Comment: why it’s time for a global price on carbon

Writing for RTCC, former Japanese climate change Ambassador Yoshi Nishimura explains how trouble with Europe’s cornerstone climate policy proves that a global carbon market is the best route to limiting warming to 2°C.

The current problems created by the European Parliament’s decision not to back reforms of the EU carbon market reveal a number of key issues on carbon pricing.

First, in the globalized world, firms participating in a closed-circuit carbon market like the EU ETS run a substantial risk of losing out to free-riding foreign competitors.

Carbon pricing inherently requires being a global system if the institution is to provide firms with a level playing field. If a carbon price goes up globally without discrimination, people will shift to a low-carbon lifestyle and won’t complain about different “pollution prices”.

Pricing carbon must also be realised in the market devoid of manipulations on the supply and demand of allowances. Even containing price fluctuations within a narrow band is heresy in the market economy.

Mutsuyoshi Nishimura is Japan’s former chief climate negotiator

And pricing of carbon must cover the whole economy, not just emitting firms, so that it delivers its full force in pushing investment and consumption towards a low-or zero-carbon future.

Finally, pricing of carbon must be instrumental in achieving the global temperature target to limit warming to 2°C. No major climate effort should be launched without regard to this ultimate global objective.

No doubt the EU policy makers are working towards realizing a global ETS eventually, but the current European design remains way behind that. No wonder it has long been trouble prone.

Whatever surgery might be administered after the April 16 decision against backloading, woes will come back if it does not tackle the above points.

carbon map for web 466

The pink circles represent how much fossil fuel can be burned to stay within 2C of warming. The blue is potential reserves. Copyright: Carbon Tracker Initiative and Grantham Research Institute, LSE, 2013 CLICK TO EXPAND

Polluter pays

So what is the proper design that meets all above considerations?

As experts agree that there is logic to having a global price for CO2 emissions, here is one solution where such logic is put into practice in a global carbon market.

First, governments globally must put a lid on global emissions so as to realise the 2°C temperature target. This means capping emissions at a level that simply won’t allow the global greenhouse gas output to go beyond what science says is needed to achieve such a target. [See the Carbon Tracker Initiative and IEA estimates]

This limited amount of global emissions is the carbon budget for 2°C. Since this is a new “global commons” it will be collectively owned by an assembly of governments. The assembly will sell them as allowances in the market.

Fossil fuel companies that extract or import energy resources must buy allowances and pass the cost on to the downstream economy so that emitting firms and consumers of carbon products bear ultimately the cost of using limited global commons.

This would mean the 2°C will be achieved and a universal market price created, a market price that can be integrated into the whole world economy and a level playing field assured. No manipulation of prices.

As the carbon price goes up globally, all firms and consumers of all countries shift from high carbon to low carbon investment and consumption.

When thre EU voted against reforms to its regional carbon market, it highlighted the shortfall of such schemes, says Nishimura (Source: Flickr/EuroParliament)

Revenues

Furthermore, by instituting a mechanism to channel those sales revenues of allowances to help all countries in need, the global carbon market can give rise to a major source of climate financing that is decoupled from public coffers.

This is the only possible way for carbon pricing to work without causing the troubles the EU ETS is embroiled with today.

This global carbon market proposal will allow all fossil fuels including coal to be burnt as long as it is price competitive. No consideration other than the carbon price should come into play since the overall cap is set to achieve the 2°C.

Linking various ETS platforms is only a half solution…as it does in fact reduce costs but fails to achieve the temperature target. Those individual systems are built on the basis of ambition-driven national pledges to reduce emissions reductions (QELROs) and not on the basis of the carbon budget for the specific 2°C target.

Tortuous climate negotiations in year after year shows us a “failure of ambition”. Aggregated ambitions of governments shall never achieve the 2°C target, not even 3°C. Our failing efforts will surely bring us to a furnace of 5°C of warming.

Europe should not give up its crucial leadership just because of the current woes.

The merit and value of carbon pricing is not called into question. The design is.

Europe can continue spearheading renewed leadership by re-designing carbon pricing in ways to stop warming before we pass our temperature target. It can do it cost-effectively and substantially reduce poverty, not just energy poverty but poverty writ large.

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