What is carbon-pricing and why do we need it?

A dangerously warming planet is not only an environmental challenge, it’s a fundamental threat to efforts to end poverty and could put prosperity out of reach of millions of people. If you need further evidence, read the recent Fifth Assessment Report from the Intergovernmental Panel on Climate Change.

So what do we do about it? There is general agreement among economists that a price on carbon is part of an effective strategy to avert dangerous climate change. A strong price signal directs finance away from fossil fuels and towards a suite of cleaner, more efficient alternatives.

Putting a price on carbon means taxing carbon, building an emissions-trading system, or putting in place other measures – in energy policy for example. To be effective, the price must be robust.

This logic is not lost on governments and companies. Despite recent events in Australia, momentum is clearly building around the globe. Consider these facts:

• A total of eight new carbon markets opened in 2013 and another launched early this year. With these additions, the world’s greenhouse gas emissions trading schemes are valued at about $30 billion.
• China is now home to seven local carbon markets covering the equivalent of 1,115 million metric tonnes of carbon-dioxide equivalent (MtCO2e), making them the second-largest group after the EU emissions trading system, with its 2,039 MtCO2e cap in 2013.
• The United States is also home to a number of leading carbon-pricing efforts. California already manages an emissions trading programme. If you add Oregon and Washington, which have announced plans to price carbon, together with the nine north-eastern states in the Regional Greenhouse Gas Initiative, carbon pricing will operate in states with nearly one-third of the US population.
• New carbon taxes were introduced in Mexico and France in 2013. South Africa is planning to implement a carbon tax, starting in 2016.
• Many large global companies already use internal carbon pricing as a tool to “future-proof” their business models, managing risks and opportunities in current operations and future profitability.

The best news is that carbon-pricing systems are delivering economic benefits while they address climate change. Corporate and government leaders recognize that the value of low-carbon, sustainable growth goes well beyond protecting the climate that their supply chains rely on. As the recent World Bank Group report, Adding Up the Benefits, showed, the advantages of climate-smart development extend to healthier employees and customers, more jobs and increased economic growth – as well as protecting the climate.

The Canadian province of British Columbia was an early mover, with the creation of a carbon tax in 2008. From 2008 to 2010, British Columbia’s per-capita greenhouse gas emissions declined by 9.9%, outpacing the rest of Canada by more than 5%. At the same time, the programme returned C$300 million more in tax cuts than it received in carbon-tax revenue, resulting in a net benefit for taxpayers. The province’s personal and corporate income tax rates are now the lowest in Canada due to the carbon tax shift, while its GDP outperformed the rest of the country. Ireland has a similar story. After three years, its carbon tax had raised nearly 1 billion euros ($1.3 billion), including 400 million euros in 2012. The carbon tax revenue helped the Irish government narrow a budget gap that year and avoid raising income taxes.

The New York Times recently profiled California’s emissions-trading programme, and pointed out that by the end of the decade the state is expected to collect about $5 billion a year in permit fees, with the bulk of the money being recycled into clean-energy projects.

There is also growing evidence that corporate disclosure on climate change correlates well with strong financial performance. Several corporate leaders – some working globally with carbon prices that vary from country to country – actively manage their risks by using an internal “shadow” carbon price to help plan and make smart investments for the future. Some of the largest US utilities, including American Electric Power and Exelon, have said that they price carbon internally to avoid stranding assets, such as large fossil-fuel-fired power plants, and to reassure investors. Other less carbon-intensive businesses use internal prices to achieve corporate sustainability goals; TD Bank aims to go carbon-neutral; Walt Disney Corporation uses internal pricing to encourage employee innovation while delivering profits. CDP found that the disclosure of climate-change risk and mitigation strategies is linked to higher performance on three key financial metrics, which reflect overall corporate quality: return on equity, cash flow stability and dividend growth.

Clearly there is momentum, and this is good news. However, more needs to be done. To raise political and corporate ambition, the World Bank Group is working with partners – including the United Nations Global Compact, CDP, the Prince of Wales Corporate Leaders Group, the International Emissions Trading Association, the World Business Council for Sustainable Development, and the We Mean Business coalition – to highlight leadership and encourage governments and companies to support carbon pricing ahead of the United Nations Secretary-General’s Climate Summit in September.Currently, more than 200 companies have registered their support, including Ernst & Young, GDF Suez, Statkraft and the French pension fund ERAFP, and more than 20 countries have expressed support, including Indonesia, Germany, Norway and Côte d’Ivoire. We invite countries, the business community and other stakeholders to join this growing coalition of first-movers to support putting a price on carbon.

Leadership in the 21st century will be defined by these and other forward-looking businesses that redefine economic growth to focus on people, planet and profits. They are showing that being green can keep companies, and economies, in the black. And perhaps most importantly, they are contributing their voices and political support to governments aiming to solve the climate problem.

Author: Tom Kerr is the lead climate policy officer at the International Finance Corporation, World Bank Group.

Image: Vapour pours from a steel mill chimney in the industrial town of Port Kembla, about 80 km (50 miles) south of Sydney July 7, 2011. REUTERS/Tim Wimborne