What About a Price on Carbon? - ACS Symposium Series (ACS

Chapter 6

What About a Price on Carbon?

Downloaded by UNIV OF FLORIDA on December 11, 2017 | http://pubs.acs.org Publication Date (Web): October 23, 2017 | doi: 10.1021/bk-2017-1254.ch006

Jessica McDonald* Nicholas School of the Environment, Duke University, 450 Research Dr., Durham, North Carolina 27708, United States *E-mail: [email protected].

Carbon pricing policies can encourage deep emissions cuts, accelerate innovation in clean energy technologies, and provide incentives for the growth of a low carbon economy. This chapter makes the economic case for carbon pricing policies and outlines the use of carbon pricing in the European Union, United States, and China. This chapter also highlights the political momentum toward the use of market mechanisms to support ambitious emissions reductions as seen in the lead up to and actions following the adoption of the Paris Agreement.

We Will Get This Done I tip-toed into the conference hall. My first mission of the morning was to grab a free coffee, and with my caffeine prize in hand, I settled into my seat. The room was silently buzzing as scientists, economists, and politicians found their way to the seating area as the clock rang 9:30. I secured a seat next to two of my peers from Duke University’s Nicholas School of the Environment, as seen in Figure 1. Even though we had yet to finish our respective coffees, the early morning hour did not curb our enthusiasm. The three of us were awarded scholarships to attend the annual National Conference on Science, Policy, and the Environment in Washington, DC. The theme of the annual conference when we attended in January 2015 was “Energy and Climate Change.” Since all three of us were pursuing our Masters Degrees in Environmental Management with a focus on energy and the environment, the theme fit well with our interests. The theme also resonated with me particularly strongly, as I had recently returned from Peru where I attended the second week of the United Nations Framework Convention on Climate Change © 2017 American Chemical Society

Peterman et al.; Climate Change Literacy and Education Social Justice, Energy, Economics, and the Paris Agreement Volume ... ACS Symposium Series; American Chemical Society: Washington, DC, 2017.


(UNFCCC)’s 20th Conference of the Parties (COP20). My thoughts were still reeling from the annual UN climate conference, and I was yearning for more conversation on how emissions could be mitigated from the energy sector in order to prevent dangerous levels of warming. This morning of the conference was especially exciting, because the keynote speaker we were about to hear from is a renowned leader in climate action who has spearheaded the discussion on regulating greenhouse gas emissions both domestically and internationally. The crowd fell silent as she took the stage. Her Massachusetts accent was unmistakable, her message clear and strong. Gina McCarthy, Administrator of the Environmental Protection Agency (EPA), spoke about her determination and strategy to regulate carbon emissions in the United States. She stated that she has no doubt that we will regulate carbon dioxide emissions, and she reiterated that we “will get this done.”

Figure 1. Left to right: Alyssa Poirrier, April Christensen, Jessica McDonald (author). National Conference on Science, Policy, and the Environment, Washington, D.C., 2015. What exactly was she referring to when she said we will get this done? Well, her speech focused on new standards in the United States that target carbon emissions from existing coal-fired power plants under the authority of the Clean Air Act. Originally released on June 2, 2014 and finalized on August 3, 2015, the ruling, called the Clean Power Plan (CPP), is an historic set of rules that, if instituted, would put the United States on a trajectory to cut carbon approximately 30% in the power sector relative to 2005 emissions (1). The room erupted in applause. My friends and I looked at one another with gleaming smiles. In short, Gina McCarthey is an environmental hero for us young professionals looking to make an impact in the energy field. Instituting the CPP rules presents a huge national climate policy opportunity. It’s the cornerstone of the United States’ climate pledge under the Paris Agreement. However, even more importantly, it also presents an enormous economic opportunity for the United States. Every successful climate policy must have these two pillars in mind: the environment and the economy. 64



