New report for G7 indicates promising way to achieve a single carbon price

Three scenarios for globally converging carbon prices have been at the center of a recent study by adelphi. All three are linking different mitigation instruments and enhance the advantages of carbon pricing. The scenario which seems politically most feasible is at the same time also the m

As of 2015, 40 countries and more than 20 sub-national jurisdictions across five continents have put a price on carbon emissions - the total market value amounts to almost 50 billion US Dollars (about 45 billion Euros). Market-based instruments, like an emissions trading system (ETS) or a carbon tax, enable cost-effective climate mitigation and provide flexibility to emitters. Additionally, as Chancellor Merkel and President Hollande noted at the Petersberg Dialogue in May 2015, carbon pricing "offers incentives for low-carbon transformation."

This call was echoed by business leaders at the Business & Climate Summit in Paris, calling for "robust and effective carbon pricing mechanisms" to "gear investment and orient consumer behaviour towards low-carbon solutions". With the establishment of a Chinese national ETS expected as early as 2016, the global trend towards carbon pricing will continue to gain momentum. However, given the increasingly bottom-up dynamic in the international climate regime, a global carbon market is unlikely to emerge from the top. This increases the relevance of linking domestic EHS.

Within the context of the 2015 G7 Summit in Germany, a newly published report builds on this momentum. "Towards a global price on carbon: Pathways for linking carbon pricing instruments" explores ways toward a global carbon price and examines possibilities to link different carbon pricing instruments like emissions trading schemes, carbon taxes and regulatory systems. The report was commissioned by the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB) to support the political discussion within the G7 about global carbon pricing and carbon markets.

Linking ETS is the most effective way to establish a single carbon price

In their report, the authors explore three different scenarios for globally converging carbon prices: (1) a scenario of linked ETS; (2) a scenario where ETSs are linked with carbon taxes; and (3) a scenario where ETS and taxes co-exist and collaborate with regulatory systems.

The results show that across all three scenarios, ETS-only linking is the most cost-effective one as it unlocks the widest array of mitigation options. It is also the only scenario that would create a single global carbon price, reducing concerns about carbon leakage. An ETS-tax scenario is politically much more complex and would require not only harmonization of systems but also agreement on a price band before linking. Given the difficulties of comparing explicit carbon prices created by carbon taxes and ETSs with implicit carbon prices stemming from regulatory policies, linking efforts between (market-based) ETSs and regulatory systems should rather be embedded into a broader dialogue on mitigation ambition.

Nevertheless, all three scenarios, even those linking heterogeneous systems, have the potential to generate benefits in terms of cost-effectiveness and reducing carbon leakage. Linking ETS can reduce the cost of mitigation, levels the playing field for business and thereby creates room for more ambitious climate action.

Report recommends G7 countries take leadership role on carbon pricing

"Towards a global price on carbon" ends with recommendations to G7 members that were also discussed at a workshop of G7 Director-Generals on Climate Change in Berlin in April 2015. The authors recommend that G7 members should continue to promote carbon pricing at home, and if appropriate, scale up to the national level. Furthermore, establishing a voluntary platform consisting of G7 members and other major emitters may provide an appropriate forum for initiating a high-level strategic discussion on these issues, building on the work of ICAP and other initiatives.

Finally, at the international level, it will be crucial to ensure that the Paris climate conference delivers an outcome that opens the door for carbon markets to play a role in cost-effective mitigation efforts and to their prospective linking.

» Publication: Towards a global price on carbon: Pathways for linking carbon pricing instruments

» Focus Topic: Emissions Trading and Carbon Markets