Carbon pricing, divestment, and fossil fuel subsidy reform options for UN climate deal

29 September 2015

A series of reports regarding the use of carbon markets as a central means for achieving international climate goals were released as the seventh annual multi-stakeholder New York Climate Week unfolded from 21-28 September in the US, just ahead of the adoption of the new “2030 Agenda for Sustainable Development” by the UN General Assembly at its headquarters.

While the number of carbon pricing schemes worldwide has increased over the past few years, nations must accelerate their deployment in order to achieve an internationally agreed upon goal of limiting temperature rise to no more than two degrees Celsius above pre-industrial levels, according to a report on the state and trends of carbon pricing released by the World Bank last week.

Several parties support the use of global carbon markets as an option to meet emissions reduction targets as part of a new climate deal under the UN Framework Convention on Climate Change (UNFCCC) to be inked in December in Paris, France. These players specifically call for the agreement to include reference to the use of international transfers of mitigation units. However, no consensus has formed as to whether, or to what extent, market mechanisms will be cited. (See BioRes, 18 September 2015)

Some strong ideological opposition and practical hesitations abound among other countries and analysts over the use of market-based mechanisms to tackle climate change, ranging from a desire to avoid commodification of the environment, to fears such policies will not result in credible emissions reductions.

Despite a lack of certainty in the international sphere, the number of implemented or planned carbon pricing schemes has almost doubled since 2012 with some 40 nations and 23 cities, states, or regions using emissions trading schemes and carbon taxes. These schemes now cover some 12 percent of annual global greenhouse gas (GHG) emissions and are worth approximately US$50 billion.

Carbon market developments

Recent developments in this area include the launch of South Korea’s carbon market at the start of this year, the approval of a national carbon tax by the Chilean government that is set to come online in 2017, and China’s announcement of a proposed national scheme that once operational in 2017 would overtake the EU’s Emissions Trade System (ETS) to become the largest in the world. (See BioRes, 9 September 2015)

The World Bank, together with the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF), also published a series of principles last week designed to help governments craft and implement carbon-pricing policies.

The principles, shortened to the acronym “FASTER” for short, stands for Fairness; Alignment of policies and objectives; Stability and predictability; Transparency; Efficiency and cost effectiveness; and Reliability and environmental integrity.

Higher carbon price

Although not setting a specific target price, the World Bank’s carbon pricing state and trends report calls for more ambitious carbon prices in order to significantly incentivise a shift for investors away from carbon-intensive industries towards cleaner sources of energy.

The price of carbon in the schemes covered in the report range from less than US$1 a tonne of carbon dioxide equivalent (CO2e) in Mexico to US$130 a tonne in Sweden. More than 85 percent of the schemes have a carbon price lower than US$10 CO2e, and according to the study, these numbers are “considerably” lower than what is required to avoid the worst consequences of climate change.

In addition, the report emphasises the importance of cooperation and supports the linking of carbon pricing instruments across borders, suggesting that this could result in net annual flows of financial resources of up to US$400 billion by 2030 and up to US$2.2 trillion by 2050.

While many experts supportive of market-based mitigation policies have echoed the benefits of linking carbon markets, concrete progress on the ground towards cooperation, particularly between the EU ETS and other countries, remains slow.

It is likely that the EU may finalise plans to link schemes with Switzerland within the next year or so, however, experts do not expect any linking with either China’s proposed national carbon market or South Korea’s scheme before the end of the decade, as the schemes must first be aligned in many key areas. (See BioRes, 25 September 2015)

International credits

In a bid to boost demand for international carbon offset credits, the UN launched the “Go Climate Neutral Now” initiative on 22 September, a new online platform to purchase carbon offsets generated by one of the UN’s emissions crediting programmes, the Clean Development Mechanism (CDM).