“How many tons or tonnes of carbon dioxide will this policy reduce by [insert date]?” is typically trumped in policy debates by the question, “How will this policy impact the economy?” The ambitiousness of emissions reductions is limited by the perceived negative economic costs nations and businesses are willing to absorb. Well, at least that was the status quo of climate policy understanding during the 1990s and most of the early 2000s. The tide is turning with current and emerging climate technologies and growing evidence that highlights the profitability of renewable energy and low-carbon projects. Acting on climate change does not have to stymy economic growth and can result in a stronger, more resilient economy. After hearing Gina McCarthy’s speech, I thought back to my experience at the UN climate conference in Lima. I attended COP20 as one of eight student delegates for the American Chemical Society during my first year in graduate school at Duke University. During the conference, I thrived in the fast-paced, high-level policy atmosphere. I interviewed the national delegation from Madagascar, participated in several events focused on gender equality and climate change, and even spoke with the Prime Minister of Togo. I left the conference with the goal to better understand the public policies shaping the international climate discourse. From my academic coursework in graduate school, I engaged in discussions regarding the economics of natural resource management and climate change. I learned about the public policy tools we can leverage to cut emissions. There was one kind of policy that came up time and time again: carbon pricing. My support for market mechanisms as a central pillar to combat climate emissions deepened while I worked for the International Centre for Trade and Sustainable Development (ICTSD) in Geneva, Switzerland as part of a Duke Program to study public policy and global environmental governance. I researched the emergence of carbon pricing policies around the globe and closely followed the discussion of markets in the development of the Paris Agreement. My work for ICTSD continued during my second year at Duke and complemented my participation in a unique annually held Practicum that teaches students about the climate negotiations and the structure of the UNFCCC. Through this Practicum, I traveled to Paris to attend COP21 as part of ICTSD’s climate negotiations team. It was our responsibility to track changes in the negotiating text, in particular references to the use of market mechanisms. While carbon pricing is not explicitly mentioned in the Paris Agreement, language referring to the use of market mechanisms to curb emissions was agreed upon on the final day of negotiations. Referred to as “cooperative approaches,” this language on markets could encourage the future linking of carbon market schemes (2). There remains a significant amount of uncertainty regarding the formation of these linked carbon markets around the globe. However, the message is clear that market mechanisms and carbon pricing are essential to implementing the new Agreement. If designed correctly, carbon pricing is a triple dividend. It’s good for people and the environment, it raises revenue efficiently, and it spurs private sector innovation needed to invest in clean and low-carbon technologies (3). 65


I support the potential of markets to provide tangible emissions reductions in a cost-effective manner, and there are a number of lessons that can be learned from countries around the world that have been experimenting with pricing systems. This chapter provides a high-level snapshot of the economic argument for establishing carbon pricing policies, reviews current carbon pricing schemes in key emitter countries, and outlines the political momentum for carbon pricing that has surfaced in recent years.


Externalities In its most skeletal form, economic theory tells us how to most efficiently price goods and services to produce an outcome that is socially optimal. One aspect of the theory teaches us about how to deal with externalities. An externality can be either positive or negative, and it occurs when an action impacts a third party that is not directly involved in an economic transaction (4). For example, when I was a student at Duke, my roommate was an avid environmentalist who walked to campus instead of driving. This is a positive externality, because her decision benefited others by reducing congestion on the roads and by reducing pollution. On the other hand, when I was late and rushing to campus, I would hop in my car and drive. My decision to drive resulted in a negative externality for society. I contributed to local air pollution and to global emissions driving climate change, pun intended. These negative externalities are one kind of market failure in the eyes of economists. As stated by economist Nicholas Stern, climate change is the “greatest market failure the world has ever seen” (5). Those who produce greenhouse gases are imposing huge costs on other people around the world and on future generations. The costs of emitting carbon dioxide and other greenhouse gases are not truly reflected in the costs emitters pay. The costs are borne by society through public health costs and the costs that accrue through the impacts of climate change, including temperature and sea level rise, and the devastating effects of extreme weather events, among many others. If climate change goes unmitigated, the economic costs of inaction will reshape the global economy by reducing average global incomes approximately 23% by 2100 and widening global inequality (6). The costs of acting on climate now far outweigh the costs we will face as a global society if we fail to mitigate emissions. We must implement policies to curb emissions and we must do so quickly. In the United States, net mitigation costs could increase, on average, 40% for each decade of delay on hitting a specified climate target, according to a report released by the White House Council of Economic Advisers in 2014 (7). Thus, we need to account for the external costs of carbon in our decision-making, which can help correct the economic market failure of externalities. However, there is another economic issue with mitigating emissions and tackling climate change. We’re facing the challenges inherent to global public goods. 66 Peterman et al.; Climate Change Literacy and Education Social Justice, Energy, Economics, and the Paris Agreement Volume ... ACS Symposium Series; American Chemical Society: Washington, DC, 2017.


