The World Bank

Carbon pricing is achieving critical mass as governments learn from one another

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Courtesy of The World Bank

Over the past two weeks, hundreds of global business and government leaders meeting in Paris and Barcelona demonstrated the growing support for ambitious climate policies.

At the Business & Climate Summit in Paris, François Hollande, the president of France, echoed a key message from the private sector in his keynote address, saying, “Carbon pricing is essential to move to a low-carbon economy.” Business leaders repeatedly asked governments to put a price on carbon to enable them to scale up investment in low-carbon solutions. Eldar Saetre, chief executive of Norway’s Statoil described a carbon price as “the single most efficient measure.”

The messages carried into Barcelona and Carbon Expo the following week, as market traders and officials from from multinational companies and governments discussed carbon pricing tools and options to finance a transition to sustainable economic growth. The Expo saw a 30 percent uptick in attendance this year, due in part to the growing interest in carbon pricing and the upcoming climate negotiations. The World Bank Group released its Carbon Pricing Watch, reporting that about 40 national and over 20 sub-national jurisdictions, representing almost a quarter of global greenhouse gas emissions, are now putting a price on carbon. Carbon pricing instruments have increased their coverage threefold in the past decade and now represent 7 gigatons of CO2.

A learning journey

With the growth of carbon pricing instruments and rising interest from the private sector, governments are increasingly learning from one another and experimenting with different carbon pricing solutions. Whether they use taxes or emissions trading systems, there is now an emerging evidence base of how to successfully price carbon. Three jurisdictions are leading the way: the European Union, California and China.

EU ETS: The catalyst

There is a myth purveyed in much of the world that the European Union’s Emissions Trading System has not been successful, due to political choices that have led to low carbon prices. However, in conversations in Paris and Barcelona, it was clear that the system – the largest in the world, covering 31 countries and more than 11,000 facilities – is delivering.

In fact, the EU is on track to achieve its greenhouse gas reduction target. According to the EU Environmental Agency, CO2 emissions declined 19 percent between 2005 and 2013, in line with the Union’s 21 percent emissions reduction target by 2020. And lower carbon allowance prices during the economic downturn have meant lower compliance costs for companies. Compliance with the trading system over the last 10 years has helped companies discover new opportunities for efficiency. Many are moving from just a compliance approach to re-engineering approaches that yield even greater cost savings while delivering superior products.

In addition, the EU ETS experience has generated several important lessons for other jurisdictions as they design their own carbon pricing systems. In this way, it can be seen as a catalyst for the growth of successful carbon pricing that we have seen in places as diverse as California, Korea, and China.

California: A regional success story and pioneer in linking systems

California now has the largest economy-wide ETS in the world, and it is seeing emissions decline while its economy continues to grow. California would not have achieved this success without the benefit of the early EU ETS experience. To avoid some of the EU challenges, California developed a set of effective flexibility and cost-containment provisions, such as a “true-up” at the end of each multi-year allowance period; allowance banking and borrowing; a price floor and an allowance price containment reserve; and the use of offsets. These benefits are now being employed on a wider scale through California and Quebec’s linked systems, which Ontario recently announced plans to join.

China: The potential to lead the world in pricing carbon

Perhaps the sleeping giant among carbon pricing systems is China. Building from the EU and California experiences, China launched seven regional emission trading pilots in the past two years, and it is developing a national ETS to start as early as 2016. Cumulatively, the pilots operating today cover a range of sectors and geographies, constituting over 1 gigaton of CO2 emissions and comprising about 25 percent of the country’s GDP.

The pilots were designed to encourage innovation – each province and municipality was given flexibility to adapt its ETS to local circumstances – while also maintaining some common features, such as sectoral coverage, the use of free allowances, and banking of allowances. The pilots cover both direct emissions from fossil fuel use and emissions attributable to electricity use, including those from electricity generated outside their boundaries. By April 2015, the total trading volume of CO2 had reached nearly 22 million tons, and other cities and regions had started planning their own ETS's, including Gansu, Qingdao, Hangzhou, and Anhui.

The lessons from these experiments are expected to inform the Chinese government as it designs a national ETS. No other emissions trading system in the world has been built like this, from the bottom up, by learning from province- and city-based pilots. China’s National Development and Reform Commission (NDRC) and State Council are currently working on high-level regulations for a national ETS that would be the world’s largest.

Businesses are joining coalitions of the working

Business leaders and investors are watching these developments closely and increasingly speaking up in support of effective carbon pricing designs, as we saw in Paris and Barcelona. Several dozen business, investment, and government leaders are now working together through the Carbon Pricing Leadership Coalition to determine best practices and understand the business implications of various pathways to carbon pricing. For them, it’s no longer a question of whether the effects of climate change will impact their bottom line, but how to mitigate the risks.

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