The platform aims to make the CDM competitive on the “voluntary market” – in other words, where greenhouse gas cuts are not mandated – and purchases of offsets through the online platform can be made by any individual, government, or company without commission fees normally expected by brokers.  The offsets generate revenue for projects and programmes geared towards reducing emissions in over 107 developing countries.

However, a number of analysts do not think that the initiative will have a significant impact on the current glut of CDM credits, and some experts have voiced concerns that it could possibly jeopardise high quality emissions reductions. Recent reported trends in carbon markets reflect these apprehensions, players such as the EU that used to accept international credits from the CDM have now transitioned to accepting only domestic offsets.

Shifting investments

Some members of the international community last week also hailed progress in a shift of investments away from fossil fuels, particularly from the high-emitting coal industry.

Some 436 institutions and 2040 individuals across 43 countries and representing US$2.6 trillion in assets have committed to stop supporting fossil fuels, according to a report from Arabella Advisors, an investment research firm, also unveiled during the New York Climate Week. 

These numbers showcase a 50-fold increase since Arabella’s last report, which found that 181 institutions and 656 individuals representing US$50 billion had committed to divest in 2014. (See BioRes, 30 September 2014)

While the total value of the holdings that investors are selling is not known, an analyst at Arabella has reported that in a sample of just seven percent of the investors involved, they had sold or promised to sell about US$6 billion of fossil fuel investments.

As the world shifts towards decarbonisation to tackle climate change in the long-term, some analysts contend that profits from investing in high-emitting industries could plummet. A report from global consulting company Mercer released in June, for example, found that the average annual returns from the coal sub-sector could fall by anywhere between 18 percent and 74 percent for investors over the next 35 years.

This could be partially attributed to the growing number of carbon pricing schemes and other associated policies that place a greater emphasis on the “negative market externalities” generated by greenhouse gas emissions.

Reforming subsidies

Industrialised and key emerging economies are still spending some US$160 to US$200 billion a year on policies that support fossil fuel consumption and production, according to a report by the Paris-based OECD released last Monday. The report identifies close to 800 spending programmes and tax breaks used by 34 OECD countries and governments in Brazil, China, India, Indonesia, Russia, and South Africa.

“The time is ripe for countries to demonstrate they are serious about combating climate change, and reforming harmful fossil fuel support is a good place to start,” said Angel Gurría, OECD Secretary-General, with the report highlighting that around two-thirds of the fossil fuel support measures were introduced before the year 2000 under different economic and environmental contexts.

Countries have been pledging to phase out or reform inefficient fossil fuel subsidies for several years, with the latest commitment coming from the meet of G7 leaders in June, and in the recent post-2015 development agenda. (See BioRes 11 June 2015)

The report concludes that while it appears that global support for fossil fuel subsidies may have already peaked in 2008 and then again in 2011-2012, it estimates that global progress towards reform remains slow.

For example, the OECD has been locked in negotiations to phase out a form of coal subsidy that helps developed countries export technology linked to fossil fuel generation. Another round of negotiations held earlier in September stalled, however, and reports indicate that the talks on understanding the role of export credits in achieving climate goals will resume again in mid-November.

Some experts suggest a positive agreement among these developed countries on export credits and the reform of other fossil fuel subsidies would help the global economy shift financial resources towards greener sources of energy and possibly open up much needed financial pathways for climate finance to developing countries before the Paris meet.

ICTSD reporting; “New principles to help accelerate the growing global momentum for carbon pricing,” WORLD BANK, 20 September, 2015; “Carbon pricing schemes double since 2012 in climate fight: World Bank,” REUTERS, 20 September, 2015; “Funds worth $2.6tn pledge to dump coal,” Financial Times, 22 September 2015; “Progress on cutting fossil fuel subsidies “alarmingly slow,” REUTERS, 21 September 2015; “Rich world struggles to resolve row over coal subsidies,” REUTERS, 14 September 2015; “UN launches CER cancellation hub, urges world to offset emissions,” CARBON PULSE, 22 September 2015.

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