Anthony Horton on how carbon pricing provides a consistent, credible and strong investment signal and creates new business opportunities over time, and how the world can expedite the process.
In recent blogs I have discussed the extent to which decisions made by Government, the private sector and individuals are precipitating significant action with respect to investment in clean technologies (solar and wind in particular), decarbonising entire business operations, the divestment phenomenon and an increase in the uptake of carbon emission pricing schemes. These pricing schemes are now valued at approximately US$50 billion and cover 12% of global greenhouse gas emissions. I have also discussed how companies are using internal carbon pricing as a means of decarbonising their operations and more recently as a basis for choosing suppliers of goods, services or in some cases, both. In a global economy, procurement decisions made on such a basis have far reaching consequences.
In partnership with the OECD, the World Bank Group published its report titled “The FASTER Principles for Successful Carbon Pricing: An approach based on initial experience” in September this year. In the Preface of the report, other approaches to reduce greenhouse gas emissions such as energy efficiency standards (for vehicles, buildings, lighting, appliances) and clean energy incentives are acknowledged, however the World Bank’s position is that carbon pricing is critical to shifting economies onto a low carbon path which will ultimately benefit all of us.
According to the report, there are six principles of successful carbon pricing based on international experience and economic principles. With the United Nations Climate Change Conference in Paris, it is timely to be discussing the issue of carbon pricing given the debate around it as a mechanism for reducing greenhouse gas emissions and the risks associated with climate change over the last few months. The six principles are Fairness, Alignment of Policies and Objectives, Stability and Predictability, Transparency, Efficiency and Cost Effectiveness and Reliability and Environmental Integrity. The World Bank hopes that the FASTER principles will guide and inspire countries, regions, states and companies that may be considering carbon pricing systems in the future to accelerate their progress, and that the principles will evolve to accommodate new experiences with respect to the design and implementation of pricing.
Fairness underpins successful carbon pricing according to the World Bank Group, as pricing policies capture the cost of damage from the emissions and therefore reflect the polluter pays principle. National systems that support innovation in labour markets can facilitate an easier transition of jobs and assets from high emission to lower emission companies, and if pricing does burden poorer households disproportionately, fiscal transfers or other targeted complimentary measures can be implemented to provide some protection.
Measures that support continually increased emissions reductions over time are critical to the success of carbon pricing policies. Innovation, the removal of institutional barriers, behavioural incentives and policies that encourage investment in low carbon infrastructure are examples of the alignment of policies and objectives, as they facilitate competition and openness, ensure equal opportunities for low carbon initiatives and lastly, they can interact with broader climate and non-climate (e.g. economic, social) policies.
Carbon pricing is one component of a policy framework that provides a consistent, credible and strong investment signal and creates new business opportunities over time. From a Government point of view it can also provide a stable revenue base. While a lower initial but steadily rising carbon price creates incentives, it can produce higher short term emissions compared to a price that is higher initially. Emissions Trading Systems can assist economies to adapt to unpredictable economic and technological developments and can also be revised as the scientific understanding of climate change becomes more thorough and robust.
Regular communication with stakeholders regarding the rationale, desired outcome and shared benefits of carbon pricing not only helps to generate support, it can also assist the change management in terms of the structure of the economy that is required to support it. In addition, effective monitoring and verification of emissions reduction/mitigation efforts is critical to maintain the trust and support of the voting public.
In terms of efficiency and cost-effectiveness, carbon pricing encourages lowest cost reductions which gives companies some flexibility to choose the method and timing of those reductions based on their cost/benefit assessments. Resource allocation can also be improved by ensuring that the costs associated with greenhouse gas emissions are taken into account in decisions regarding production, consumption and investment made by both the public and private sectors, households and individuals.
When carbon pricing policies are consistent with environmental objectives they are more effective, especially if substitutes for emission intensive activities or products are easily available at low cost. Pricing policies can also facilitate local environmental and health benefits, on the proviso that the design and selection of pricing instruments are underpinned by robust decision making support models/tools.
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