The next steps towards a price on carbon

Five months after the UN Climate Leadership Summit, with its unprecedented call to action for putting a price on carbon, low oil prices have provoked governments to look again at whether they have prices right and to consider how to exploit a golden opportunity to reset signals within their economies for lower-carbon growth.

Business leaders in closed-door and public sessions in Davos last month talked of the inevitability of effective prices on carbon and the need for an orderly transition to lower-carbon growth. There was a sense that business, not normally reticent when pointing out how policy can negatively affect operations, needs to use its voice to urge smart, early policy action on carbon pricing. The bottom line was that this price signal will be essential, if insufficient on its own, to steer economies closer to a pathway that can keep warming below 2 degrees Celsius.

The voices were CEOs, from all sectors of the economy and all regions of the world. They recognize the risks climate change poses to their supply chains and businesses.

Last week, we heard those arguments again as organizations that have come together since the summit into a Carbon Pricing Leadership Coalition (CPLC) met to assess progress and plan for 2015.

The CPLC has embarked on three streams of work:

• To deepen the understanding of the business case for carbon pricing as prices emerge in different jurisdictions across the world in different forms. This “scenarios” work will be published over the course of the year.
• To work with jurisdictions considering moving forward with pricing and supplement the technical support offered by the Partnership for Market Readiness and other programs.
• To encourage business to do more in their own use of carbon prices in operations and to be transparent about how they use carbon pricing.

To pull all this together, the coalition has started working on recommendations for principles to guide the introduction of carbon pricing. We believe the principles will stand countries, regions and states in good stead, will be helpful in the boardroom and C suite, and will provide a focus of G7 and G20 leaders, as well as ministers, as they prepare for the climate conference in Paris in December and develop their Intended National Determined Contributions (INDCs).

An extraordinary year of opportunity

This is an extraordinary year of opportunity. In addition to the work under the surface, all eyes are on major economies as they prepare their INDCs and on which policy instruments countries will choose to propel themselves forward for low-carbon growth.

Myriad conversations are now taking place around the world about how carbon pricing should fit into INDCs and what it would take to shift toward more effective prices over the next few years. The signal effect of business and government leaders voicing their support for carbon pricing will be essential in the run-up to Paris to build confidence that a Paris package will be material.

The countries, regions, and cities that have or are introducing carbon pricing are pockets of the future. The role of the coalition is to help find that future.

A strategy to Paris and beyond

Pricing, sending signals to investors, and decoupling carbon intensity from growth, from jobs, and from competitiveness are essential components of the shift we need to see in how we manage economies towards zero net emissions in the second half of this century.

This is not a strategy to Paris, it’s a strategy through Paris and beyond.

There are many points this year where we send clear signal:

• The Spring Meetings of the World Bank Group and IMF will allow ministers to talk about how climate finance and development finance can be understood together in a year when a new framework for financing development, a set of Sustainable Development Goals (SDGs) and a new climate agreement will all come to pass.
• In May, the business community will gather in Paris for a Climate Week and then in Barcelona for Carbon Expo – time for action beyond words and also a reminder that there needs to be conversation at the national level so that policy makers and businesses understand each other’s concerns around shifting pricing.
• In June, the G7 will meet and, amid the short- and medium-term profound crises in Greece and Ukraine, the long-term leadership challenges of climate action must also feature.
• In Addis Ababa, as a new financing for development framework is discussed in July, so the transition to low-carbon growth and the financing of resilience needs to be understood as part of the package.
• And then we move to the autumn through discussion of the SDGs, each of which will be achieved in a world shaped by climate change; through the G20 finance ministers meeting; to the Annual Meetings of the World Bank Group and IMF, where finance ministers will meet for the last time before Paris.

It’s a busy year, but a year in which leadership can build momentum and produce the signal effect of getting the basics right – pricing carbon, getting rid of wasteful and harmful subsidies, using the opportunity of low oil prices to get energy prices right, leveraging long-term investment in low interest rate environments, and creating new vehicles for investment in essential low carbon infrastructure in countries where the cost of capital is high.

Getting our own house in order

In the World Bank Group, we have also been moving ahead. Two years ago, in response to asking ourselves the question “what are the least number of most important things that need to be done to keep warming below 2 degrees,” we concluded first that the world needed to get prices right and finance flowing.

In that context, we have been working to put our own house in order.

We apply an internal carbon price of $30 per ton for assessing new projects. IFC has the capability to shadow price too. We are in the process of updating our internal guidance on discount rates, and we are speeding up the roll-out of greenhouse gas accounting across more sectors of our lending. We are engaged in exercises to understand the exposure to carbon in our active portfolios. Having introduced climate and disaster risk screening to all projects in IDA countries, the poorest countries, we are also building up the data and evidence on how to ensure development assistance builds resilience, and we are developing a resilience indicator that we hope can be used by others, too.

We have embarked on analytical work with carbon-intensive economies to understand the sovereign risk they face as the world sees emerging carbon pricing.

If, as the business leaders in Davos said and the CPLC believes, carbon pricing is inevitable, we have a responsibility in the Bank Group to help our clients thrive in this emerging reality. We are dedicated to finding the future and, where we find it in pockets, to help our clients understand how they can get there, too.

This article was first published by the World Bank’s Development in a Changing Climate blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Rachel Kyte is World Bank Group vice president and special envoy for climate change.

Image: The sun is seen behind smoke billowing from a chimney of a heating plant in Taiyuan, Shanxi province December 9, 2013. REUTERS/Stringer.