Seizing the Global Opportunity: Partnerships for Better Growth and a Better Climate.

Source: The World Bank, 2015

Source: The World Bank, 2015

New Report from the Global Commission on the Economy and Climate: Effective Carbon Pricing through International Cooperation

Support for carbon pricing is growing around the world as governments, businesses and investors alike realize that it can effectively reduce greenhouse gas emissions without harming the economy. In the US the nine states that participate in the Regional Greenhouse Gas Initiative cut their emissions by 18% and grew their GDP by 9.2% in 2009-2013. By comparison, emissions in the other 41 US states fell by only 4%, and their GDP grew by 8.8% over this same period. California’s economy grew by 2% while emissions fell by 4% in 2013. British Columbia’s carbon tax was increased from CD$5 in 2008 to CD$30 in 2012, and over this period reduce per capita greenhouse gas emissions by about 10%, compared with a 1% reduction in the rest of Canada, without any adverse impact on GDP. The size of Europe’s economy grew by 45% 1990-2012 while emissions fell by 19%. Sweden’s economy grew by nearly 60% in 1990-2013 while emissions fell 23%. All of these countries have explicit carbon prices in place - some for many years such as Sweden with prices of nearly US$170 per tonne of CO2e in some sectors.

But there are still major impediments to scaling up the use of carbon pricing across sectors and countries. Governments may be unwilling to act alone on carbon pricing because of anxieties that it could impact national competitiveness. However, greater international co-operation among G20 countries or other coalitions of willing governments on carbon pricing – and its complement fossil fuel subsidy reform – can help to minimize the real or perceived risks and accelerate action.

This is a key finding of a new report, Seizing the Global Opportunity: Partnerships for Better Growth and a Better Climate, which was released this week by the Global Commission on the Economy and Climate—a group made up of leading figures from government, business, and finance from 20 countries, including Sri Mulyani Indrawati, Managing Director and Chief Operating Officer of the World Bank.

Implementing a carbon price is one of the most important steps that governments can take to build a more robust economy and a safer climate. Carbon prices can send important signals across the economy, helping to guide consumption choices and investments towards low-carbon activities. Carbon prices can also raise fiscal revenues for productive uses, with the potential to boost growth. For example, revenues raised through carbon prices can be used to reduce other, more distorting taxes, such as taxes on labor and business activities. The revenue can also be used to offset any impacts on low-income households. The central role of carbon pricing in managing low-carbon change and its full range of benefits was discussed in the Global Commission’s Better Growth, Better Climate Report from 2014.

Momentum for carbon pricing is increasing around the world. Today, around 40 countries and 20 sub-national jurisdictions have adopted or scheduled a price on carbon, around three times the coverage of a decade ago. Twelve per cent of global emissions are now covered by explicit carbon pricing. In 2014 alone, China, South Korea and Chile adopted or scheduled carbon prices. Major businesses, including in high-emitting sectors, are now supporting carbon pricing after years of resistance, including British Airways, Shell, Statoil, Unilever and BP. Shell, BP and Exxon-Mobil use an internal carbon price of around US$40 per tonne of CO2e or more. These actions from major countries and businesses are increasing our knowledge on how to design successful carbon pricing policies and unlock their benefits at the national and corporate level.

Yet concerns that pricing carbon will hurt industrial competitiveness continue to restrain action. As a result, where carbon prices are explicitly in place, they are still quite low, less than US$10 per tonne of CO2, and often without any mechanism or plan to increase them. Furthermore, a number of countries have provided exemptions or special treatment to their most polluting and energy-intensive industries, which limits the effectiveness of the carbon price.

International cooperation can help to overcome this barrier. Instead of pushing for border carbon adjustments – measures that would apply a tax on the carbon embedded in traded products and services – to try to “level the playing field” between countries of differing climate ambition, trading partners can coordinate the introduction of carbon prices of roughly comparable levels to overcome competitiveness concerns. By working together, countries can also benefit from knowledge-sharing on best practice, greater transparency, and the opportunity to link trading schemes where appropriate. This is already happening across Europe, and increasingly in North America where California and Quebec recently linked their cap-and-trade programs.

2015 is a good time to increase cooperation and accelerate action on carbon pricing. The recent fall in global oil prices, and lower gas and coal prices, can help to offset any energy price increases that might occur from introducing or strengthening carbon prices. Carbon pricing is also likely to attract renewed attention during 2015 as countries discuss the most efficient and effective policies to reduce emissions as pledged in their Intended Nationally Determined Contributions for COP21 in Paris.

Governments that choose to act together have considerable support available. The Carbon Pricing Leadership Coalition, which brings together leaders from across government, the private sector and civil society, is working to increase knowledge on effective carbon pricing systems, and helping to define the business and economic case for carbon pricing. The World Bank Partnership for Market Readiness has also helped to accelerate action, supporting countries in the preparation and implementation of carbon pricing instruments and other climate policies.

G20 countries have already agreed to phase out inefficient fossil fuel subsidies and several are now acting with support from international institutions, including the World Bank and the IMF. Now is the time for G20 countries, and other coalitions of willing countries around the world, to build on these commitments to introduce meaningful explicit carbon prices across countries at the same time.

Dr James Rydge is Lead Economist at the New Climate Economy, the flagship project of the Global Commission on the Economy and Climate. James is the lead author of the carbon pricing work of the New Climate Economy’s 2015 report, Seizing the Global Opportunity: Partnerships for Better Growth and a Better Climate.