The global race to put a credible price on carbon
Mike Scott reports on how the resurgence of the EU carbon market and an expected move by China to put a national price on carbon are boosting hopes for prices that are high enough to drive decisive climate action
In 2018, the best-performing commodity in the world was not oil or iron ore, the mainstays of the 20th century economy. It was not copper or lithium, which will play a crucial role in the global economy of the 21st century. It was something that had for a decade or more languished in the doldrums: carbon allowances on the European Union’s Emissions Trading Scheme (EU ETS).
Prices for emissions of greenhouse gas CO2 had hovered for many years at around €5-€6 a ton because EU governments had issued high-emitting companies with too many allowances, a move whose impact was exacerbated by the financial crisis, which depressed economic activity and thus emissions. Prices started rising at the beginning of 2018 and have climbed steadily ever since to just under €30 at the moment. The €30 level is a psychological barrier for the market because it is the level at which experts say the carbon price will really start to change behaviour and lead to significant cuts in emissions.
The simple technical reason for the price increase is that the EU has reformed the market. It has introduced a Market Stability Reserve, which removes excess allowances from the market, to the tune of 24% of the excess every year, or 1.5bn tons over five years. The reserve came into force at the start of 2019 and has had a dramatic effect.
It’s really important politically that there is a strong carbon price signal in Europe
Thinktank Carbon Tracker sees prices as high as €55 by 2030, if the EU introduces policies that align the bloc’s current emissions targets with the Paris climate agreement.
“It’s really important politically that there is a strong carbon price signal in Europe,” says Ian Trim, energy director at consultancy Navigant and one of the authors of the World Bank’s annual State and Trends of Carbon Pricing report. “A credible carbon price in Europe shows that carbon markets can work. It’s also useful from a technical perspective, because it illustrates that technical interventions in the market do work.”
There must always be caution when predicting carbon prices, because they are an artificial market, entirely governed by policy, and if supportive policies are withdrawn then prices can collapse – as the first decade of the EU ETS demonstrated. It was not just the EU ETS; efforts to create a global carbon market as part of the Kyoto Protocol came to nothing, and a voluntary market in the US, the Chicago Climate Exchange, fizzled out in 2010 when it became clear that there would be no legislation to tackle emissions in the US.
But sentiment towards carbon markets has strengthened significantly in recent years, for a number of reasons. One is that the evidence of human impact on the climate continues to strengthen, not just scientifically but anecdotally – recent heatwaves in Europe, fires breaking out in the Arctic, a huge increase in ice melt in Greenland, deadly wildfires in California are just a few of the recent examples.
This is backed by a strengthening social movement around the world – spearheaded by Swedish student Greta Thunberg and the global school strikes, along with the Extinction Rebellion campaigners – that is helping to drive policy changes in a range of countries.
A number of countries, including the UK and France, have committed to net-zero targets, while Ursula von der Leyen, newly elected president of the European Commission, promised MEPs she would create a European Green Deal, including a stronger carbon market, a net-zero target and a carbon border tax. In the US, a number of Democrat lawmakers are pushing the idea of a Green New Deal and it has captured the public imagination in a way that has never been seen before.
Now carbon markets are being seen as a way to drive efficiencies in economies
These factors all add to the growing consensus that something needs to be done. “Action at the societal level seems to have driven greater national ambitions,” Trim points out.
And carbon markets are seen as part of that ambition, not just in Europe but around the world. “We have seen fantastic growth in domestic schemes popping up all over the world, from Kazakhstan to South American countries (Chile, Argentina, Colombia) and South East Asian markets, where Indonesia is likely to bring a scheme online soon,” says Trim.
“And there is a move away from carbon markets being seen as a way for developing countries to produce project-based allowances to sell to developed countries. Now they are being seen as a way to drive efficiencies in their economies.”
Canada launched a national market earlier this year and there are regional schemes in the US, in California and the Regional Greenhouse Gas Initiative in the northeast of the country. There are even tentative moves to create markets in North Africa and sub-Saharan Africa, led by Senegal and Côte d’Ivoire.
But, notwithstanding the revitalisation of the EU carbon market, carbon pricing is catching on around the world only at “a snail’s pace”, according to a new report from the Organisation for Economic Co-operation and Development, which argues that carbon-pollution prices remain far too low to make a dent in emissions. Secretary-General Ángel Gurría says there needs to be “a big, fat price on carbon”.
“It’s the single most important pre-condition to win this war,” Gurria said. If we don’t make emissions expensive enough, we will not change behaviour. Anything below $30 is not even getting to the starting point. We need to climb towards $100 over time.”