One Jurisdiction at a Time We all enjoy using the climate. The climate includes our atmosphere, biosphere, hydrosphere, geosphere, and cryosphere. However, the state of the climate is the product of everyone’s behavior. The climate is a public good, because it meets the two properties of non-rivalry and non-excludability (8). This means that consumption of a good does not reduce the quantity available to others, and it is impossible to prevent anyone from consuming the good. However, the climate falls into a particular category of a public good: a global public good. The impacts of climate change affect the entire globe and will affect generations yet to come (9). A distinguishing factor of a global public good is that it involves “stock externalities” (8). In the case of carbon dioxide emissions, every tonne of carbon dioxide emitted in the United States is equivalent to a tonne of carbon dioxide emitted elsewhere in the world, whether it be in China, Indonesia, Germany, Nigeria, or Antarctica. The colorless carbon dioxide in the atmosphere mixes and accumulates. Unbeknownst to generations before us, our atmosphere turned into a free carbon dioxide disposal site. With the growing scientific understanding of the Earth’s linked natural systems, we now know that there is a long-lasting consequence of increasing the concentration of carbon in the atmosphere. Tackling the global public goods challenge requires international collective action. Building the necessary frameworks for international collective action in order to stay within our carbon budget is a complex and multifaceted issue. Elinor Ostrom researched the issues of the global commons and collective action and won the 2009 Nobel Prize in Economic Sciences. Ostrom won the Nobel Prize for her groundbreaking research that demonstrated how common resources can be successfully managed at the local level. She is the first woman to win the Nobel Prize in Economic Sciences, and she was also listed in Time Magazine as one of the world’s most influential people in 2012 – the same year she passed away (10). I recommend watching her Prize Lecture on the Nobel Prize website (10). In her paper, “A Polycentric Approach for Coping with Climate Change,” Ostrom argues that a single government unit is incapable of solving a global collective action problem like climate change because of free-rider problems (11). Free-riding occurs when an actor receives the benefits of a public good without contributing to the costs. In the case of international climate action, countries have the incentive to rely on others mitigation actions. For instance, when the United States pays for new technologies to cut carbon emissions, the benefit of these actions is global. Thus, other countries are less inclined to cut their own emissions, because they can “free-ride” off of the United States’ emissions cuts. Free-riding is problematic in these instances where the costs are concentrated and the benefits disperse (12). In order to overcome the free-rider challenge, Ostrom recommends a multi-tiered approach to governance with interlinked actions at the local, regional, and national levels (11). This layered approach to climate action would build commitment and trust between actors through a comprehensive monitoring and information-sharing framework. The challenge of how best to establish these linkages with a robust monitoring system has not yet been solved, 67 Peterman et al.; Climate Change Literacy and Education Social Justice, Energy, Economics, and the Paris Agreement Volume ... ACS Symposium Series; American Chemical Society: Washington, DC, 2017.


but I believe that Ostrom’s vision for a polycentric, joint-policy cooperative approach to climate governance is slowly coming to fruition. At the international level, the Paris Agreement sets forth a framework for countries to submit national climate action plans. These plans link international climate goals to bottom-up climate and energy policy approaches in 190 countries (13). As mentioned at the beginning of this chapter, the Agreement also establishes a hook for the use of cooperative approaches among jurisdictions, including through the use of “internationally transferred mitigation outcomes,” ITMOs for short (14). The definition of what actions can be counted as ITMOs is still under consideration by the UN. Nonetheless, this is a compelling sign for the more than 90 developed and developing countries that indicated plans to use international, regional, or national carbon pricing mechanisms for mitigating greenhouse gas emissions (15). It may take a decade or more before substantial cooperative approaches with carbon pricing systems are established. However, we need to take this step by step. The first step is for jurisdictions to create carbon pricing policies. The momentum towards carbon pricing can be seen in recent statistics released by the World Bank. According to the World Bank’s “Carbon Pricing Watch 2016” report, in 2016 approximately 40 national jurisdictions and more than 20 cities, states, and regions—together representing almost a quarter of global greenhouse gas emissions—are putting a price on carbon (16). Furthermore, the number of carbon pricing instruments already implemented or scheduled for implementation has nearly doubled since 2012 (17). Polluter Pays Principle Pricing carbon is a policy mechanism that corrects the carbon externality market failure by shifting the burden of the damages of climate change back to those who are responsible. The benefits of carbon pricing are twofold. For governments, carbon pricing is an economically driven mechanism to achieve emissions reductions while also generating revenue (18). Businesses, on the other hand, use an internal carbon price to identify the impacts on their operations under a mandatory carbon price. This allows a business to identify opportunities to mitigate risks in a future carbon-priced world. The topic of carbon pricing thus brings together two groups of stakeholders—the private sector and national/subnational governments—that have spoken in favor of climate action but have rarely historically worked together. Putting a price on carbon effectively ties together economic self-interest and the interests of our planet. Polluters can decide for themselves if they want to stop their polluting actions, pay for measures to reduce emissions, or continue polluting and pay for it (19). To Cap or Tax There are two common instruments used to price carbon. Firstly, a carbon tax directly puts a price on carbon. This tax can be defined by a tax rate on greenhouse gas emissions or even a tax rate on the carbon content of certain fuels—particularly 68



