Carbon markets grow, but global price is out of reach

A global carbon price is out of reach, but governments meeting in Paris can promote linking of national carbon markets

Smokestacks at a power plant in Arizona. The power sector has the most potential to cut carbon (Flickr/ Nick Humphries)

Smokestacks at a power plant in Arizona. The power sector has the most potential to cut carbon (Flickr/ Nick Humphries)


By Gerard Wynn in Paris

Governments are gathered in Paris to reach a new global climate agreement, expected on Friday. One way they can take action is by giving a nudge to carbon pricing initiatives around the world.

Carbon pricing forces polluters to bear the cost of burning fossil fuels, through a price per tonne of carbon dioxide emissions. Such pricing can be applied through a carbon tax or emissions trading scheme.

In theory, carbon pricing is a transparent, technology-neutral tool, which incentivises polluters to cut emissions more cheaply. In practice, it has seen hard times, since the global financial crisis drove a European carbon market to the edge of irrelevance, by creating a glut of emissions allowances, and Australia reversed its plans for a national market.

The pendulum has now swung the other way, as China plans to launch a national carbon market in 2017, and planned or new national schemes in Mexico, Chile and South Korea, and growing links between sub-national markets for example in California, Quebec and other Canadian provinces.

A global carbon price is almost certainly out of reach. The features that make carbon pricing more efficient – raising energy prices economy-wide – make it a matter of just too much political interest and industry resistance.

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But countries and groups of countries can introduce carbon markets or taxes, where the European Union is proof.

And governments gathered in Paris to reach a new global climate agreement, expected on Friday, can give a gentle prod, to promote planned and existing schemes, encourage these to link and learn from each other, under the new international carbon market jargon of “ITMOs” and “SDM”.

In Paris, some 186 countries have agreed targets to slow growth in or cut greenhouse gas emissions. Some of these efforts include formal caps on emissions, whether across entire economies, or individual sectors or polluters. Governments can agree a wording in the final agreement which supports trading carbon credits between formal caps, called international transferred mitigation outcomes (ITMOs). Such “cooperative mechanism” could favour linking of regional carbon markets, from the bottom up, creating a “club of carbon markets”, as proposed by the U.S. Environmental Defense Fund.

Countries might also favour a sustainable development mechanism (SDM), which allowed rich countries to meet emissions reduction targets by paying for emissions cuts in poorer countries which have no formal caps. But such emissions cuts may be harder to calculate and verify.

Whatever the outcome in Paris, there is no doubt that carbon markets have space to expand and link, whether that is under a Paris agreement, or in bilateral arrangements.

Meanwhile, there is work to do. The European Union must reform its market, to permanently remove a glut of allowances, and devise a new, more efficient to overcome competitiveness fears, where it might learn from California.

Countries can remove fossil fuel subsidies, which incentivise increased emissions more than carbon markets penalise them.

And multiple green policies can cancel each other out, as explained by Harvard University’s Robert Stavins, who points out that wind power subsidies within a cap and trade scheme will boost wind, but reduce demand for and price of carbon allowances, easing pressure on polluters.

Perhaps most encouraging in Paris has been new support for clean energy research and development (R&D), which could promote innovation, and cut the costs of emissions abatement, thus reducing the level of carbon price needed.

Perhaps most concerning, working in the opposite direction, are plunging fossil fuel prices, which will increase the competitiveness of coal, oil and gas, thus increasing the carbon prices needed to drive abatement.

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