Carbon pricing: a challenge for the future

Emissions trading systems around the world. [screenshot/World Bank]

This article is part of our special report Climate change: The road to Paris.

SPECIAL REPORT: The concept of carbon pricing as a tool to combat climate change is broadly accepted by the international community. But at what price, and under what conditions? As the world looks for ways to cut CO2 emissions, many questions remain unanswered. EURACTIV France reports.

At the World Economic Forum in Davos last week, François Hollande, Ban Ki-moon and Jim Yong Kim, the president of the World Bank, all stressed the importance of placing a price on carbon.

Many of the methods used to tackle climate change have evolved in recent years, even though a growing consensus has emerged around the pricing of greenhouse gas emissions.

But opinion is divided over how pricing systems should be implemented. Emilie Alberola, an economist in charge of carbon market research for CDC Climat, said “A real consensus emerged over the price of carbon at the UN summit in New-York in September, but there were no calls to establish carbon markets”.

The difficult beginnings of the first carbon market

The reputation of carbon markets has suffered in recent years. Headlines were made at the COP 20 in Lima, when indigenous tribes appealed to the United Nations conference not to develop carbon markets for fear that they would encourage land speculation. In Europe a lack of credibility is the major issue.

The European emissions trading system (ETS) has weathered many storms, including massive VAT fraud, quota thefts, various scams like Ponzi schemes, and criticism from environmentalists. It is also in direct competition with other EU energy policies, such as the large-scale subsidising of renewable energies. Renewables are responsible for over half the EU’s reduction of CO2 emissions since 2008.

Though the aim of the ETS is clearly being achieved, with greenhouse gas emissions falling, the precise achievements of the carbon market are harder to pin down.

>> Read: Economic crisis not the main cause of the EU’s CO2 drop, researchers say

Despite this lack of clarity, the carbon market has its supporters.

Emilie Alberola said, “The carbon market has not reached the end of its shelf-life. It represents a way of defining an explicit [carbon] price, whether in the form of a quota or a tax. The alternative is to bring about an implicit price through the introduction of new standards. In any case, we must recognise that neither system is totally efficient”.

Majority support

The concept of carbon markets enjoys the broad support of the international community. Its increasing introduction by governments around the world illustrates their political acceptability as a method of taxation. China has established no fewer than six carbon markets, South Korea has recently launched its first, and the United States has two major markets, one on the east coast and one on the west.

Certain European countries, including the United Kingdom and Sweden, believe in carbon pricing so thoroughly that they have implemented parallel carbon taxes.

EU reform under way

Juliette de Grandpré, a climate and energy expert at WWF Germany, said “Reform takes time, it’s true. But the latest developments are encouraging. In the European Parliament even the Industry, Research and Energy (ITRE) Committee is not opposed to the scheduled reduction of the quotas on offer”.

On 22 January, the ITRE Committee failed to adopt a common position on carbon market reform. German European People’s Party members voted with the Greens and the Socialists and Democrats to speed up progress on the newly proposed Market Stability Reserve. The reserve would see carbon quotas withdrawn from the market in order to increase the price of CO2 emissions.

The European Parliament Environment (ENVI) Committee will decide in February whether to begin withdrawing quotas from the market in 2017, four years ahead of the current schedule.

The future model of carbon quota allocation will be more delicately managed than the current model. Since becoming operational in 2005, the ETS has systematically over-allocated carbon quotas.

Private sector to the rescue?

Private initiatives are also part of the range of tools being considered for the job of fixing a price on carbon emissions. Emilie Alberola said, “It is possible that businesses will address the issue themselves[…] those that bet on and invest in a decarbonised model could see returns in the long term”.

In the absence of clear regulation, this is a bet that some companies are already willing to take. 73 states and 1,000 companies (including Unilever and Philips) are already participating in a scheme organised by the World Bank, that aims to put a firm price on the carbon they emit.

With a turnover of some €90 billion in 2010, the EU's Emissions Trading System is the world's largest carbon market. About 80% of it is traded in futures markets and 20% in spot markets.

The ETS aims to encourage companies to invest in low-polluting technologies by allocating or selling them allowances to cover their annual emissions. The most efficient companies can then sell unused allowances or bank them.

The system had been heavily criticised for containing a number of major flaws, but is nonetheless being imitated around the world. Thailand and Vietnam have recently unveiled their own ETS projects. China has launched several ETS projects. Mexico and Taiwan are also planning to introduce their own carbon markets.

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