Currently, about 40 national jurisdictions and over
20 cities, states, and regions—representing almost a
quarter of global greenhouse gas (GHG) emissions—are
putting a price on carbon (Figure 1). Together,carbon
pricing instruments cover about half of the emissions in
these jurisdictions, which translates to about 7 gigatons of
carbon dioxide equivalent (GtCO2e) or about 12 percent
of global emissions (see Figure 2).
To date, China and the United States are the two
countries with the largest volume of emissions covered
by carbon pricing instruments. In China carbon pricing
instruments cover 1 GtCO2e, while in the United
States they cover 0.5 GtCO2e. China has announced its
intention to move to a national emissions trading system
(ETS). It currently has seven pilot ETSs, which combined
form the largest national carbon pricing initiative in
the world in terms of volume. The European Union
Emissions Trading System (EU ETS), which covers
2 GtCO2e of emissions, remains the single largest
international carbon pricing instrument.
So far this year, the Republic of Korea launched an ETS, and California and Québec’s cap-and-trade programs expanded their GHG emissions coverage from about 35 to 85 percent by including transport fuel.
Also, Ontario announced its intention to implement
an ETS linked to California and Québec’s programs. A
major structural reform in the EU ETS was approved
for implementation starting in 2019, and a proposal
to revise the EU ETS after 2020 has been put forward.
These changes should make the EU ETS more resilient
to sudden changes in macroeconomic conditions and
help ensure that the EU ETS enables cost-effective
emission reductions in the decade to come.
The advances in 2015 follow on the heels of 2014
milestones such as the implementation of two new
subnational ETSs in Hubei and Chongqing (both
Chinese jurisdictions), the implementation of carbon
taxes in France and Mexico, and the adoption of new
tax legislation in Chile. The year has also seen more
companies using an internal price on carbon.
Carbon pricing is increasingly being used internally
by firms as a tool to analyze business and investment
strategy. Some of these carbon prices are substantially
higher than current price levels in mandatory carbon
pricing instruments. Internal carbon pricing is part of
a risk management strategy to evaluate the current or
potential impact of a mandated carbon price on business
operations. It is also used as a means to identify and
value cost savings and revenue opportunities in low carbon investments.
In a world of fragmented carbon pricing instruments,
the potential impact of carbon pricing on the international
competitiveness of some domestic industrial sectors has
been a concern. The risk of carbon leakage is real as long
as carbon price signals are strong and the stringency of
climate policies differs significantly across jurisdictions.
However, the report finds, based on available
research, that carbon leakage—the phenomenon of
companies moving their production and/or redirecting
their investments to other jurisdictions where emissions
costs are lower, thereby increasing emissions there—has
not materialized on a significant scale. This risk tends to
only affect a limited number of exposed sectors, namely
those that are both emissions- and trade intensive. This
risk can be effectively managed through policy design
components, such as free allocations, exemptions,
rebates and border adjustment measures, as well as
specific complementary measures, for example, financial
assistance.
The risk of carbon leakage declines as more countries
take concrete actions to prevent climate change.
International cooperation through carbon pricing
instruments and climate finance can help redress the
existing asymmetry in carbon pricing signals, reduce
concerns about their impact on competitiveness, and
eliminate the need for protection of firms. Under these
circumstances, carbon prices can be used to enhance
the performance of economies—specifically benefiting
innovative, low-carbon firms, and promoting the
technical upgrade or exit of the least efficient firms in
emissions-intensive industries. This would improve the
overall efficiency of the economy.
In addition to reducing the risk of carbon leakage,
cooperation between countries can significantly reduce
the overall cost of achieving a 2°C climate stabilization
goal compared to domestic actions alone, as countries
have more flexibility in choosing who undertakes
emission reductions, and who pays for them. Moreover,
such cooperation could drive low-carbon growth in
lower-income countries, some of which might lack the
resources to modernize their economies, create jobs in
low-carbon sectors, or reduce poverty in a sustainable
manner. Through international cooperation, the global
costs associated with a given emission reduction target
can be lowered or a larger mitigation target can be
achieved at a given cost, and development gaps can be
narrowed.
According to estimates from economic models,
financial transfers through cooperation could reach
up to US$100–400 billion annually by 2030, possibly
increasing to over $2 trillion dollars by 2050. The size
of the transfers will be beyond the level of public sector
spending, and will need to be channeled through a blend
of instruments. These include carbon pricing instruments
such as ETSs, carbon taxes, offsets and a combination
thereof and linkages between them, as well as innovative
hybrid instruments, such as variations of results-based
climate finance. Climate finance and carbon pricing
instruments will be essential in leveraging these financial
transfers and enabling cooperation to mitigate climate
change.