carbon-heavy fuels like coal and oil. It is important to note that a carbon tax does not guarantee a certain quantity of emissions reductions. The second popular instrument for carbon pricing is an emissions trading system (ETS). These systems are also referred to as cap-and-trade systems, and they set a cap on the total level of greenhouse gas emissions permitted. Industries with low emissions have the flexibility to sell their extra allowances to the larger emitters. This creates a market price for carbon through the buying and selling of allowances. Any company that does not fulfill their compliance obligations under the ETS is typically penalized by a regulator. The benefit of an ETS is that it is more likely to ensure that the aggregate required emissions reductions occur. The similarities of a carbon tax versus an ETS outweigh their differences, as both a well-designed carbon tax and ETS incentivize industries to invest in measures that result in cost-effective emissions reductions (20). The stringency of both instruments is critical, and thus the success of either a carbon tax or ETS boils down to its design. Policymakers and economists have not settled all questions regarding carbon pricing instruments, but the message now is louder than ever that the use of these tools is essential to raising the global ambition of emissions reductions. As World Bank Group President Jim Yong Kim said in April 2016, “The most direct and certain path to reduce carbon emissions is to put a price on them, so that carbon pollution becomes an operating cost, and incentives are created to push forward with greener technologies and solutions” (21).

Carbon Pricing Around the World European Union: Getting the Price Right The EU established the world’s first major emissions trading system (EU ETS) in 2005 and is currently the world’s largest carbon market. The EU ETS operates in 31 countries (all 28 EU countries, as well as Iceland, Liechtenstein, and Norway) using a cap-and-trade system. It covers around 45% of the EU’s greenhouse gas emissions and limits emissions from more than 11,000 energy-intense industries including power stations and industrial plants (22). It also covers airline emissions when a flight takes off in the region and lands in another country included under the scheme. The success of emissions reductions under the EU ETS is critical in order for the EU to reach its emissions reduction target to reduce greenhouse gas emissions by at least 40% domestically by 2030 from 1990 levels (23). The system was executed in several phases in order to allow for flexibility as the EU experimented with the design of the system. The EU ETS is currently in the middle of its third phase, which started in 2013 and will remain in place until 2020 (24). Due to the design of the EU ETS in the first two phases and the 2008 recession, the EU ETS is facing challenges with an oversupply of allowances and credits for emissions reductions that, at times, even exceeded total emissions. Thus, since the price of carbon is set by the market, the price of the allowances has been historically lower than anticipated (25). This means that there is not a strong incentive for businesses to reduce their emissions. 69



