The SDG Knowledge Hub of the International Institute for Sustainable Development (IISD) provides the recent update on carbon pricing and markets compiled by Leila Mead.
Carbon Pricing and Markets Update: Initiatives Promote Carbon Pricing Approaches in Southern and Eastern Africa
Carbon pricing measures, which play a critical role in climate action, can both stimulate economic growth and protect environmental health, and are increasingly being employed not only at the national level, but at the regional and subnational levels as well. Recent examples include initiatives in Eastern and Southern Africa and an expansion of options under the Tokyo Emissions Trading Scheme (ETS). A New Climate Institute report evaluates carbon pricing options for the international shipping sector. A number of recent studies discuss various uses of revenues gained from implementing carbon pricing measures.
This Update looks at these and other initiatives and reports on carbon pricing and markets that were launched over the course of the past few months.
World Bank Report Analyzes 57 Carbon Pricing Initiatives
The World Bank has published the ‘State and Trends of Carbon Pricing 2019’ report, which provides an overview of existing and emerging carbon pricing instruments, and examines trends regarding their development and implementation and the ways in which they could advance long-term mitigation goals. The report looks at 57 carbon pricing initiatives, and finds that while carbon pricing policies continue making advances, coverage and price levels remain insufficient to meet the goals of the Paris Agreement on climate change, with only around 20% of global emissions covered by regional, national and subnational carbon pricing initiatives and less than 5% priced at a level consistent with achieving global temperature goals.
The report highlights new carbon pricing initiatives in the past year, mostly at the subnational level and in the Americas, including in Canadian provinces and territories, driven by Canada’s federal carbon pricing approach, and in Argentina, South Africa and Singapore. It also notes that Colombia, Mexico, the Netherlands, Senegal, Ukraine and Viet Nam are exploring new or complementary policies. In addition, for the first time, the 2019 report looks at the role of implicit carbon pricing, such as fuel taxes, to drive climate action. The report was launched in Singapore on 7 June 2019 at the Innovate4Climate conference, a World Bank Group event on climate finance, investment and markets.
UNFCCC Executive Secretary Highlights Critical Role of Carbon Pricing in Climate Action
During an EU high-level conference on international carbon markets in Brussels, Belgium, on 3 June, UNFCCC Executive Secretary Patricia Espinosa said that the right market signals can result in an increase in, and more accessibility to, renewable energy, and urged completion of negotiations on Paris Agreement Article 6 (cooperative mechanisms) at the 25th session of the Conference of the Parties (COP 25) to the UNFCCC in Santiago, Chile, in December. She said that any further delay would, inter alia: fragment carbon market action; mean that no central mechanism would be in place under the Paris Agreement to provide market access to Parties that lack the economic or regulatory capacity to access them independently; and erode confidence in the UN cooperative process.
Carbon Pricing Approaches in Eastern and Southern Africa
An East African Alliance on Carbon Markets and Climate Finance was launched during the Bonn Climate Change Conference in June 2019. The Alliance aims to: promote a common regional vision on carbon markets and climate finance; foster active and better coordinated participation of delegates from the region in UNFCCC negotiations on market mechanisms; and support readiness to implement Article 6. Several East African countries are already using market mechanisms to facilitate implementation of their Nationally Determined Contributions (NDCs) and aim to build on this experience for “accessing Article 6,” including transitioning Clean Development Mechanism (CDM) projects.
The Alliance is supported by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) Global Carbon Market Project in East Africa, with the UNFCCC Regional Collaboration Center Kampala. It was inspired by the West African Alliance on Carbon Markets and Climate Finance.
A related UN Environment Programme (UNEP) report titled, ‘Carbon Pricing Approaches in Eastern and Southern Africa,’ explores possibilities of and obstacles associated with implementing carbon pricing in Ethiopia, Kenya, Rwanda, Mauritius and Uganda, as well as at the regional level. Commissioned to determine the potential for implementing carbon pricing approaches by gathering information on the feasibility of, and readiness for, carbon pricing/carbon market mechanisms, with a focus on existing legal frameworks, the report emphasizes the need to:
- increase available financial resources to fund emission reduction projects;
- increase domestic and international supply and demand for emissions reduction units;
- enhance domestic legal frameworks to facilitate implementation and administration of carbon pricing mechanisms; and
- build capacity to develop and implement domestic and regional-level carbon pricing.
The study will help interested donors make decisions to support implementation of carbon pricing instruments, in line with the countries’ needs and priorities towards achieving their NDCs and the SDGs.
Subnational Efforts: Tokyo ETS Update
Tokyo has finalized regulations for the third compliance period of its ETS from 2020-2024, including an expansion of options to reduce compliance obligations through low-carbon energy use. During this period, entities covered by Tokyo’s ETS will be required to reduce emissions by 25-27% below 2000 levels, up from 15-17% during the 2015-2019 period. Tokyo’s ETS involves mandatory participation of approximately 1,300 large-size facilities, which account for around 40% of the city’s industrial and commercial sector emissions, and collectively had already reduced emissions by 27% by March 2018.
Tokyo’s experience shows that simultaneously pursuing aggressive sustainability policies while maintaining a healthy economy is possible, and that national governments may be able to follow suit. The Tokyo ETS is already aligned with national goals, and the city has helped develop a national supplement to the carbon reporting platform that captures approximately 80% of Japan’s emission sources. In addition, Tokyo has signed an agreement with Saitama Prefecture that enables trading credits and could be used as a model for other Japanese cities.
Report Outlines Carbon Pricing Options for Maritime Emissions
Carbon markets are also being discussed at the sectoral level. To assist with this, the New Climate Institute has published a report titled, ‘Carbon Pricing Options for International Maritime Emissions,’ that assesses three options for a market-based measure to address the climate impact of international shipping: an offsetting scheme; a maritime ETS; and a climate levy. It proposes four criteria for evaluating each of these measures, namely: effectiveness; ability to comply with the International Maritime Organization (IMO) principles of non-discrimination and no more favorable treatment; ability to consider impact on States and common but differentiated responsibilities and respective capabilities (CBDR-RC); and ability to minimize associated transaction costs and administrative burdens.
The report applies the criteria to the three options, and makes recommendations in order to contribute to IMO’s carbon pricing discussions. The report concludes that a climate levy would be the most suitable measure to help decarbonize the maritime sector as it would provide investors with more certainty, is dependent on prices and future trajectories, and could incentivize emission reductions in the sector. The paper notes that both an offsetting scheme and an ETS would result in higher transaction costs and administrative burdens.
World Bank Technical Paper Details Options for Carbon Revenue Use
The World Bank has published a paper providing guidance on ‘Using Carbon Revenues’ to help policymakers understand the implications, opportunities and challenges associated with different approaches to carbon revenue use. The paper notes that carbon pricing, which is an important source of government revenue, can help support climate change mitigation, industrial competitiveness and other economic and development objectives. The ways in which carbon revenues are used are also important for public and stakeholder acceptance of carbon pricing.
The report explains that carbon revenues can, inter alia: help developing countries finance development objectives; be used to address the potentially negative impacts of carbon pricing on domestic industry competitiveness, reducing the risk of carbon leakage; and compensate individuals, households or businesses through direct transfers to help them deal with the negative impacts of carbon pricing. While individual countries tend to implement a combination of spending initiatives, the report notes, funding for climate and development projects has been the most widely adopted option based on reported revenue uses.