Carbon Pricing – a Paris success story
We Mean Business
Paris has already delivered global carbon pricing – the key now is to ensure prices are high enough to drive investment at scale.
Business has sent a very loud signal to policy makers with over 1000 signing the World Bank statement in 2014 and over 1000 disclosing to CDP this year that they are already implementing internal carbon prices, often $40 or higher.
In order for carbon pricing to play its role in the energy transition, business needs to see three things: broad adoption of carbon pricing around the world, prices high enough to drive investment and innovation and the convergence over time of carbon prices, through market linkage or other means.
In the run up to Paris, the conversation has often focussed on the apparent lack of progress on ‘putting a global price on carbon’ and the creation of market linkages in the UNFCCC process. This is a mistake for two reasons. Firstly, business IS getting global carbon pricing but via national policies not the UNFCCC text and secondly the real focus needs to be on ensuring business confidence that prices will rise higher.
How can we say that Paris has already delivered global carbon pricing? Let’s look at the G20 countries, together responsible for 85% of global GDP. If we look at existing (eg EU ETS, Indian Coal tax, US states, and Canadian provinces) as well as planned (notably Chinese ETS and further pricing schemes from US Clean Power Plan implementation), we expect that countries representing over 90% of G20 GDP will have carbon pricing policies in place by 2018. So business is getting global carbon pricing!
So now we need to pay more attention to the actual and expected levels of carbon price. This is the key to unleashing the $trillions of needed energy infrastructure investment.
The good news is that business and thought leaders are starting to talk much more openly about needed prices. HSBC research shows that prices need to reach $30, whereas BP say $40 to drive the switch from coal to gas. Shell say that CCS investment will only happen at scale if prices reach $60-80. The New Climate Economy special report on carbon pricing calls for developed countries to have average prices of $75 by 2030.
We can take such calls for adequate carbon pricing and produce a ‘corridor’ for effective carbon pricing, giving an indication of how prices should develop over time if we are to successfully drive the energy transition. The French government’s Canfin-Grandjean commission recommended just such a corridor in their report Mobilising Climate Finance (p50). Fig 1 shows an example of such a corridor from the We Mean Business/CDP carbon pricing pathways work carried out as part of the workplan of the CPLC.
We can see that prices are high enough in some jurisdictions (eg BC carbon tax of C$30, UK carbon floor price of £18) and have clear mechanisms to get there (California, current price $12 and floor price ratchet which will guarantee at least $38 by 2030). However, there is little certainty that prices will go beyond $20 in many jurisdictions, leaving business without sufficient certainty of signal to invest. This is our next challenge. We need prices globally to fall within the ‘carbon pricing corridor’ of success.
Today We Mean Business and CDP announced the launch of the ‘Carbon Pricing Corridor’ as part of the workplan of the World Bank’s Carbon Pricing Leadership Coalition. The corridor will be launched in spring 2016 and updated regularly by a panel of experts in the light of policy and technology developments around the world to provide business, investor and government stakeholders with an informed view of how prices need to develop in the future to drive the investment we all need.