The design of phase three is considerably different from the rules in the first two phases in the attempt to raise the low carbon price set by the market. For instance, there is now a single, EU-wide cap on the number of emissions allowances. Each allowance gives the holder the right to emit either one tonne of carbon dioxide, or the equivalent amount of two more powerful gases including nitrous oxide (N2O) or perfluorocarbons (PFCs). In 2013, the cap for emissions from installations was set at approximately 2 billion allowances. This cap then decreases each year by a linear factor of 1.74% of the average total number of allowances issued each year from 2008-2012. According to the European Commission, this equates to a reduction of 38,264,246 allowances each year. Ultimately, this means that the number of allowances, and thus the level of emissions from businesses covered in the scheme, will be 21% lower in 2020 than in 2005 (26). However, even with this annually decreasing cap, emissions are not decreasing at a rate sufficient enough for the EU to reach its climate target. In 2014, the EU proposed a new mechanism to handle the surplus of allowances in the ETS in order to increase the carbon price and incentivize greater mitigation actions. The mechanism, called the Market Stability Reserve (MSR), will remove excess emissions allowances based on a set of “trigger” thresholds and place them into a reserve, and thus out of the market (27). The mechanism will also be equipped to feed allowances back into the system when there are too few. This new element of the EU ETS will be operational by 2019 (28). Moreover, in 2015, the European Commission presented a legislative proposal to revise the EU ETS design for its fourth phase starting in 2021. One central element of the reform is to increase the annual linear reduction of allowances by 2.2%, compared to the current 1.74% (29). The reform also outlines new rules for the allocation of free allowances to high-emitting industries in order to combat concerns regarding carbon leakage. Carbon leakage occurs when industries move to another country that has less stringent greenhouse gas regulations, thus impacting the competitiveness of European industries. These concerns are addressed in the reforms, and these structural changes to the EU ETS will be considered in the plenary in February 2017 (30). However, after more than a year of negotiations, EU member state environment ministers failed to find common ground on the reform in December 2016 (31). The EU ETS has certainly experienced some growing pains. However, the lessons learned by the EU ETS can be incorporated into the design of other emissions trading schemes. The creation of the MSR and the reforms to the EU ETS will help to ensure greater emissions reductions as the emissions cap decreases and the carbon price, hopefully, increases. China: Building from Pilots In 2017, China may surpass the EU and establish the world’s largest ETS. It is predicted that China’s ETS could set a cap twice the size of the EU’s—that would be approximately 4 billion allowances (32). President Xi first announced the possibility of a national ETS in September 2015. China’s State Council must approve the plans. In December 2016, China’s State Council reportedly approved 70



an overall cap on carbon emissions for 7,000 companies covered under the emerging scheme (33). The design of the national ETS has not been finalized, but a notice circulated in January 2016 outlines the possible sectors and subsectors that will be covered by this scheme. These sectors include power, petrochemicals, chemicals, iron and steel, non-ferrous metals, building production and materials, pulp and paper, and aviation (34). This announcement builds on the several years of emissions trading experience in China since the creation of seven ETS pilot systems in 2011. The seven pilots cover a total of five cities and two provinces. Since the end of July 2015, some 57 million tonnes of carbon have been traded under the pilots (32). Each pilot was designed and managed at the local level, which means that each was operating under a variety of rules for a number of design elements including the overall emissions reduction target, the sectors covered, and how allowances were distributed, among others. Since each pilot was run individually, the result was seven different carbon prices (35). While it is certainly going to be challenging, the national ETS will harmonize the rules between all regions. This is a significant step forward for the world’s largest emitter to utilize market mechanisms to reduce domestic emissions. A national ETS is one of several policies China will put in place in order to meet its Paris pledge to reduce carbon emissions intensity by 60 to 65 percent by 2030 (36). China’s announcement on its national ETS was part of the U.S. and China’s Joint Presidential Statement on Climate Change made in 2015. In the statement, the United States also called attention to its historic plan to reduce emissions from the power sector: the Clean Power Plan (37). United States: Trading Ready If the Clean Power Plan (CPP) is implemented in the U.S., all states will have to comply with carbon dioxide emissions regulations in the power sector for already existing coal-fired power plants. This is, in the words of Barack Obama, the “biggest step” the United States has ever taken to reduce carbon pollution (38). In 2015, carbon dioxide emissions from the power sector in the United States were responsible for 37% of total U.S. energy-related emissions (39). The rules rely on the 1970 Clean Air Act, which requires the Environmental Protection Agency (EPA) to reduce air pollution that harms public health. Carbon dioxide and other greenhouse gases were deemed by the EPA in a 2009 ruling to be a danger to both public health and welfare for current and future generations (40). An in-depth analysis of the CPP shows that emissions of fine particulates and ozone pollution from power plants, including sulfur dioxide and nitrogen oxides, will decrease substantially under the ruling. The estimated health benefits are enormous. According to the EPA, the CPP could prevent up to 3,600 deaths, 1,700 heart attacks, 90,000 asthma attacks, and 300,000 missed work and school days per year by 2030. Together, these carry a value ranging from $12 billion to $34 billion (41, 42). Most importantly, the 47 states under the ruling have a menu of climate actions to choose from in order to meet their targets. Emissions reductions targets differ across states, because each state has a unique electricity-generation mix 71



