Two-thirds of the Paris Agreement signatories are using or considering carbon pricing schemes to achieve their emission reduction targets. The EU, China, and the USA should lead a worldwide “carbon pricing coalition” for the period 2030-2050, argue Jyrki Katainen and Karl-Henrik Sundström.
Jyrki Katainen is the vice-chair of Climate Leadership Coalition. He is a former vice-president of the European Commission and former prime minister of Finland.
Karl-Henrik Sundström is chair of Climate Leadership Coalition. He is the former CEO of Stora Enso, a Finnish manufacturer of pulp, paper and other forest products.
Climate change is accelerating. Several countries have set climate targets but the investment level for clean solutions is too low. Only a fraction of greenhouse gases has an effective price. If we do not fix this soon, investments will not be made in the volume needed.
We need to have a strong coalition to scale up the carbon price, and this coalition needs to include the EU, China, and the USA. The Paris Agreement set the scene and it is now time to act.
Many parties to the Paris Agreement have announced climate neutrality targets – China for 2060, the EU, Japan, South Korea, Canada, the UK, and New Zealand for 2050, Sweden for 2045 and Finland for 2035. The President-elect Joe Biden and his transition team are aiming for the US to achieve net-zero emissions no later than 2050.
This is all good news, but even with this taken into account, the world is still heading towards a global temperature of above 2°C. The average global temperature has risen by about 1.1°C and the last five years have been the five hottest.
This year is likely to follow suit. The annual global average carbon dioxide grew to 410 parts per million in 2019 and has continued to rise in 2020 despite COVID-19 lockdowns.
In 2019, the additional energy supply by renewables and nuclear energy was bigger than the additional supply by fossil energy. A year earlier, fossil energy still dominated with over double the share of renewables and nuclear energy.
This is promising, but the speed of change is still too slow. It is estimated that the level of ambition needs to be roughly tripled to align with the 2°C limit and must be increased around fivefold to align with the 1.5°C limit.
The best way to ramp up non-CO2-emitting investments and to ramp down emitting ones would be to set an effective price for greenhouse gases. Today, we are still far away from this. Only about 22% of global greenhouse gas emissions are covered by carbon pricing initiatives, and less than 5% of GHG emissions are within the recommended range of USD 40–80/tCO2.
About half of covered emissions are priced at less than USD 10/tCO2e, and the global average carbon price is USD 2/tCO2.
Last year, governments applying carbon pricing raised about USD 45 billion revenues, whereas direct fossil subsidies were USD 478 billion. The indirect costs of climate change are above USD 5 trillion per year. This means that we “penalise” GHG emissions by one monetary unit, support fossil fuels with ten units and do not care about costs that are a hundred times bigger.
During the last five years, the coverage of carbon pricing has increased by less than two percentage points per annum. If we do not have a step change for this, we will not get the investments from the private sector that are required in order to mitigate climate change on time.
With public money, we could ramp up the investments to some extent, but in the EU, for example, our view is that the vast majority of investments – close to or above 80% – need to come directly from the private sector.
The Climate Leadership Coalition has a proposal: we propose that the EU, China, and the USA should drive carbon price development, supported by the interested parties. Two-thirds of Paris Agreement signatories are using or considering the use of carbon pricing to achieve their emission reduction targets.
This ‘carbon pricing coalition’ should start to plan the carbon pricing architecture for the period 2030-2050. If private investors would trust that CO2-prices will be at an adequate level between 2030-2050, this would start to have major effects even today and many new projects would be initiated well before 2030.
The cap and trade concept would be a natural backbone for the carbon pricing architecture. The “cap” should be based on the cumulative net greenhouse gas emissions that can still be emitted or need to be removed from the atmosphere within the present century. To begin with, a GHG budget should be defined for 2020-2050 and later for 2050-2100.
California has already demonstrated how cap and trade can cover over 80% of GHG emissions and how the proceeds from cap and trade are used to support the transformation with a significant share directed at low income and disadvantaged communities. The EU is also considering expanding its emissions trading, as is China.
We congratulate the EU, China, Japan, many other countries and the President-elect Biden and his transition team for setting the targets for climate neutrality. If, however, the carbon pricing schemes do not support the targets, investments will not come from the private sector in the required volume.
We are only one investment cycle away from 2030 and this is likely to be the last chance to get the policies right.