Discussions over the value of carbon are heating up as the EU releases the latest plans to cut its carbon dioxide emissions; the US announces plans for a carbon border tax; and the emissions trading scheme of the world’s worst polluter, China, becomes active.
Defining the price of carbon is a complex task, and not just because of the challenges in getting to a numeric value globally that would keep temperatures rising to less than 2°C since industrial times by 2030.
Not only does the exercise equate to making carbon an internationally tradable commodity with defined and specific standards — carbon needs to be treated like any other commodity, say coffee, where price varies depending on variations in types of coffee beans — but care must be taken to ensure the environmental efforts will not lead to economic (and therefore social) disadvantages for trade participants, particularly in voluntary, private sector-led markets.
Kelley Kizzier, vice-president of Environmental Defence Fund, a global non-profit organisation, summed up well the urgency of the problem at a recent event organised by the Institute of International Finance (IIF) discussing voluntary carbon markets. “The bathtub is full but the tap is still on,” she put simply.
People are selling for $2-3 a tonne something that could be worth $75 a tonne in three or four years
Markets and governments have long been looking at carbon pricing. The EU’s emissions trading scheme (ETS) — under which Brussels releases a certain number of carbon allowances across certain industries, which can then be traded — was created in 2005. It is the world’s first and largest, although others have followed. Some countries have also introduced carbon taxes, including within the EU, such as France and Sweden.
In total, there are currently 64 carbon pricing mechanisms around the world, either in operation or under consideration, according to the World Bank, which include both ETSs at national, subnational or regional level, and carbon taxation. Thanks to China’s new scheme, this body of measures covers around 22% of the world’s greenhouse gas emissions, with its ETS being the largest in terms of pollution covered, even if at launch these relate only to fossil power generation. Respondents to the Refinitiv Carbon Market Survey 2021 expect it to expand to the iron and steel sector next.
Private sector
In addition to government interventions, there are private-sector initiatives that aim to deal with the problem, as well as banker and investor scepticism over the authenticity of green assets. At the IIF event, Mark Carney, the UN special envoy for climate action and finance who is behind the Taskforce for Scaling Voluntary Carbon Markets (TSVCM), said that the issue of greenwashing is “precisely why this task force was set up”. The private sector initiative is chaired by Standard Chartered’s chief executive, Bill Winters.
The price of carbon varies greatly across all government-sponsored initiatives and is, on average, $3 per tonne of carbon dioxide — a far cry from the price range needed to meet the Paris Agreement’s 2°C target, which stands at $40-$80. In its State and Trends in Carbon Pricing 2021 report, the World Bank notes that only 3.76% of global emissions are priced at or above that range. Meeting the more ambitious 1.5°C target would require a price of $160 per tonne, according to research firm Wood Mackenzie.
So, at the moment, while there is tension because of the potential negative effect of addressing climate change at the expense of economic development, neither problem finds a satisfactory solution in existing initiatives.
Some in particular take issue at private sector markets. At the IIF event launching the TSVCM’s ‘second phase’ report, detailing new initiatives that include the creation of a governance body and work around standards, Ms Kizzier quipped: “We’re not going to get to 1.5°C voluntarily.” She would like stronger commitment from all actors.
Legal framework
The task force plans to standardise the legal framework underpinning credit issuance and trading contracts using a common language on aspects such as liability, ownership and delivery. It says that more than 430 members have signed up to it, representing 250 organisations.
Even with these plans, the environmental group Gold Standard has a list of concerns, including a “disproportionate focus on meeting wishes of the demand side, without due consideration for those supplying credits — particularly in developing countries”.
Pricing smaller suppliers — or whole countries — out of economic development remains a sticking point. “Finding that carbon price floor is going to be a challenge, in part, of course, because there also has to be fairness in the international system,” says Valerie Hickey, the World Bank’s practice manager for environment, natural resources and blue economy in Latin America and the Caribbean.
Without standards and supervision, this issue could become particularly acute in private carbon trades, where the weaker part of the transaction might “end up selling for pennies on the dollar”, she notes.
“Right now, people are selling for $2-3 a tonne something that could be worth $75 a tonne in three or four years. A lot of those sellers are small farmers. They’re indigenous peoples, local communities for whom that natural capital, that carbon commodity, is a path out of poverty,” she adds.
At the IIF event, Mandy Rambharos, general manager for a just energy transition at South Africa’s Eskom Holdings, noted how the state-owned energy utility would struggle with higher carbon prices. While welcomed in terms of the world’s global environmental health, negative and abrupt incentives to fossil fuels would inevitably have an impact on the country’s economy. South Africa does not have an ETS, but has an explicit carbon tax that only equates to around $5–7 per tonne, says Ms Rambharos. Still, its existence helps to change corporate behaviour as it comes with corporate filing requirements.
Carbon tax
The idea of a carbon border tax, however, is far more controversial. While both the EU and US support the measure, India’s environment minister, Prakash Javadekar, said that “it is the most regressive proposal [with] no principle of equity adhered to”, during a Bloomberg conference in late June.
“This is unfair taxation, nobody will accept it,” he said, adding: “We are paying; we are suffering from climate change that was caused by the reckless emissions for hundreds of years by the developed world.”
On July 14, the US announced plans for a tax on imports from carbon-polluting countries to help pay for its $3.5tn government funding package. On the same day, the EU released its ‘Fit for 55’ plans, detailing a similar proposal, albeit with some opposition within the bloc.
The new plans aim to meet Brussels’s goal to reduce average greenhouse gas emissions by 55% by 2030 and become carbon neutral by 2050. Fairness is raised as an issue here too, with poorer European countries feeling disadvantaged, as reported by the Financial Times. In contention are rising costs for business and consumers, and the extension of the EU ETS to certain industries for the first time. The bloc’s carbon-pricing scheme will now capture the car industry, along with the emissions related to the heating of buildings. Parts of the shipping industry will be captured by the wider ETS: intra-EU journeys and 50% of journeys outside the bloc from 2023. There are also plans for a fuel tax for the aviation and maritime industries, and tougher emission rules for new automotive vehicles.
The carbon border adjustment mechanism may prove a challenging component of the plan too. It taxes imports of steel, cement, aluminium and fertiliser from outside of the bloc, while Europe’s carbon prices soar. The measure would keep local production competitive in comparison with producers operating in markets with a lower or inexistent carbon price, but it does not apply to all and any imports, raising concerns over discrimination. This would mean it fails to comply with World Trade Organisation (WTO) rules — though some invoke environmental exceptions to those rules to justify the measure.
Making carbon a commodity requires clear standards, rules and a forum where disputes can be adjudicated and appealed against, Ms Hickey notes. She agrees that the WTO should play an important role in this space while the World Bank is working with governments on their carbon-pricing strategies, and adds that all initiatives — public and private — are needed. However, she warns: “Carbon pricing alone isn’t the answer to decarbonisation.”
