middle easten
Sustainable Investing Glossary

Carbon pricing

Carbon pricing is a price or tax applied to carbon pollution. It can be an effective way to encourage polluters to reduce their CO 2 emissions and thereby limit global warming. Carbon prices can be in the form of a carbon tax, or form part of carbon emissions trading, where ‘allowances’ are issued and traded.

Carbon pricing addresses the fact that CO2 emissions comprise a ‘negative externality’; that is, the harm caused to an unrelated third party by a company’s decision making. The negative externality in this case comprises in this case damage to crops, health care costs from heat waves and the devastation caused by rises in sea levels, for example. The famed economist Arthur Pigou was the first to prove that results of this nature could be charged at a price equal to the damage, in this case the societal cost of carbon, and thereby internalize the externality to the benefit of society. In this way, carbon pricing is aimed at incorporating climate risks into business costs, also driving innovation as producers seek to reduce emissions. 

Pricing a large enough percentage of CO2 emissions adequately is key to stimulating the development of clean technology and low-carbon economic growth. Most countries, however, still do not have a carbon tax or trading scheme. At the end of 2020, only 61 carbon pricing initiatives were in place or planned in the world, covering 12 gigatons of carbon dioxide equivalent, which is only about 22% of global greenhouse emissions. 

The average global price of USD 2 tons per CO2  equivalent is also too low. In Europe, though, the average price of carbon is now EUR 33/t CO2e, a price that Robeco sees as ready to start impacting economic behavior. Shifts from coal-fired to gas-fired power production take place at this price level, as does the stimulation of low-carbon innovation in industries.

Creating returns that benefit the world we live in
Creating returns that benefit the world we live in
Sustainable investing
Sustainable Finance Action Plan
Sustainable Finance Action Plan
Overview
The future of fashion
The future of fashion
As long-term investors, we think carefully about the impact of secular changes in consumer behavior on industries and individual companies.
28-06-2022 | Insight
SI Dilemmas: We need to start thinking differently about SI and returns
SI Dilemmas: We need to start thinking differently about SI and returns
For many years, the debate has raged among investors and academics about whether sustainable investors need to sacrifice returns in order to achieve their values.
23-06-2022 | SI Dilemmas
Circular solutions – a triple threat for supply chain challenges
Circular solutions – a triple threat for supply chain challenges
The certainty of climate change combined with the uncertainty of geopolitics means risks to supply chains are greater than ever.
16-06-2022 | Insight