State and Trends of Carbon Pricing Washington DC October 2016 2016 State and Trends of Carbon Pricing Washington DC October 2016 2016 This report was prepared jointly by the World Bank, Ecofys and Vivid Economics. The World Bank team included Richard Zechter, Thomas Kerr, Alexandre Kossoy, Grzegorz Peszko, Klaus Oppermann, Celine Ramstein and Nicolai Prytz. The Ecofys team included Noémie Klein, Long Lam, Lindee Wong, Kornelis Blok, Maarten Neelis, Yannick Monschauer, Sam Nierop and Tom Berg. The Vivid Economics team included John Ward, Thomas Kansy, Luke Kemp, Bryan Vadheim and Nick Kingsmill. © 2016 International Bank for Reconstruction and Translations—If you create a translation of this work, please add Development/The World Bank the following disclaimer along with the attribution: This translation 1818 H Street NW, Washington DC 20433 was not created by The World Bank and should not be considered Telephone: 202-473-1000; Internet: www.worldbank.org an official World Bank translation. The World Bank shall not be Some rights reserved liable for any content or error in this translation. 1 2 3 4 17 16 15 Adaptations—If you create an adaptation of this work, please This work is a product of the staff of The World Bank with external add the following disclaimer along with the attribution: This is an contributions. The findings, interpretations, and conclusions adaptation of an original work by The World Bank. 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State and Trends of Carbon Pricing Photo credits: page 17: dioxin / photocase.de; 2016 (October), by World Bank, Washington, DC. page 21: peych_p / fotolia.com; page 57: zettberlin / photocase.de; page 79: assistant / fotolia.com Doi: 10.1596/978-1-4648-1001-5 License: Creative Commons Attribution CC BY 3.0 IGO Cover and interior design: Meike Naumann Visuelle Kommunikation 2 Reflecting the growing momentum for carbon pricing worldwide, the 2016 edition of the State and Trends of Carbon Pricing report targets the wide audience of public and private stakeholders engaged in carbon pricing design and implementation. This report also provides critical input for negotiators involved in implementation of the Paris Agreement at the meeting of the Conference of the Parties (COP) in Marrakesh. As in the previous editions, the report provides an up-to-date overview of existing and emerging carbon pricing instruments around the world, including national and subnational initiatives. Furthermore, it gives an overview of current corporate carbon pricing initiatives. Another key focus of the report is on the importance of aligning carbon pricing with the broader policy landscape. The analysis provides lessons for policymakers on how to maximize synergies between climate mitigation and other related policies, while managing potential tensions and tradeoffs. This year’s report provides new modelling analysis to demonstrate the crucial benefits that an international carbon market established under Article 6 of the Paris Agreement could provide in reducing the costs to countries of achieving their emission reduction targets. An international carbon market could thus enable greater ambition in taking steps to reduce greenhouse gas emissions to a level consistent with the 2°C climate stabilization goal. The task team responsible for this report intends to select new relevant topics to be explored in future editions. These topics could include, for example, the interaction of carbon taxes and fiscal policy. As part of the World Bank’s expanded carbon pricing intelligence program, additional analytical topics such as the effectiveness of carbon pricing may also be explored. The report benefited greatly from the valuable written contributions and perspectives of our colleagues in the climate and carbon finance community, ensuring the quality and clarity of this report: Conor Barry, Carter Brandon, Karan Capoor, Hannah Cushing, Kurt van Dender, Shari Friedman, Dafei Huang, Ying Liu, Blanca Moreno-Dodson, Guoqiang Qian, Nigel Topping, and Peter Zapfel. Section 4 strongly benefited from the contribution of Ajay Gambir and Adam Hawkes of Imperial College London. We wish to extend our gratitude to those who offered their cooperation and insights during the development of this report: Emilie Alberola, Pedro Barata, Richard Baron, Joaquim Barris, Nicolette Bartlett, Adrien de Bassompierre, Garo Batmanian, Stefanie Bradtner, Derik