New State and Trends Report: Cut climate costs through carbon market cooperation

New State and Trends Report: Cut climate costs through carbon market cooperation

– blog by Richard Zechter, Climate Change World Bank, Noémie Klein, Ecofys and John Ward, Vivid Economics.

This year’s State and Trends of Carbon Pricing report, launched recently in Vietnam, includes the first deep dive analysis of the carbon pricing initiatives of countries’ climate plans submitted in Paris last year and looks specifically at how international trading of carbon assets would affect the cost of carbon mitigation.  Of 101 countries considering the use of carbon pricing, the vast majority indicate they will use international approaches to emissions trading per their NDC pledges.

What we learned is that without cooperation through carbon markets, the goal of limiting emission reductions to meet a 2°C or lower target will be difficult - if not impossible - to achieve in a cost efficient manner.

The new modelling analysis in the report points to the savings that carbon market cooperation can bring. It shows that an international carbon market or markets could enable large-scale emission reductions at a much lower cost:  by 2030, an international market would allow for savings of about 30 percent; by the middle of the century, a market has the potential to reduce global mitigation costs by more than 50 percent.  This is an important finding, as it supports the direction of Article 6 in the Paris Agreement, where the mechanisms of an international carbon market or markets are laid out. Such a market allows those who have the financial responsibility for reducing emissions to purchase carbon credits wherever it is most cost-effective. This flexibility can significantly reduce costs, allowing for an increase in ambition.

The report also indicates that some of the poorer regions in the world may be able to generate financial flows from selling carbon credits amounting to 2-5% of GDP by 2050. It is unclear what those carbon assets would look like - this is what discussions by policy makers at COP22 in Marrakesh will tease out – but it is clear that emissions trading can play a crucial role in financing green projects in many developing countries.

The results of the report are further supported by some major developments in the international carbon space in the last couple of weeks. These include: the Paris Agreement poised to enter into force; Washington State adopting carbon pricing legislation in the form of the Clean Air Rule; Canada announcing plans for a federal minimum carbon price level; and ICAO, the international civil aviation organization, agreeing to cap its emissions at 2020 levels, ensuring carbon neutral growth of the aviation sector after 2021. This new momentum makes the possibility of increased global cooperation more real than ever before.

As in previous years, the data for the State and Trends report is collected through interviews with officials in countries and jurisdictions, to make sure the numbers are reliable and vetted.  Sometimes this involves discussions on what, in fact, is a carbon pricing initiative, how does it work, and what does it cover? In the report, we define carbon pricing as an initiative that puts an explicit price on carbon in terms of per ton of CO2. Some of the most important carbon pricing initiatives in the past year included a price on liquefied natural gas plants in British Columbia, an ETS in South Korea covering two thirds of the country’s emissions, and a carbon tax in Portugal.   

The attitude towards a price on carbon has changed dramatically in the past four years..  Not only are countries and jurisdictions moving ahead, but there is also increased integration between the policies and the practical implementation of carbon pricing, through close collaboration between, on the one hand, high-level political discussions within the Carbon Pricing Leadership Coalition and, on the other hand, technical work in-country through the Partnership for Market Readiness. Overall, the report describes how carbon pricing can be the most effective in changing behaviors when it is aligned with the broader climate mitigation policies in a country, such as a policy on removing fossil fuel subsidies.

We have also seen a greater involvement by the private sector and a dramatic rise in the use of a carbon price by companies, with a tripling since 2014 to 1,200 companies reporting that they are currently using an internal price on carbon or plan to do so within the next two years. The price range is wide, but about 80% of the reported internal carbon prices are ranging between $5 to $50/tCO2e.

We also have seen a growing network of external contributors to the report, which helps ensure quality and accuracy of information, and which contributes to building a carbon pricing community of practice. We are able to “fact check” the figures we receive with a variety of partners and soon there will be a dashboard housed within the World Bank with the latest carbon pricing figures – created as a response to the high demand for the data behind the figures, maps and graphs in the report. This will make up-to-date information easily available in an interactive way, and make the topic even more trackable and tangible for a wider audience.  

Today, 13% of global emissions are covered by carbon pricing initiatives, a threefold increase in the last decade, and the number of initiatives implemented or scheduled for implementation jumped from 9 to 42 over the same period. Analysis shows this could double to 20-25% by 2020, if the Chinese ETS goes into effect in 2017 as announced, and world leaders are calling for it to double again in the next decade, given the commitments made in Paris. Other initiatives scheduled to start next year include an ETS in Ontario, a carbon tax in Alberta, as well as carbon taxes in Chile and South Africa. Also, France is planning to introduce a carbon price floor in 2017.

In this fast moving environment, the reliable and current information provided by the report is valuable. And, as focus turns to implementation challenges, the recent addition of complementary analytical chapters serves to make the State and Trends report a crucial resource to policymakers and stakeholders across the world.