Carbon Pricing for Carbon Curbing

Ground rules for international carbon markets were recently agreed upon at COP 26 after years of negotiations. No matter what side of the fence you land on, there is now a floor to work from in the months and years ahead. The momentum is welcome as transitioning the world’s carbon-based economies towards lower or zero carbon solutions will be perhaps the most complex and difficult industry transformation in history.

In advance of COP 26, the Paulson Institute, Task Force on Carbon Pricing in Europe, and International Finance Forum convened American, European, and Chinese experts and stakeholders across three virtual workshop events to help promote the debate for carbon pricing and amplify ideas around its effectiveness and necessity as a tool to help address climate change.

With the premise that the trilateral efforts of the world’s three largest emitters are consequential in curbing emissions, the meetings were held in July and October and the dialogue covered considerable ground. Talks focused on the urgency to curb emissions, with COP 26 as a crucial marker, and with an emphasis on the fact that global leadership is absolutely imperative to collectively raise the essential political will to tackle emissions.

Bubbles trapped in ice are caused by methane gas release

Conversation across the events stemmed from nuances around the two routes to curb emissions:

  • Phasing out of fossil fuels and growing renewables capacity
  • Removing the emissions that have already entered the atmosphere

This was underpinned by the acute need to put a price on carbon. Topics like the sectoral approach to curb carbon starting with hard-to-abate sectors like steel and cement, the development of an effective carbon border adjustment mechanism (CBAM) tool and its wider global impact, the growing near-term threat of methane emissions and how to address them, and the opportunities and challenges of carbon removal technological innovations were thoroughly discussed as part of the agenda.

From the many thoughts and insights offered by participants, the Paulson Institute saw these notable observations:

  • The great potential and momentum for carbon pricing mechanisms. The long-awaited trading of China’s national carbon market provided a boost of enthusiasm for carbon trading as it has the promise to be a gamechanger if done right. Constructive discussions on developing and implementing CBAM in a way that is most advantageous for incentivizing decarbonization are ongoing. A growing number of companies are making net zero pledges, which will likely create a large demand for high quality, credible carbon offsets, and thereby, growth of the offsets market.
  • Challenges remain for carbon pricing. Aside from political barriers for carbon pricing, there are technical and practical obstacles including the need for more transparency and a greater push to harmonize standards in disparate carbon markets across the world. This will reduce inefficiency, complexity, and transaction costs that result from the fragmented standards. The social costs of carbon transition are also increasingly being considered—especially for local and indigenous communities and for emerging economies more dependent on carbon-intensive industries.
  • Carbon pricing, and particularly the carbon tax, is not a cure-all for climate. Carbon pricing mechanisms are revenue raisers for governments, but the generational climate crisis is only solvable through a comprehensive set of solutions. There needs to be a blend of other government-led policies, from regulation and subsidies to research and development investments and targeted incentives, to effectively discourage firms from emitting carbon and encourage them to develop, invest in, and scale low-carbon and zero-carbon technologies.

The fundamental rewiring of the economic system will see wholesale transformation in many areas including power generation, mobility and transportation, infrastructure, agriculture, and manufacturing. Behind this is the necessity to finance it all. In this endeavor, governments can only provide a portion of the capital needed. Perhaps, however, a more critical role for governments is in sending positive signals to markets and in creating the regulatory framework that encourages decarbonization. There is no more effective way to send this signal than setting a price for carbon.

Note: On November 8, the Task Force on Carbon Pricing in Europe held a side event on the margins of the COP 26 that was a culmination of the efforts mentioned in the blog. Remarks from Edmond Alphandery, Chair of the Task Force on Carbon Pricing in Europe, to open the event can be found here.