About 80 government representatives from more than 30 countries just concluded the 9th Assembly of the Partnership for Market Readiness (PMR) – three days of rich discussions on various domestic policy instruments that put a price on carbon, such as emissions trading systems (ETS), carbon taxes, and payments for emission reductions. At the same time, private sector firms are arriving in Cologne to attend Carbon Expo which runs until the end of the week.
A timely “rendezvous” between the two sectors – public and private – took place today on the subject of carbon pricing policies. The event, hosted by the World Bank’s PMR, the International Finance Corporation, and the International Emissions Trading Association (IETA), invited leading private firm and government representatives to discuss the initial findings of a study by the PMR and the Center for Climate and Energy Solutions (C2ES), which interviewed three companies – Rio Tinto, Shell, and U.S. utility Pacific Gas & Electric (PG&E) – on how they are preparing for a carbon price.
Companies and governments are working in parallel to value carbon, so they have much to learn from one another. A recent CDP survey of 4,500 companies sends a clear message: Disclosure of climate change risk and mitigation strategies is linked to higher performance on three key financial metrics: return on equity, cash flow stability, and dividend growth.
PMR and C2ES explored how internal carbon pricing strategies can change established corporate behavior, providing companies with a means to identify profitable emissions reduction investments, fulfilling compliance obligations, and develop strategies to reduce risk.
As Janet Peace, VP for markets and business strategy at C2ES, said in her introduction:
“Carbon markets are complicated, and it’s important to understand how they work so a company can thrive and do well. It’s important to understand how these different regulations will impact their businesses.”
Government officials from China, South Africa, and Mexico shared their perspectives with companies such as PEMEX, EDF, BP, Statoil, JP Morgan, and Enel.
We heard from Julio Valle, head of the PEMEX Carbon Finance Office, who spoke about the long term view required to introduce carbon pricing policies. In the case of Mexico, a fuel tax, a clean technology quota and an emissions trading scheme in the power sector are all being introduced. “Different instruments, such as taxes, quotas and trading schemes, can co-exist,” he said. He also predicts that most companies will learn to play by these new rules and the possibility of trading carbon allowances will help Mexican companies be more competitive.
Miles Austin of CMIA likened setting carbon pricing policy to raising a family: “Set the rules for industry, and treat industry like you treat your children: be firm, kind, and consistent. Set the rules and stick to them.”
One attendee asked the question on everyone’s mind: What is better in your opinion, a carbon tax or a cap-and trade scheme?
Peter Janoska, senior economist at the South Africa National Treasury, answered that, in their circumstance, a carbon tax made more sense, but if a global climate agreement is put forth, they would be happy to join it. Austin said a cap-and-trade is better because while it has a floating carbon price, it shows you exactly what your emissions are. Shell said they prefer a scheme that allows trading but that countries should keep their options open. As Tanya Morrison, international government relations manager for climate change at Shell put it: You can’t predict innovation: don’t lock yourself in.
Luis Muñozcano, deputy director general for climate change projects at SEMARNAT in Mexico, gave perhaps the most insightful response: If you ask my minister of finance, he prefers a tax, because it will tell him exactly what the revenue will be. If you ask the ministry of environment, we prefer cap-and-trade, because then we know what the emission reductions will be.
As the day came to an end, there was a sense that carbon pricing is inevitable; collaboration is essential; and this sort of dialogue is key. But this story is far from over. In my closing remarks, I invited the government and the business community in the room to highlight their cause at the UN Secretary-General's Climate Summit in September by supporting the World Bank Group-facilitated statement to Put a Price on Carbon as a necessary step for us to tackle the issue and redirect financing to low-carbon and resilient investments.