How can carbon pricing help governments and the private sector make a cost-effective low-carbon transition?
Since 2013, eight different carbon prices have emerged in regions across China where ETS was piloted. At the time of writing, prices in these markets ranged from CNY 9 in Fujian to CNY 87.5 in Beijing.
China’s national ETS started trading in July. On the opening day, trading started at CNY 48/tonne, and as of 5 August, prices were trading between CNY 53-59/tonne.
Is carbon pricing really making an impact on the reduction of greenhouse gas emissions?
The EU ETS is a successful tool in reducing emissions cost-effectively. Between 2005 and 2019, installations covered by the ETS reduced emissions by about 35%. The introduction of the Market Stability Reserve in 2019 resulted in higher and more robust carbon prices, which helped ensure a year-over-year total emissions reduction of 9%, with a 14.9% reduction in electricity and heat production and a 1.9% reduction in the industry. In September 2020, under the European Green Deal, the Commission presented an impact-assessed plan to increase the EU’s net greenhouse gas emissions reductions target to at least 55% by 2030. And in July 2021, the Commission presented legislative proposals to implement the new target, including revising and expanding the scope of the EU ETS.
In late 2020, the California Air Resources Board (CARB) released the final 2018 greenhouse gas emissions inventory. While overall 2018 emissions were slightly higher (0.8 MMT CO2e) than in 2017, the state was still 6 MMT CO2e below the 2020 goal of returning to 1990 emission levels. Since peak emissions in 2004, California’s emissions have dropped over 65 MMT CO2e, or just over 13%. But CARB itself acknowledges that the state must do much more to reach the 2045 carbon neutrality goal. An encouraging piece of news from the 2018 emissions inventory is that emissions from the transportation sector have declined 1.5 MMT CO2e since 2017. This is an important step as transportation emissions make up approximately 40% of California’s emissions, and this sector has historically been hard to decarbonize.
Will carbon pricing continue to expand in jurisdiction coverage and impact on the global actions to fight climate change?
PwC’s 2020 survey of carbon markets participants reported many stakeholders expect the expansion of carbon pricing regimes to other countries to slow. This is a difficult metric to measure, while the only major additional carbon pricing mechanism expected to start operation in 2021 will be China’s national emissions trading system, it will lead to a major leap in global emissions covered, by as much as 25%. However, the world’s next largest emitters, India and Russia, are not expected to introduce carbon pricing in the short to medium term.
What impact will carbon neutrality targets have on carbon pricing?
In late 2020 and early 2021, as countries revise their Paris Agreement commitments, key economies, including the EU, U.S., China, Japan, Korea, and the U.K. announced a number of new commitments to achieving carbon neutrality. Of these countries, the EU, China, and Korea already have carbon pricing in place at the national level and are expected to expand its coverage: in China by adding major emitters other than the power sector, and in the EU by Germany covering entities that fall below the entry threshold for the EU ETS.
In the U.S., a national carbon pricing system seems unlikely due to the difficult politics of climate policy, however moderate expansion to the existing regional carbon pricing mechanisms is taking place. Virginia became the 11th state to participate in the Regional Greenhouse Gas Initiative (RGGI) in January 2021, and the Governor of Pennsylvania is working to make his state the 12th on the RGGI list. On the other hand, Texas is the state that produces the most CO2 emissions and is unlikely to pursue carbon pricing in the near future; its state Republican Party is deeply opposed to the idea.
In Japan, the government’s commitment to carbon neutrality gained momentum around the discussion of national carbon pricing and built on the experience of the cap-and-trade program in Tokyo for commercial buildings and factories.
As the Paris Agreement is implemented and expands, ambition to grow a carbon pricing mechanism will emerge. If the temperature goals laid down in the agreement are to be met, it will be inevitable, and should lead to greater and more extensive use of carbon pricing in jurisdictions that already have it as well as in those that have yet to introduce one. Interest is increasing in the tool, especially in emerging economies in South America and Southeast Asia, as it not only provides a way for governments to meet emission reduction targets while limiting economic impacts, but it also helps companies shift their operations in the direction of a low-carbon future, which will be crucial for future success.