Nations must accelerate their deployment of carbon pricing to ensure the world fends off global warming at least cost, the World Bank said on Sunday, publishing a series of principles designed to help countries impose policies.
The bank also published the full 92-page 2015 edition of its annual State and Trends Carbon Pricing report, after putting out the headline findings at the Carbon Expo conference in Barcelona in May.
Dubbed the FASTER principles and published together with the OECD and the IMF, the World Bank sees carbon pricing as an inevitable step in tackling climate change and hopes they will help countries accelerate deploying them.
“Carbon pricing is central to the quest for a cost-effective transition towards zero net emissions in the second half of the century. These principles will help governments to incorporate carbon pricing as a key part of their policy toolkit,” said Angel Gurría, Secretary-General of the OECD, in a statement.
FASTER stands for Fairness, Alignment of policies and objectives, Stability and predictability, Transparency, Efficiency and cost effectiveness and Reliability and environmental integrity.
“There is a growing sense of inevitability (about carbon pricing),” Rachel Kyte, the World Bank’s vice president and special envoy for climate change, told journalists in a conference call on Friday.
“(But) both ambition and coverage need to accelerate considerably … without ambition, prices will not get to the right level and goals will not be achieved,” added Kyte, who will leave her role and become the CEO of the UN-led Sustainable Energy for All initiative at the end of the year.
LOW PRICES
The State and Trends report found around 12% of the world’s annual GHG emissions are covered by carbon pricing schemes in around 40 countries and 23 sub-national jurisdictions, which together account for 23% of total global emissions.
It found that over 85% of covered emissions are priced below $10/tonne, which the report said was considerably below what economic models suggested was needed to meet the 2C temperature rise recommended by UN-backed scientists.
Kyte said that countries had tended to introduce carbon pricing with low prices but that these “might evolve over time”, citing the example of Chile’s carbon tax, which is due to be introduced at $5 per tonne in 2017.
DAY AFTER PARIS
Kyte noted that carbon pricing had up to now been deployed largely independently of UN climate negotiations, but that a global climate deal in Paris this December will spur more to take action regardless of whether the issue forms a major part of the negotiations at the conference.
“Carbon pricing is not explicitly in every INDC. On the Monday morning after Paris countries are going to have to get their prices right and put policies in that drive CO2 out of the economy,” she said.
“It’s difficult for us to see how you can implement an INDC without using some form of carbon pricing… but we are not asking people to work around a blind corner anymore,” Kyte added.
The FASTER principles follow the $127 million World Bank-led Partnership for Market Readiness, which offers guidance for 17 emerging economies on carbon pricing, though after four years has deployed minimal financial support.
Kyte said that a “powerful coalition” had been formed last year, when 73 countries, 11 sub-national jurisdictions responsible for over half of global emissions and GDP had joined with business to sign a declaration in support of carbon pricing. She said she expected members of this coalition to make further announcements before Paris.
INDUSTRIES PROTECTED
The State and Trends report features a chapter on carbon leakage risks, finding that to date carbon leakage has not materialised on any significant scale. It said the risk is limited to few exposed sectors and can be eliminated with smart policies, such as freely allocating carbon allowances to firms at risk.
Most emissions trading systems worldwide have used free allocation extensively to guard against the risk of carbon leakage, though the report notes “studies suggest that leakage prevention assistance has not always been necessary” and that the risk diminishes as more and more nations introducing carbon pricing.
This means the heavy use of freely allocated allowances to big emitting companies among emissions trading systems looks set to continue in the near term, pushing the cost of carbon onto the general public as utilities forced to buy the units are able to pass on that cost via higher power bills. This appears to conflict aspects of the World Bank’s first FASTER principle that carbon pricing be ‘fair’,
“Successful carbon pricing policies reflect the ‘polluter pays’ principle and contribute to distributing costs and benefits equitably, avoiding disproportionate burdens on vulnerable groups,” the principle states.
INTERNATIONAL CARBON TRADE
The World Bank’s focus is currently on encouraging national and sub-national governments to impose carbon pricing policies to cut emissions within their own territories, shifting from its drive in previous years for a global carbon trading regime making extensive use of the UN’s CDM and JI crediting mechanisms.
The CDM channelled over $300 billion to advancing economies such as Brazil and China but largely failed to attract cash to poorer nations and raised concerns about allowing industrialised countries to offset their greenhouse gas output without doing enough to reduce it.
Yet, the World Bank still has an eye on connecting national carbon pricing efforts globally, running its Networked Carbon Markets programme since 2013 to study how various mechanisms can be comparable and compatible, and exploring how ratings agencies could be deployed in allowing nations to sell emission reductions to other countries.
“We believe that there will be enormous savings achieved if you secure widespread cooperation and effort sharing between many, many, many more countries,” said Kyte.
The State and Trends report found that cooperation between countries, compared to domestic action alone, could lower the cost of keeping temperature rises to 2C, by up to $400 billion by 2030 and up to $2.2 trillion by 2050 in net annual flows of financial resources.
The current list of INDCs suggests there could be up to 1.9 billion tonnes of CO2 market demand over 2021-2030, yet most appear to be seeking to sell credits, denting the prospect of a transnational carbon market in the near term.
PROTECTION FOR POOR?
Both reports published Sunday reflect the Bank’s stance that carbon pricing is a critical but not exclusive policy in tackling climate change.
Kyte said the bank agreed with warnings by the Catholic Church, including Pope Francis’ recent encyclical on climate change, on the risks that financial speculation could hurt the world’s poor.
The encyclical specifically singled out carbon trading, warning that “the strategy of buying and selling carbon credits can lead to a new form of speculation which would not help reduce the emission of polluting gases worldwide.”
“It’s not about making a quick buck on the back of the poor in order to put a green invisibility cloak on yourself,” Kyte said. “The impact on the poor is taken care of in other measures.”
The FASTER principles document said: “Ensuring that carbon pricing schemes are fair requires policies and temporary protection measures that support a smooth transition for affected people.”
By Ben Garside – ben@carbon-pulse.com
