As people around the world gather to celebrate Earth Day, world leaders have convened New York this morning to sign a landmark agreement aimed at slashing greenhouse gas emissions and keeping global climate change in check. And as discussions intensify around the agreement’s likelihood of success, a growing number of experts are arguing that carbon pricing — a controversial economic method intended to cut down on emissions — may be the key.
On Thursday, a group of world leaders came forward with an ambitious new vision statement calling for the world to double the extent of global emissions covered under carbon pricing schemes by the year 2020 — and quadruple it within the next decade.
The group, known as the Carbon Pricing Panel, was convened by World Bank Group President Jim Yong Kim and International Monetary Fund Managing Director Christine Lagarde. It includes six heads of state — the leaders of Ethiopia, Chile, Canada, France, Germany and Mexico — as well as the governor of California, the mayor of Rio de Janeiro and the secretary general of the UN’s Organization for Economic Cooperation and Development (OECD).
The idea of carbon pricing is simple enough: By placing a monetary charge on carbon emissions, we can create an incentive to reduce them. The concept can take two major forms. Cap-and-trade schemes place a limit on the total amount of greenhouse gas emissions permitted and allow industries with low emissions to sell their leftover allowances to industries with higher emissions. In this case, the price becomes established by the market. A carbon tax, on the other hand, places a fixed price or tax rate on carbon emissions, which serves as an incentive to keep emissions low.
With the carbon tax approach, “you fix the price, and then you let the market respond to that price by adopting new technologies and changes in behavior,” said David Victor, an expert on global policy and strategy at the University of California San Diego. “The two systems share in common the idea that government by itself can’t figure out the best way to cut emissions so it should be left up to the market.”
The idea of carbon pricing has long been touted by economists as an effective tool for lowering emissions and combating climate change, and it’s increasingly gaining the support of business and political leaders as well. The Carbon Pricing Leadership Coalition — an advocacy and leadership group launched during the Paris negotiations in December — consists of more than 20 national governments and dozens of private sector partners, including several notable oil and gas companies, such as Shell and BP.
Still, the idea has been slow to catch on with many political leaders — particularly in the U.S., where talk of carbon taxes has been highly controversial. California remains the only state with any pricing scheme in effect (a cap-and-trade system), although groups in several others, such as Washington and Massachusetts, are working to implement carbon taxes.
Currently, only about 12 percent of global emissions are already covered by carbon pricing schemes. The new goal would expand this coverage to 25 percent by 2020 and, most ambitiously, 50 percent within the next decade.
Most of the current 12 percent comes from just a few places, Victor said — mainly the emissions trading schemes in the European Union and California, the two largest such programs in the world. Other programs already in existence include a trading scheme in Quebec and a carbon tax in British Columbia. But more may be on the way.
According to The World Bank, approximately 90 countries included proposals for carbon pricing schemes in the individual commitments they’ve made as part of the Paris Agreement. The most critical of these, if we’re to make the 25 percent coverage goal by 2020, is that of China, Victor said. China has already launched a pilot emissions trading system in several provinces and is planning to implement a national program next year.
“That action alone gets you potentially 20 percent or so of world emissions,” Victor said.
The importance of China’s program was also noted in a new report from the Environmental Defense Fund and the International Emissions Trading Association, released alongside the vision statement on Thursday. The report explores the steps that would be necessary in order to meet the new goals, and concludes that they are possible — but only if existing carbon pricing schemes are maintained, China goes through with its proposed program and additional global action is taken.
Notably, the report recommends that emissions from civil aviation be placed under a pricing scheme and points out the need for other high-emitting countries — such as the U.S. — to implement or significantly scale up their own national programs.
Even if this happens, Victor pointed out that most of the existing or planned programs in the world today allow heavy regulations — for example, on automobile emissions — to do most of the work, rather than letting the market take care of itself. This is true in the European Union and in California, he said, and is likely done by design in order to prevent the market from driving prices too high and losing public support.
“What we don’t see anywhere in the world today at large scale is actual real carbon pricing,” he said. “They look like carbon pricing on the surface and you look behind the facade and you see most of the work is getting done by regulation.”
Actually allowing the markets to work by themselves would be a “real accomplishment” some day, he said. But for now, the biggest challenge is simply getting more governments on board with any pricing scheme at all.
“The 50 percent goal by 2030 is going to be much harder because it involves getting lots of other countries to adopt carbon pricing systems that aren’t even thinking about it right now,” Victor said.
But making it happen may be a crucial component of the Paris Agreement’s success.
“There is a growing sense of inevitability about putting a price on carbon pollution,” said World Bank Group President Jim Yong Kim in a statement accompanying the Carbon Pricing Panel’s goals. “In order to deliver on the promises of the historic Paris climate agreement, a price on carbon pollution will be essential to help cut emissions and drive investments into innovation and cleaner technologies.”