Implementing Effective Carbon Pricing

Abstract

Support for carbon pricing is growing around the world. Governments, businesses and investors are recognising that nationally-appropriate taxes and trading schemes, as part of a well-aligned package of policies for low-carbon change, can reduce greenhouse gas (GHG) emissions without harming the economy. Strong, predictable and rising carbon prices send an important signal to markets, helping to align expectations on the direction of change, thereby steering consumption choices and the type of investments made in infrastructure and innovation. They also raise fiscal revenues that can be put to productive uses. Around 40 national jurisdictions and over 20 cities, states and regions, have adopted or are planning explicit carbon prices, covering about 12% of global GHG emissions. The number of carbon pricing instruments implemented or scheduled has almost doubled from 20 to 38 since 2012. Over 1000 major companies and investors have endorsed carbon pricing, and around 450 now use an internal carbon price (US$40/t CO2 or higher for some major oil companies) to guide investment decisions, up from 150 companies in 2014. While this momentum is encouraging, current price levels and coverage of emissions are still very low. Carbon prices vary significantly, from less than US$1 to US$130 per tonne of CO2e, with around 85% of emissions priced at less than US$10 per tonne. This is considerably lower than the price that economic models suggest is needed to meet the 2°C global warming goal adopted by the international community. International cooperation on carbon pricing and subsidy reform, in particular between countries of the G20, and with the support of the World Bank, the Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF), can help mitigate concerns holding back faster progress. Cooperation can help to overcome concerns about competitiveness impacts from unilateral policy action, improve knowledge-sharing and transparency, provide opportunities to link emission trading schemes, and reduce the costs of action.