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Carbon pricing is too small scale to make a difference

Carbon pricing is too small scale to make a difference

26-04-2021 | Insight
Carbon pricing is a solution to curbing emissions, since it is a direct cost on the higher emitters. However, it is far from being adopted on the global scale needed to make a difference, and current carbon prices are much too low.
  • Lucian Peppelenbos
    Lucian
    Peppelenbos
    Climate Strategist

Speed read

  • Average global carbon price of USD2 per ton is far too low
  • Only 22% of global greenhouse gas emissions are priced
  • EU trading scheme targets 55% emissions cut by 2030 

In its simplest form, carbon pricing is a tax per ton on the amount of carbon emitted, and is typically levied by a government. Sweden has the highest carbon taxes in the world, charging about USD 120 per ton of CO2e, according to the World Bank Group’s ‘State and Trends of Carbon Pricing 2020’ report.

Another means of dealing with emissions is through ‘cap and trade’ schemes, in which carbon allowances can be traded with other emitters subject to thresholds set by the governing authority. One of the most extensive of these is the European Union’s Emissions Trading Scheme (ETS). In such schemes, the carbon price fluctuates according to the supply and demand of the allowances. The current price in the EU ETS is around EUR 33/t CO2e.

Most countries, however, do not have either a carbon tax or a trading scheme, or operate them at such a low level that it doesn’t act as a deterrent to emissions. At the end of 2020, there were only 61 carbon pricing initiatives in place or planned in the world, consisting of 31 ETS’s and 30 carbon taxes, the World Bank Group says. These cover 12 gigatons of carbon dioxide equivalent or only about 22% of global greenhouse emissions, up from 20% in 2019.

Climate investing: from urgency to solutions
Climate investing: from urgency to solutions
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A comparison between carbon prices and the share of greenhouse gas emissions of the relevant area. Source: ‘State and Trends of Carbon Pricing 2020’, World Bank Group.

Prices are too low

Meanwhile, carbon prices remain substantially lower than needed to act as an incentive to meet the goals of the Paris Agreement. In 2017, the High-Level Commission on Carbon Prices estimated that a global carbon price of USD 40-80/tCO2e by 2020 and USD 50-100/tCO2e by 2030 would be needed to limit the increase in global warming to 2°C. The current global average price is about USD 2/tCO2e, according to the IMF.  

“At the global level, currently only 22% of carbon is being priced, which is really insufficient,” says climate change strategist Lucian Peppelenbos. “And the average global price of about USD 2/t CO2e is nowhere close to being serious.”

“But there are some signs now that it is finally being taken more seriously. The price of carbon in Europe is now EUR 33/t CO2e, and that's really the price at which it starts to impact economic behavior. We’re already seeing the shift from coal-fired to gas-fired power production taking place at these price levels, and it is stimulating low-carbon innovation in industries.”

Being taken more seriously

The issue is clearly being taken more seriously within the EU, which has committed to becoming carbon neutral by 2050 in the European Green Deal. Its first target is to achieve a 55% reduction in greenhouse gas emissions compared to 1990s levels by 2030. As part of this ambition, a Carbon Border Adjustment agreement is being drawn up to create a level playing field and protect European industries against cheaper, high-carbon products from outside the EU. 

“The ETS is the cornerstone of EU climate policy,” says Peppelenbos. “To achieve its objective of a 55% reduction by 2030, the EU understands that the carbon allowances will need to become scarcer, which will push up the price per ton of CO2. The carbon border tax would be a game changer globally.”

Comparing it with gas taxes

Higher carbon prices and border taxes may be good for the climate, but won’t they harm the economy? One way of making it more palatable to those actually paying the taxes is to compare it with existing taxes on fuel. “If you take the average amount of taxes on gasoline in Europe, this would equate to a carbon price of around USD 300 per ton,” Peppelenbos says. 

“This taxation has not stopped the European car industry from being competitive, and it hasn’t stopped consumers from buying or driving cars. But it did help to produce much more efficient cars in Europe versus the world average.”

“This shows that it’s possible to introduce higher prices without killing the car industry or consumer purchasing power. You just need to do it in a clever way; none of this needs to be a threat.”

This article is taken from our climate investing platform

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