All jurisdictions must go further and faster in using carbon-pricing policies as part of their climate policy packages
Swift action is needed, agrees John Roome, senior director at the World Bank’s Climate Change Group. “Carbon pricing is the most effective way to reduce emissions and all jurisdictions must go further and faster in using carbon-pricing policies as part of their climate policy packages.”
The World Bank calculates that carbon prices need to be in the range of US$40-$80 a ton by 2020, and between $50 and $100 a ton by 2030 to achieve the temperature goals in the Paris Agreement.
Yet there is a feeling that everyone is waiting on the launch of a national market in China, the world’s biggest emitter. Beijing has had a number of pilot schemes running for the past 11 years in provinces and cities including Shanghai and Shenzhen. These were meant to be followed by a national scheme, but few details have yet been forthcoming.
One leading expert, however, expects the Chinese government to make an announcement soon. Paula DiPerna, special adviser to CDP and former president of the Chicago Climate Exchange, who helped to create the first Chinese pilot scheme in Tianjin, told Ethical Corporation: “There would have been a national scheme already if the US hadn’t cancelled the Clean Power Plan. That scheme was set up by President Obama as part of the deal for China to set up its carbon market. However, it’s given [China] more time to design the national scheme.”
She added: “The Chinese have all the design steps in place and in the decade since setting up their first market, they have educated an entire generation on environmental finance. If they go national, it will create the largest commodity market in the history of the world.” (See All eyes on China as national carbon plan emerges from the haze)
Chris Peterson, a Canada-based consultant at Anthesis, points out a move by China would also have wider ramifications. “Once it is in place, while I would be hesitant about placing a bet on a regulatory solution in the US, it will give an impetus to industry-led solutions there. Companies will say ‘this is good business, it’s something we need to do and we have to incorporate it into our decision-making’.”
Internal carbon pricing changes behaviour when people are given a budget and have to manage to it. It also removes obstacles to compliance
His US-based colleague Don Reed points out that it also has the potential to change the debate in the rest of Asia.
Trim at Navigant agrees that China coming on stream would be “a hugely important signal to the rest of the world. When fully established, it will be bigger than the EU ETS and alongside that scheme, a really significant proportion of global emissions would be covered by a carbon price.”
Already, some 1,300 companies around the world have declared that they use an internal carbon price to drive their decision-making and investment decisions, Trim says. “It’s often put in place in advance of legislation, but it’s also a useful tool for managing risk.”
Internal carbon pricing is critical, agrees DiPerna. “Within the company, it does change behaviour when people are given a budget and have to manage to it. … It also removes obstacles to compliance” and shows companies where their hidden costs are.
Climate change impacts on companies from the extreme weather events that are causing havoc around the world are starting to become increasingly obvious, DiPerna adds.
Peterson points out that the bankruptcy of PG&E as a result of liabilities arising from last year’s Californian wildfires highlights just how big and material the risks are. “As those consequences become more and more tangible and this narrative builds, it will lead to broader acceptance of the idea of carbon pricing, especially in the US and Canada,” he added.
Many people’s mental frameworks are really shaken by climate change. It signifies such significant changes to the world that they don’t want to acknowledge it
Reed, however, warns that despite the momentum that is building in favour of carbon markets, widespread adoption is far from assured. The gilet jaune protests in France are testament to how a poorly designed or administered carbon tax can backfire.
And some of the pushback against Canada’s nationwide scheme has been “really surprising”, states Peterson. “Four provinces refused to ‘play nice’ and the government imposed the scheme on them, a move that has become a campaign issue for the country’s upcoming national election.” (See Knife-edge election puts Canada’s carbon pricing revolution in doubt)
This resistance highlights one of the biggest stumbling blocks to carbon pricing: the shift in mindset necessary to take the first step. “Getting on to the treadmill is a real challenge,” Peterson says. “It’s a change in direction and the initial impact on the individual or company is higher prices for fuel and other inputs. Many people’s mental frameworks are really shaken by climate change. It signifies such significant changes to the world that they don’t want to talk about it or acknowledge it.”
It is also why prices are too low in many schemes at the moment. “The first thing is to get the coverage,” says Trim. “Then when people are used to how it works, you can tighten the caps to drive reductions.”
However, as more and more companies take that first step, and as the number of national schemes grows, carbon markets should start to do their job of encouraging the shift to a lower-carbon economy.
But even their proponents say that carbon prices should not be seen as a silver bullet that can deal with all the issues. “Carbon pricing is part of a suite of policy tools that should drive progress towards a national target,” Trim says. “But you also need command and control measures to mandate measures that may be too expensive for carbon pricing to affect, such as carbon capture and storage.”
Mike Scott is a former Financial Times journalist who is now a freelance writer specialising in business and sustainability. He has written for The Guardian, the Daily Telegraph, The Times, Forbes, Fortune and Bloomberg.