Question

What is carbon pricing? Why is carbon pricing regarded as an important policy in addressing the challenge of climate change

Answer 1

A dangerously warming planet is not just an environmental disaster. Fundamentally, it is an economic and social challenge. Putting a value or price on carbon emissions tackles climate change at its source. This creates an incentive for firms and individuals to change their investment, production, and consumption patterns. Through a clear and strong price signal, carbon pricing sets the right incentives for the much-needed large-scale transition to a low-carbon economy.

The momentum to act and price carbon pollution is clearly growing. Since 2012 the number of implemented or scheduled carbon-pricing instruments has nearly doubled. Today, 42 national and 25 sub-national jurisdictions put a price on carbon emissions. The value of these carbon pricing initiatives—including emissions trading schemes (ETS) and carbon taxes—reached $52 billion, an increase of 7 percent compared to 2016.

According to a World Bank report State and Trends of Carbon Pricing 2017 jurisdictions raised revenues of more than $20 billion from carbon-pricing schemes, for the second consecutive year and with the potential to raise much more.

Through the World Bank’s platform, Partnership for Market Readiness (PMR), countries can better prepare and implement climate-change policies, including carbon-pricing instruments. The PMR leverages partners’ experiences to share knowledge and best practices.   The result involves sharing highly technical and complex details of designing carbon-pricing schemes, such as allocation, legislation development, emissions registry, as well as systems to monitor, report and verify (MRV).

Putting a price on carbon is an important step, and many in the private sector believe strongly that governments need to go in this direction to effectively address climate change. A rapidly increasing number of companies are preparing for a world with a higher cost of carbon emissions—in 2017 nearly 1,400 companies disclosed the use of an internal carbon price, including more than 100 Fortune Global 500 companies with collective annual revenues of $7 trillion.

Despite this progress, 85 percent of emissions are still not covered by carbon pricing. Further, most current carbon prices are significantly lower than $40-80 per tonne CO2 by 2020 and $50-100 per tonne CO2 by 2030. The High-Level Commission on Carbon Prices, co-chaired by Joseph Stiglitz and Lord Nicholas Stern and supported by the World Bank, found these carbon- pricing target goals to be consistent with the temperature goal of the Paris Agreement.

Carbon pricing represents a simple, fair and efficient policy option to address climate change. It can also deliver additional benefits, reducing air pollution and congestion while avoiding the increased costs of remedial measures associated with the world’s current high-carbon growth path.

For businesses, carbon pricing enables them to manage risks, plan their low-carbon investments, and drive innovation.

But it is clear that stronger action is needed on the carbon pricing front. Current carbon price initiatives only cover 15 percent of global emissions, and 75 percent of these emissions are priced at under $10 per tonne. More progress is needed to help achieve the Paris Agreement goals.

Transformative Action

Officially launched at COP21 in Paris in December 2015, the Carbon Pricing Leadership Coalition (CPLC) brings together leaders across national and sub-national governments, the private sector, and civil society with the goal of putting effective carbon-pricing policies that maintain competitiveness, create jobs, encourage innovation and deliver meaningful emission reductions. The Coalition drives action through different fronts:

1. Building a repository of global experience on carbon pricing policy design and implementation, including knowledge products such as the Report from the High-Level Commission on Carbon Prices, the Carbon Pricing Dashboard, webinars with business leaders, while synthesizing latest analysis on key issues.
2. Convening the public and private sectors through global events.
3. Collaborating with stakeholders in deepening sectoral engagement: including the construction value chain, banking sector, and maritime sector.

The goal of the CPLC, which the World Bank Group helped to convene and supports, is to advance effective carbon pollution pricing systems and expand their use globally, helping countries to maintain competitiveness, create jobs, encourage innovation and achieve meaningful emissions reductions.

As of 2017, the CPLC has more than 25 national and sub-national government partners, more than 150 private sector partners from a range of regions and sectors, and more than 50 strategic partners representing NGOs, business organizations and universities.

Expected Results

The CPLC works with partners toward the long-term objective of a carbon price applied throughout the global economy, with targets to double the percentage of global emissions covered by explicit carbon prices to 25 percent by 2020, and to double it again to 50 percent within a decade.

Key Facts & Figures

• 42 national and 25 sub-national governments are pricing carbon.
• Additional $700 billion a year will be needed annually by 2030 to finance the transition to low-carbon economies.
• Carbon pricing revenues raised more than $20 billion for the second consecutive year.
• Almost 1,400 companies factor an internal carbon price into business plans, including more than 100 Fortune Global 500 companies with collective annual revenues of $7 trillion.