Strong Paris deal needed to make carbon pricing work – analysts

Carbon markets are only as good as the political goals that underpin them, say analysts in response to New York pledge

Carbon pricing makes the polluter pay - but how much is a political matter (Pic: Alan Stark/Flickr)

Carbon pricing makes the polluter pay – but how much is a political matter
(Pic: Alan Stark/Flickr)

By Megan Darby

One of the main outcomes of this week’s climate change events in New York was a declaration of support for carbon pricing.

More than 1,000 businesses and investors backed a World Bank campaign for taxes and emissions tradings systems to make climate polluters pay.

National and regional governments representing around half the world’s population, wealth and greenhouse gas emissions also support the movement. China, Russia and Indonesia are some of the big emitters on that list.

But carbon pricing initiatives will not work without more ambitious political targets to cut emissions, analysts from Thomson Reuters’ Point Carbon team warn.

At the World Bank’s last count, 39 national and 23 sub-national jurisdictions had implemented or were developing carbon pricing systems. The largest scale of these is the EU emissions trading system.

The existing market-based systems are delivering little in the way of emissions cuts, says Point Carbon senior analyst Hege Fjellheim.

“Nearly all domestic or regional carbon markets are currently oversupplied – mainly due to the financial recession and lack of political ambition,” she says.

“Oversupply has pushed allowance prices to low levels across the world. None of the carbon markets are generating much abatement in the short term and it is currently questionable if they send the right signal for long-term investments.”

Market v tax

Proponents of “cap and trade” systems say they spread the burden of decarbonisation fairly across all emitters. The ability to trade allowances means emissions cuts will be made where it is cheapest to do so, limiting the cost to the end consumer.

The level of the “cap”, which ultimately determines the carbon savings that will be achieved, remains a political decision. If it is too generous, the carbon price will be too low to spur investment in low carbon technology.

Negotiators hope to strike a global climate deal in Paris next year, that will set the level of ambition for emissions reduction worldwide.

Fjellheim says: “The ‘price on carbon’ initiative confirms increasing support for use of market instruments to reduce emissions. But how effective these markets will be depends on the reduction targets in the Paris agreement.”

The other option, adopted by France, Mexico and Chile, is to introduce a carbon tax.

The International Monetary Fund has argued efficient taxation of fossil fuels could benefit economies now, irrespective of the agreement reached in Paris.

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