more commonly

2. 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.
There are also more indirect ways of more accurately
pricing carbon, such as:
1. through fuel taxes,
2. the removal of fossil fuel subsidies,
3. and regulations that may incorporate a social cost of
carbon.
4. 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?
 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.
Businesses are looking for
consistency & flexibility
Companies that joined the Put a Price on
Carbon statement say they are looking for
policy consistency and flexibility in how
they reduce emissions.

Carbon pricing policies allow them to

innovate and find the most successful
solutions for their industries.
An effective system will increase incentives for the
aviation industry to accelerate the introduction of low-
carbon technology and lock in the great potential to
decarbonize air transport,
said William Walsh, CEO of International Airlines
Group, the parent company of British Airways.
Holcim, a Swiss cement manufacturer, described
carbon pricing leveling the playing field for new
technologies.

Unilever, which includes food and consumer products,

knows the risks that extreme weather can create for supply
chains, particularly for water security and agriculture

A price on carbon enables all sectors private, government, and the

general public to factor the cost of greenhouse gas emissions into
everyday decisions,
said Anthony Earley, the CEO of U.S. utility PG&E. The sooner we
begin to incorporate these costs, the better.
Factoring carbon emissions into production is absolutely
essential if we are to do our part to help transform the
worlds energy systems, while at the same time ensuring
supply security at affordable prices, wrote E.On, a
European utility.
Without the price on carbon, it is difficult for companies to
make investment decisions and therefore impedes
investments in climate-friendly technologies.
For institutional investors like the Australian pension fund
Catholic Super, transparency is important for investing in the
future.
Institutional investors have been encouraging the businesses
they invest in to shift to cleaner energy and low-carbon growth.
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:

1. strengthening carbon pricing policies to redirect investment

commensurate with the scale of the climate challenge;
2. bringing forward and strengthening the implementation of
existing carbon pricing policies to better manage investment risks
and opportunities;
3. enhancing cooperation to share information, expertise and
lessons learned on developing and implementing carbon pricing
through various readiness platforms.
 Emissions trading systems, among the most common methods, set a
gradually declining cap on emissions and create a market for emitters to
buy or sell emissions permits up to the cap.
The value of ETSs globally rose from $32 billion a year ago to $34
billion today, despite the repeal of Australias Carbon Pricing Mechanism
last July, according to Carbon Pricing Watch.
Carbon taxes, valued at $14 billion globally today, are levied at a set
rate based on greenhouse gas emissions or the carbon content of fuel.
Together, carbon pricing instruments now cover about 7 Gt CO2e, or
about 12 percent of annual global greenhouse gas emissions.
Countries, cities, states and provinces responsible for almost a quarter of
the global greenhouse gas emissions now have carbon pricing.
The revenue is also used in different ways in different jurisdictions,
often with the goal of supporting climate change mitigation efforts and
offsetting the impact on poor people.
The EU ETS directive, for example, requires that at least half of the
revenues be used for climate and energy purposes, such as energy
efficiency, renewable energy, research and sustainable
transportation.
PRICE ON CARBON