Carbon prices: the winds of change

After several years of strong growth, the revenue generated by carbon pricing mechanisms (carbon taxes or markets) worldwide, as reported in our 2023 edition of the Global Carbon Accounts, stabilized at nearly USD 100 billion. This stabilization could not be more deceptive.  The future has rarely been so uncertain for carbon prices, caught between very strong opposing trends, and the next two years could mark a major turning point, for good or bad, for the use of these climate policy instruments worldwide. 

 

Generalization or rejection? The internationalization gamble

By introducing its Carbon Border Adjustment Mechanism (CBAM) in October 2023, the European Union (EU) is forcing its trading partners to take a stand on their own carbon pricing. This is a high-stakes gamble: while this new mechanism could encourage the adoption of mirror mechanisms around the world, its rejection could seriously undermine the European market, which depends on it to reduce its free allocations and increase its own environmental ambition. It also sends out a clear, new message: from now on, carbon prices are no longer a matter for independent national or community initiatives. They must interact on a global scale.

 

But this new dialogue is getting off to a difficult start. Many developing countries are denouncing the CBAM as a unilateral decision that jeopardizes their exports, without offering any assistance to decarbonize their economies. India and South Africa are even threatening to challenge in front of the World Trade Organization a measure that they consider as unfair trade barrier. Against a backdrop of increasingly tense global diplomacy, these protests are all the more legitimate given the recent failure of developed countries to meet their financing commitments to their developing counterparts. The OECD has just reported that the famous USD 100 billion in climate aid from developed to developing countries has still not been reached in 2021, according to the latest consolidated data; and the pre-COP agreement on the financing of loss and damage is at this stage, by all accounts, unsatisfactory for anyone.

 

National mechanisms in turmoil

Moreover, national climate ambitions are themselves being undermined by the successive crises triggered by Covid, then Russia’s war on Ukraine, and now the Israel-Hamas conflict. These crises brought energy prices up, purchasing power down, eyes away from long-term concerns; and may jeopardizing traditional leaders in the field of carbon pricing. First among them is Canada: the mechanism put in place by the federal government, often commended internationally for its ambition, is now being strongly contested by several provinces. Following the introduction of a temporary exemption for oil-fired heating, historically more widely used in the Atlantic provinces, the provinces that heat mainly with gas are crying foul, and are in turn calling for an exemption, or for the tax to be scrapped altogether. This heated debate illustrates the difficulty, on a federal scale, of bringing together jurisdictions with very different climate constraints and ambitions under a single mechanism. And yet, Canada has a federal government which can act as a referee and impose a common decision on all its provinces; this referee does not exist in the current scheme of global climate governance, making convergence on carbon prices even more difficult.

 

The pitfall of diversity

In spite of this, carbon prices may be on their way towards achieving significant advances, at least in part due to the European mechanism. Brazil, Indonesia, Vietnam and Cambodia, among others, have recently announced or implemented new pricing mechanisms that will enable them to align their exports with the EU’s CBAM requirements. Even India, in parallel with its WTO challenge, has just floated the first elements of an export tax aligned with the same specifications. The United States, which currently has no carbon pricing mechanism at federal level, is considering several solutions in response to the European CBAM, including a similar adjustment mechanism based on the carbon intensity of products, rather than absolute emissions caps. The G7 also supports the creation of a “climate club” of members with similar pricing policies, who would extend a common CBAM across their borders.
The diversity of these responses illustrates a point that is both a strength and a limitation of carbon pricing mechanisms: their flexibility and diversity. This diversity has been the strength of carbon prices, at the time of adapting to very different national issues; today, it represents a major hurdle in changing the scale, going global and bringing these mechanisms into interact with each other. The 2023 Global Carbon Accounts proposes some insights into this strong diversity; answering the question of how to deal with it, is another challenge.

 

More informations: Global carbon accounts in 2023

 

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I4CE Contacts
Sébastien POSTIC, Phd
Sébastien POSTIC, Phd
Research Fellow – Public finance, Development Email
Marion FETET
Marion FETET
Research Fellow – Local authorities, Public Finance, Green Budgeting Email
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