(43). States can invest in renewable energy, nuclear energy, increase the efficiency of energy production, implement energy-efficiency programs, and even join together in multi-state or regional agreements to find the lowest-cost options for achieving emissions reductions. The option even exists for states to implement emissions-trading programs. The rule is scheduled to take effect in 2022 and would ensure that the power sector reduces climate pollution 32% below 2005 emissions levels by 2030 (44). The outlook for renewable energy under the ruling is extremely positive. It is expected that the rule will contribute to a national electricity mix containing 28% renewable energy by 2030 (45). All states must submit an action plan outlining their “best system of emission reductions (BSER),” and if a state does not submit a plan, then a federal plan will automatically be put in place. The federal plan contains the same elements that state plans are required to include (46). The EPA is also working on creating model trading rules for states in order to make it easy for states and power plants to engage in emissions trading. The ruling stated that states should submit their final plans by September 2016, or an initial plan with a request for an extension until no later than September 2018 (44). Unfortunately, as of August 2016, the CPP remained deadlocked in the court system. While the benefits of the CPP outweigh the costs, many states are fighting back against the ruling and fighting hard. Nearly half of all states, 24 total, are suing the EPA in the D.C. Circuit Court of Appeals. These states include Texas, Alabama, New Jersey, West Virgina, and Wyoming, among others (47). They claim that the federal government does not have the authority to regulate states’ carbon emissions under the Clean Air Act, and thus, they deem the ruling unconstitutional. It is no surprise that these states also have the strong support of the coal industry and some electric utilities. In late January 2016, the D.C. Circuit denied the stay motions, which was a good sign for the continuation of the CPP ruling. However, in February 2016, those suing took the motion to the Supreme Court even though the lower court had not yet ruled on the legal merits of the case. Shockingly, the Supreme Court issued a 5-4 order in which it stayed the implementation of the CPP (48). This means the Supreme Court hit pause on the CPP until the lower courts—in this case the D.C. Circuit—determine the rules validity. Some observers suggested that this ruling hinted at a majority of the court doubting whether the EPA has the authority to impose the CPP under the Clean Air Act. The case was heard by the U.S. Court of Appeals for the D.C. Circuit in late September 2016 (49). A decision by the court is expected to take months. However, the losing side can then take the decision back to review by the Supreme Court (50). This then adds in an additional element of nail-biting uncertainty. Days after this Supreme Court ruling in February, Justice Scalia passed away. His seat has not been filled due to unprecedented pushback from Republicans in the Senate against Obama’s nominated judge (51). If the Supreme Court hears the case with eight justices and there is a 4-4 decision, then the case would revert to the decision of the lower court (52). It is extremely likely that whomever loses in the D.C. Circuit ruling will appeal back 72


to the Supreme Court. Looking ahead to 2017, the seat will be filled by President Donald Trump’s administration. It is in the best interests of our health and planet for there to be a ninth justice on the Court who understands the science of climate change and the urgency with which we must act.


Momentum for Carbon Pricing Momentum for, and interest in, carbon pricing has risen exponentially since 2014. The EU, China, and the U.S. are only three of the almost 40 national jurisdictions that are implementing or planning to implement carbon policies that leverage markets to price carbon and decrease emissions (16). When I went to Lima for the UN Climate Conference, I was expecting to hear political announcements in support of carbon pricing and the use of market mechanisms to catalyze clean energy markets. I was optimistic because of the news from the UN Climate Summit held in New York City in September 2014. During the COP, there were several strong declarations from government leaders and the private sector in support of carbon pricing policies. For instance, 74 national governments, 11 regional governments, and more than 1,000 businesses and investors signaled their support for putting a price on carbon (53). Furthermore, during the summit, government and business leaders decided to form a landmark Carbon Pricing Leadership Coalition (CPLC). While the topic of carbon pricing did not rise to the surface during the Lima negotiations, it was a central point of the discussions leading up to and during the Paris Climate Summit in 2015. Coalition Launch In 2015, carbon pricing was elevated to the international discussion in the lead up to COP21 in Paris. This level of government support for market mechanisms was reflected in an announcement made by the World Bank Group and International Monetary Fund (IMF) with the support of the Organisation of Economic Cooperation and Development (OECD) in October 2015. The World Bank Group and the IMF established a Carbon Pricing Panel to spur political discussion around carbon pricing. The members of the Panel are viewed as global leaders in establishing and implementing carbon pricing policies. Members of the panel included political leaders from Germany, Chile, France, Ethiopia, Philippines, Mexico, California, and Rio de Janeiro (54). These leaders called on others to join them to increase the weight of government voices calling for carbon pricing. The panel is one of two central pillars of the World Bank Group’s strategy to enhance and accelerate carbon pricing worldwide. The other pillar is the CPLC, which was first announced in 2014 and launched on the opening day of the Paris Climate Summit. During the launch, the Coalition had the support of 21 governments and more than 90 strategic partners from the private sector and civil society (55). The governments supporting the CPLC during the launch at COP21 are outlined in Table 1. 73 Peterman et al.; Climate Change Literacy and Education Social Justice, Energy, Economics, and the Paris Agreement Volume ... ACS Symposium Series; American Chemical Society: Washington, DC, 2017.

