Carbon pricing – delivering economic & climate benefits

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A dangerously warming planet is not just an environmental challenge – it is a fundamental threat to efforts to end poverty, and it threatens to put prosperity out of the reach of millions of people.  Read the recent Fifth Assessment Report from the Intergovernmental Panel on Climate Change if you need further evidence.

If we agree it is an economic problem, what do we do about it?  There is general agreement among economists that a robust price on carbon is a key part of effective strategies to avert dangerous climate change. A strong price signal directs finance away from fossil fuels and toward a suite of cleaner, more efficient alternatives.

This logic is not lost on governments and companies.  Momentum is building around the globe to put a price on carbon.  Consider these facts:

  • A total of eight new carbon markets opened in 2013, and another launched in early 2014.  With these additions, the world’s greenhouse gas emissions trading schemes were valued at about US$30 billion.
  • China is now home to seven local carbon markets covering the equivalent of 1,115 million tons of carbon dioxide, making them the second largest group after the EU ETS, with its 2,039 MtCO2e cap in 2013.
  • The U.S. is also home to a number of leading carbon pricing efforts.  California already manages an emissions trading program; if you add Oregon and Washington, which have announced plans to price carbon, together with the nine Northeast states in the Regional Greenhouse Gas Initiative, carbon pricing will operate in states with nearly one-third of the U.S. population.
  • New carbon taxes were introduced in Mexico and France in 2013. South Africa is planning to implement a carbon tax starting in 2016.
  • Many large global companies already utilize internal carbon pricing as a tool to “future proof” their business models, managing risks and opportunities to current operations and future profitability.

The good news is that carbon pricing systems are delivering economic benefits while they address climate change.  Corporate and government leaders recognize that the value of low-carbon, sustainable growth goes well beyond protecting the climate that their supply chains rely on. As the recent World Bank Group report Adding Up the Benefits showed, the benefits of climate-smart development extend to healthier employees and customers, added jobs, and increased economic growth – as well as protecting the climate.

For example, the Canadian province of British Columbia was an early mover in 2008 with the creation of a carbon tax. From 2008 to 2010, British Columbia’s per capita greenhouse gas emissions declined by about 10 percent, outpacing the rest of Canada. At the same time, the program returned CAD$300 million more in tax cuts than it received in carbon tax revenue – resulting in a net benefit for taxpayers. The province’s personal and corporate income tax rates are now among the lowest in Canada, due to the carbon tax shift, while its economy is growing. Ireland has a similar story. After three years, its carbon tax had raised nearly 1 billion euros ($1.3 billion), including 400 million euros in 2012. The carbon tax revenue helped the Irish government narrow a budget gap that year and avoid raising income taxes. The New York Times recently profiled California’s emissions trading program and pointed out that by the end of the decade, the state is expected to collect about $5 billion a year in permit fees, with the bulk of the money being recycled into clean-energy projects.

There is also a growing body of evidence that corporate disclosure on climate change correlates well with strong financial performance. Several corporate leaders – some working globally with carbon prices that vary country to country – actively manage their risks by using an internal “shadow” carbon price to help plan and make smart investments for the future. Some of the largest U.S. utilities, including American Electric Power and Exelon, told CDP they price carbon internally to help avoid stranding assets, such as large fossil-fuel-fired power plants, and to reassure investors. Other less carbon-intensive businesses use internal prices to help achieve corporate sustainability goals – TD Bank aims to go carbon neutral; Walt Disney Corporation uses internal pricing to encourage employee innovation while delivering profits. CDP found that the disclosure of climate change risk and mitigation strategies is linked to higher performance on three key financial metrics which reflect overall corporate quality: return on equity, cash flow stability, and dividend growth.

Clearly there is momentum. And this is good news. But more needs to be done to set us on a pathway to stabilize the climate.  To raise political and corporate ambition, the World Bank Group is working with partners – including the United Nations Global Compact, CDP, Prince of Wales’s Corporate Leaders Group, the International Emissions Trading Association, the World Business Council for Sustainable Development, and the We Mean Business coalition – to highlight leadership and encourage governments and companies to support carbon pricing ahead of the United Nations Secretary-General’s Climate Summit in September. Currently, more than 200 companies have registered their support, including Ernst & Young, GDF Suez, Statkraft, and the French pension fund ERAFP, and more than 20 countries have expressed support, including Indonesia, Germany, Norway, and Cote d’Ivoire. We invite countries, the business community, and other stakeholders to join this growing coalition of first movers to support putting a price on carbon.

Leadership in the 21st century will be defined by these and other forward-looking businesses that re-define economic growth to focus on people, planet, and profits. They are showing that being green can keep companies – and economies – in the black. And perhaps most importantly, they are contributing their voices and political support to governments aiming to solve the climate problem.

Join me and guests from the business and investment communities online over the next two weeks, Sept. 8-19, for an in-depth conversation about carbon pricing

Photo: TonyV3112/Shutterstock. ​This post also appeared in the World Economic Forum blog and Thomson Reuters Sustainability



Thomas Kerr

Lead Climate Specialist, South Asia, World Bank

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