How to measure carbon pricing potential? A framework (not just) for Asia

Global net zero emissions by mid-century – the ambitious but necessary target required to limit global temperature increases to 1.5°C above pre-industrial levels. It forms the backbone of the 2015 Paris Agreement and now also many countries’ climate trajectories, policies and, increasingly, laws. 

In a world where nations are racing to net zero, no region is arguably more important to this endeavor than Asia. From an emissions perspective, Asia is huge, accounting for 53 percent of global CO2 emissions. Many countries on the continent are also extremely vulnerable to the impacts of climate change. Due in part to population density but also geography, Asian countries have among the highest numbers of people exposed to dangerous climate-related risks such as flooding, droughts, and storms as well as sea-level rises and melting glaciers.

Rising populations and rapidly growing economies abound and show no sign of slowing down. Many countries in the region are in transition, striving to bring their populations out of poverty and moving from agrarian-driven economies towards industrialized nations. To do this, they have largely relied on large-scale fossil fuel-based energy projects, which has increased emissions in the region faster than any other globally. Energy demand from Southeast Asia alone is expected to grow by two thirds by 2030, and many new fossil-based plants are planned. Analysts have pointed to the incompatibility of almost 90 percent of current and planned fossil fuel generation assets with a 1.5°C trajectory. Without concerted and effective climate action in the region, Asia alone will use up the lion’s share of the world’s carbon budget before 2050.

Against this backdrop, carbon pricing has proven itself to be a key tool in the climate policy kit. If designed and implemented well, it can help jurisdictions reach their net zero goals in a cost-effective manner and can play a major role in driving the transition to climate-neutral economies. Creating a financial incentive to cut emissions, carbon pricing can also provide the long-term, credible signal necessary to spur investment in low-carbon innovation.

In fact, a price on carbon is increasingly being imposed across the globe and is – importantly – picking up pace also in Asia. The launch of China’s national ETS earlier this year brought online the world’s largest carbon market. The International Carbon Action Partnership’s recent Emissions Trading Worldwide Status Report 2021 shows that this development doubled the share of global emissions covered by an ETS to 16 percent. South Korea’s ETS, launched in 2015, is maturing and will enter a new trading phase this year with an increased share of auctioning.

Indonesia and Vietnam are also making strides in the development of their own systems. With a carbon market strategy already firmly in place, Indonesia launched a voluntary carbon market for the power sector in March, with full operation of the ETS mandated by 2024. In Vietnam, a legal mandate is also in place to design a domestic ETS and crediting mechanism, with a pilot expected by 2025 and full operation by 2027. Thailand, Taiwan, Pakistan, and the Philippines, too, are actively considering various instruments. Carbon pricing is ramping up as a component of many Asian countries’ green growth strategies, and there are already more than 20 carbon pricing initiatives in place on the continent.

But despite these promising developments, the vast majority of global greenhouse gas emissions remain unpriced. Key here, then, is to ensure there is fertile ground in which new carbon pricing policies can take root and thrive to drive further decarbonization. A crucial factor reflected also in the World Bank’s latest State and Trends 2021 report is that, putting aside ambition, carbon pricing must be tailored to the jurisdiction in which it is implemented for it have the greatest chance of success. Important questions remain in this respect: what are the framework conditions that facilitate the introduction and success of a carbon price? And what could this landscape look like in a region as critical but as diverse and sprawling as Asia?

Our new report delves into these issues, building an analytical framework based on a literature review of over 500 publications. We look at carbon pricing readiness and potential through political, legal, economic, technical, and multilateral lenses and identify variables that can help or hinder progress towards carbon prices. We uncover a deeply intertwined network where multiple channels can be at work at the same time, pushing a country towards or away from deploying a carbon pricing instrument.

The vested interests of carbon-intensive industries, for instance, may hold sway over political commitment to carbon pricing. The presence of a flagship climate law could form the strong legal basis for such a policy instrument. Without appropriate reforms, market structure and regulations could impede the effectiveness of a carbon price in the electricity sector. The technical capacity of regulators brought about by experience with existing policies or dedicated capacity-building initiatives could also dictate whether carbon pricing can be introduced and function smoothly. And with increasing talk on border carbon adjustments as countries around the world price their emissions, and economic integration key to many regions’ international standing, the multilateral perspective must also be untangled according to national circumstances for the full view of carbon pricing readiness. These are but a subset of the aspects, albeit important ones, that our study underlines.

The complex analytical framework has been developed with the view to now apply it to the variegated Asian context. Carbon pricing is not the panacea for the problems that loom as a result of our changing climate. Countries across Asia are also at different stages of readiness for the instrument to fulfill its significant potential. But where it can be implemented successfully, putting a price on as many emissions around the world as possible can play an essential role in driving the net zero transition. And with the region’s increasing economic importance – and increasing emissions – Asia could be set to power ahead with carbon pricing. Our new framework may just tell.