To achieve the objectives of the Paris Agreement, countries have committed to Nationally Determined Contributions (NDCs) that align over time with the agreement’s ultimate goal of holding global average temperature increases to 2°C above pre-industrial levels, while also pursuing efforts towards limiting the temperature increase even further to 1.5°C. To get there, the aim is to achieve a balance between emissions and removals of greenhouse gases (GHGs), known more simply as the “Net Zero” goal. However, analyses indicate that countries’ implemented policies and NDC pledges fall far short of this goal. For more information on this expected gap, please visit this summary of the UN Environment Programme Emission Gap Report 2019.
The Intergovernmental Panel on Climate Change (IPCC) has stated that the window of opportunity to limit global warming and its dramatic consequences is closing fast. Carbon pricing is increasingly recognized as an essential instrument to cost-effectively deliver the transition to a low-carbon economy. Many countries are committed to using carbon pricing to achieve their NDCs.
Carbon pricing puts an explicit price on GHG emissions expressed as a monetary unit per metric ton of carbon dioxide equivalent (tCO2e). Pricing carbon has proven to be an effective, flexible and low-cost approach to reducing emissions, through incentivizing consumers and producers to shift away from high-emissions processes and products to low carbon alternatives. There are three ways to implement a price on carbon:
- Carbon taxes: A government places a tax on the carbon content of fossil fuels. The goal is to set the tax at a level that creates a disincentive to use fuels and processes that generate carbon emissions and facilitates a switch to low-carbon technology, such as wind or solar power.
- Emission trading system (ETS), also referred to as a cap-and-trade system: A jurisdiction or coalition of members set a cap on the total annual GHG emissions to be generated by specific industries. The cap then declines annually to achieve the climate goals of the jurisdiction or members. Carbon allowances equal to the emissions cap are then either freely allocated or auctioned to emitting entities who may then trade these allowances between them. Additional information on ETSs can be found here.
- Carbon offsets: A carbon offset, or credit, is the reduction of one metric ton of CO2 equivalent from a baseline - that is, the level GHG emissions would have been in the absence of the project. Additional information on carbon offsets can be found here.
These carbon pricing initiatives have been implemented around the world, sometimes together. According to the World Bank, there are now 61 carbon pricing initiatives in place or scheduled for implementation worldwide, consisting of 31 ETSs and 30 carbon taxes, covering 12 gigatons of carbon dioxide equivalent (Gt CO2e) or about 22% of global GHG emissions. A map depicting these carbon pricing initiatives around the world and additional data can be found at the Carbon Pricing Dashboard on the World Bank website.
Carbon prices in many jurisdictions, however, remain substantially lower than those needed to achieve the objectives of the Paris Agreement. The High-Level Commission on Carbon Prices, led by former World Bank chief economist Nicholas Stern, estimated that carbon prices of at least US$40-$80/t CO2 by 2020 and US$50-100/t CO2 by 2030 are required to cost-effectively reduce emissions in line with the Paris Agreement. The IMF has estimated that a global carbon tax of US$75 per ton by 2030 would be necessary to limit global warming to 2°C. The following table shows that several reports have indicated that a carbon price in excess of US$100/t may be needed by 2030 to stay below the temperature threshold of 2°C contained in the Paris Agreement:
|Source||Carbon price by 2030 in USD|
|High-Level Commission on Carbon Prices (2017)||$75|
|IMF Fiscal Monitor (2019)||$75|
|IEA/IRENA Perspectives for the Energy Transition (2017)||$120|
|UK Renewable Energy Association Bioenergy Strategy (2019)||$125|
|Wood Mackenzie (2020)||$110|
As of today, about half of covered emissions are priced less than US$10/t CO2e according to the World Bank and the IMF calculates the global average carbon price is only US$2/t CO2. The following table shows the carbon price as of April 2020 in select carbon pricing incentives according to the World Bank:
|Carbon Pricing Initiative||GHG Emissions Covered
|% of Global GHG Emissions Covered||Carbon Price
|Japan carbon tax||909||1.68%||$2.69|
|South Africa carbon tax||512||0.95%||$7.06|
|Mexico carbon tax||381||0.70%||$2.42|
|Ukraine carbon tax||221||0.41%||$0.38|
|France carbon tax||172||0.32%||$48.77|
|UK carbon price floor||136||0.25%||$22.28|
|Chile carbon tax||58||0.11%||$5.00|
|Norway carbon tax||47||0.09%||$52.89|
|Sweden carbon tax||44||0.08%||$119.43|
|BC carbon tax||42||0.08%||$28.14|
Around the world, governments are putting together stimulus packages to boost economies from the fallout of the Covid-19 pandemic. Many leaders see this as an opportunity to include “green objectives” and climate policy goals to reduce emissions in these plans. These actions may lead to higher carbon prices in the future. In addition, many corporations have recently announced climate action plans that include net zero goals, which may increase the demand for carbon offsets; thereby increasing their price.