Race to zero & carbon pricing mechanisms across the world

Race to zero & carbon pricing mechanisms across the world

The good news is that Bhutan (through conservation of eco-diversity) and Suriname (thanks to its natural tropical forest earth cover) are already carbon negative, so it is not an unachievable target; the real issue is to have the right measurement systems for progress and the carbon pricing schemes that would be broadened enough to include the wide network of internal as well cross-border participants.

The good news is that Bhutan (through conservation of eco-diversity) and Suriname (thanks to its natural tropical forest earth cover) are already carbon negative, so it is not an unachievable target; the real issue is to have the right measurement systems for progress and the carbon pricing schemes that would be broadened enough to include the wide network of internal as well cross-border participants.

Net zero by 2050 is a pledge adopted by most nations that includes corporates and all forms of industries and private enterprises and households as well. The trajectory of actions, whether we follow the Stern method or the Nordhaus, must have a time bound programme; at the heart of this is the carbon pricing, now covering 12 Gigatonnes of CO2 equivalent or 22 per cent of the world’s greenhouse gases. This is an improvement over 2019, where many diverse sectors have been included, notably the most emitting ones. But when we look back at the global revenues generated by the governments, a paltry $45 billion was seen to be raised and large part of this went to general budget and some of it went to tax cuts and direct transfers; the Covid-19 impact has also been a dampener of sorts, so the pressure on actions is mounting.

The Commission on Carbon Pricing had iterated that a price of $40-$80/t CO2 by 2020 and $50-$100/T CO2 is the right range of pricing needed to counter climate change impacts (mid-range of both strategies Stern-Nordhaus). But till today only 5 per cent of the global carbon pricing is in this range and the global average is at $2/t of CO2, a far cry in terms of real actions on the ground needed. Forestry remains the dominant crediting process, while companies have remained active in the voluntary markets, including internal carbon pricing to reduce emissions. Ensuring consistency across countries and industries remains a dominant theme.

There are five types of carbon pricing schemes that have been adopted by nations and corporates:

  • Carbon taxes cover taxes, levies and excise duties that explicitly state a price on carbon.

  • ETSs refer to policy instruments where covered entities face compliance obligations for their GHG emissions and can trade emission units to meet these obligations (cap and trade or baseline and credit)

  • Carbon crediting mechanisms are initiatives that issue tradable emission units to actors that voluntarily implement emission reduction activities that are additional to business-as-usual

  • Operations.

  • Voluntary purchase of carbon credits for non-compliance purpose

  • Internal carbon pricing, which refers to the practice within organisations of assigning a monetary value to GHG emissions in their policy analyses and decision making.

If one sees the full range of carbon prices from the highs of the Nordic States, Switzerland, etc. to the lows of developing nations, the call for more coordination among finances (Coalition of Finance Ministers on Climate Change) and cross border adjustment mechanism come to the fore. Carbon tax or the ETS remain the dominant vehicles.

Let us look at some nations in details to see how they have progressed so far. Switzerland for example has a carbon tax of CHF 96 per ton of CO2, which however does not include the transportation sector. This means all fuel for combustion whether in industries or household will have to pay this as tax to the Swiss government. This comes as a surcharge to heating oil, natural gas, hard coal or propane over and above the market price. Two thirds of this revenue is returned back to the households and firms and one third is kept for developing efficient systems for the future. On a time series model the actual emission reduction has been seen to be around 10 per cent over an eight year period, bulk of this is from the household and remaining from corporates. The Swiss Emissions Trading Scheme and Non-EHS trading schemes comes as alternatives to the carbon tax and all three add to the reduction of the stock of CO2 emissions. The abatement schemes (CHF 100 for every tonne of CO2 reduced) are transparent mechanisms for adoption.

Such frameworks do exist in many nations, but almost all programmes from direct tax to trading schemes or incentives allow fertile ground to see how the incentives work in favor of initiatives to reduce emissions.

India is also entrenched in this journey, although the bulk of the emission reductions have come from the reduced proportion of emission intensive manufacturing in the overall GDP. The measure for India would be to create a comprehensive programme where emission trading schemes, internal schemes and carbon taxes can be transparently seen. The returning back of the carbon taxes (like CESS, etc.) would have to remain more transparent and must be used for balancing the impact of high costs of implementing climate change actions. The real impact of climate change actions on employment cannot be seen, the way it is visible in the developed nations.

The carbon prices taken on a moderate basis at $40/t actually would mean a pass-through rise of $24 on the price of cement unless no actions are taken to mitigate the impact of emission; that would potentially be a demand shock for countries where prices have remained low. The reason why some countries have remained where they are to implement a vibrant carbon pricing mechanism that is broad based, is because the prices of cement (just to take one example) have remained the bone of contention, without the externalities.

The race to zero must factor in the discounting of price mechanism given the trajectory of climate change actions vis-à-vis the pass-through to the final prices that can effectively be absorbed without a demand shock. This where the models must factor in internal pricing schemes, emissions trading schemes or the carbon taxes, the abatement methods included. The government must also be a participant to incentivise the right schemes and plough back the benefits to the better performing actors and keep enough for serving those who could be affected on the employment front.

Footnote:

ABOUT THE AUTHOR:

Procyon Mukherjee is an ex-Chief Procurement Officer at LafargeHolcim India.

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