Table 1. Government Support for Carbon Pricing Leadership Coalition


Carbon Pricing Leadership Coalition Government Supporters at COP21 Alberta

Belgium

British Colombia

California

Canada

Chile

Ethiopia

France

Germany

Italy

Kazakhstan

Mexico

Morocco

Netherlands

Norway

Switzerland

Norway

Ontario

Quebec

Spain

Sweden

The goal of the coalition is to help advance effective and well-designed carbon pricing systems around the world. The work plan of the coalition was also released during the launch, and it outlines three main objectives of the coalition that will enable the establishment of strong, well-designed carbon markets for national and sub-national governments around the world. Firstly, the coalition aims to help government and business leaders build the evidence base for implementing successful carbon pricing schemes. This means capturing best practices and lessons from partners such as EU countries that have experience with the EU ETS. Secondly, the coalition aims to mobilize ambitious private sector support. Lastly, it establishes a framework for constructive dialogue between countries. These Leadership Dialogues are expected to take place in Chile, Mexico, Germany, and India (56). This knowledge and best practices sharing platform is what governments need to develop comprehensive and successful policies. Link to Business Similarly to governments, carbon pricing is a high priority for businesses. The Carbon Disclosure Project (CDP) found that 435 companies from around the globe reported using an internal price on carbon in 2015. This number was only reported as 150 in 2014. Even more shocking is that 1000+ companies are now disclosing to their stakeholders that they are pricing, or plan to price in the next two years, their carbon emissions in order to understand the risks to operations due to climate change (57). On July 15, 2016, the largest number of companies, almost 20, joined the CPLC at the same time. All of the companies that recently joined are Canadian businesses (58). Raising the Bar The use, or planned use, of carbon pricing policies is increasing worldwide, and the Paris Agreement embraces the use of cooperative approaches that encourage the linking of market approaches across jurisdictions. This signals to a future where carbon pricing could be an integrated and integral part of our global fight to combat climate change. Since 2015, four new carbon pricing initiatives have been implemented or are scheduled for implementation, as identified by the World Bank Group. The Republic of Korea, British Columbia, and Australia introduced emissions trading 74



schemes. Portugal created a carbon tax that entered into force covering all energy products in non-EU ETS sectors. Furthermore, Canada has made significant strides in carbon pricing. In the near future, more than 85% of Canadians will live in jurisdictions with an existing or planned carbon pricing system (59). However, more action is required. Despite the current momentum towards pricing carbon, only 12% of greenhouse gas emissions are currently covered by carbon prices. That is why the High Level Panel on Carbon Pricing released a vision statement on April 21, 2016—the same day the Paris Agreement was first unveiled for signatures. The vision statement outlines a carbon pricing goal to double the percentage of emissions covered by explicit carbon prices to 25% by 2020 and to 50% before 2030 (60). Three pathways were identified to reach these targets including: 1. Broadening carbon pricing in jurisdictions and sectors; 2. Deepening carbon pricing by increasing ambition in places it already exists; and 3. Enhancing cooperation by both facilitating and promoting the alignment of carbon pricing programs (59). The process of establishing jurisdictional carbon pricing mechanisms that encourage true emissions cuts, accelerate innovation in clean technology, provide incentives for the growth of the green economy, and minimize carbon-leakage or competitiveness concerns is going to take trial and error. The good news is that governments are already learning from those who acted first to create markets that reflect the true cost of carbon on society. If we can build on this carbon pricing momentum then I, too, believe that we will get this done.

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