Broekhoff, Cyril Cassisa, Marcos Castro Rodrigues, Zhibin Chen, Gerald Crane, Todd Croad, Neydi Sagnite Cruz García, Oscar Diamond, Charlie Dixon, Michael Döring, Maxime Durande, Beth Elliott, Etienne Espagne, Jasmin Faller, Christine Fedigan, Alexis Gazzo, Cécile Goubet, Katharina Grave, Duncan Gray, Greenhouse Gas Inventory and Research Center of Korea, Kelley Hamrick, Andries Hof, Xiaochen Huang, Aurélie Jardin, Frank Jotzo, Junki Kawamura, Alex Kazaglis, Pauline Maree Kennedy, Susanna Laaksonen-Craig, Sara Law, Franck Lecocq, Benoît Leguet, Lina Li, Rob Macquarie, Binzhang Meng, Cecil Morden, Aya Naito, Meike Naumann, Norwegian Ministry of Finance, Julien Perez, Annie Petsonk, Rodrigo Pizarro Gariazzo, Ulrika Raab, Isabel Saldarriaga Arango, Misato Sato, Igor Shishlov, Gerardo Spatuzzi, Gemma Toop, Ian Trim, Mariëlle Vosbeek, and Emilio Wills Valderrama. Oversight and guidance on drafting was provided respectively by Alexandre Kossoy for Section 2 on carbon pricing initiatives around the world, Grzegorz Peszko for Section 3 on aligning carbon pricing with the broader policy landscape, and Klaus Oppermann for Section 4 on building an international carbon market after Paris. We also acknowledge the support from the Partnership for Market Readiness. 3 LIST OF ABBREVIATIONS AND ACRONYMS °C Degrees Celsius A AAU Assigned Amount Unit C CCER Chinese Certified Emission Reduction CDM Clean Development Mechanism CER Certified Emission Reduction Ci-Dev Carbon Initiative for Development CMA Conference of the Parties serving as the Meeting of the Parties to the Paris Agreement CO2 Carbon dioxide CO2e Carbon dioxide equivalent COP Conference of the Parties CORSIA Carbon Offset and Reduction Scheme for International Aviation CP1 First Commitment Period under the Kyoto Protocol CP2 Second Commitment Period under the Kyoto Protocol CPP Clean Power Plan D DRC Development and Reform Commission E EBRD European Bank for Reconstruction and Development ERF Emissions Reduction Fund ERU Emission Reduction Unit ETS Emissions Trading System EU European Union EU ETS European Union Emissions Trading System G GDP Gross Domestic Product GGIRCA Greenhouse Gas Industrial Reporting and Control Act GHG Greenhouse gas Gt Gigaton GtCO2e Gigaton of carbon dioxide equivalent I ICAO International Civil Aviation Organization IEA International Energy Agency IET International Emissions Trading IFC International Finance Corporation INDC Intended Nationally Determined Contribution IPCC Intergovernmental Panel on Climate Change ITMO Internationally Transferred Mitigation Outcomes 4 J JCM Joint Crediting Mechanism K ktCO2e Kiloton of carbon dioxide equivalent L LNG Liquefied Natural Gas M MoU Memorandum of Understanding MRV Monitoring, Reporting and Verification Mt Megaton MtCO2e Megaton of Carbon Dioxide Equivalent MW Megawatt N NDC Nationally Determined Contribution NDRC China’s National Development and Reform Commission O OECD Organisation for Economic Co-operation and Development P PMR Partnership for Market Readiness ppm Parts per million R RBCF Results-based Climate Finance REDD+ Reducing Emissions from Deforestation, Forest Degradation, and the role of conservation, sustainable management of forests, and enhancement of forest carbon stocks RGGI Regional Greenhouse Gas Initiative S SBSTA Subsidiary Body for Scientific and Technological Advice SGER Specific Gas Emitters Regulation T t Ton (note that, unless specified otherwise, ton in this report refers to a metric ton = 1,000 kg) tCO2 Ton of carbon dioxide tCO2e Ton of carbon dioxide equivalent U UK United Kingdom UN United Nations UNFCCC United Nations Framework Convention on Climate Change US United States 5 CONTENTS List of abbreviations and acronyms 4 Executive summary 10 1 Introduction 17 2 Existing and emerging carbon pricing 21 initiatives around the world 2.1 Overview, recent developments, and emerging trends 22 2.1.1 Global overview of carbon pricing initiatives 22 2.1.2 Recent developments and emerging trends 28 2.2 International carbon pricing initiatives 32 2.3 Regional, national, and subnational carbon pricing initiatives 42 2.4 Internal carbon pricing initiatives 54 3 Aligning carbon pricing with the 57 broader policy landscape 3.1 Aligning policies with multiple objectives 59 3.1.1 Complementary policies 59 3.1.2 Overlapping policies 68 3.1.3 Countervailing policies 74 3.2 Measuring the effectiveness of carbon prices in 76 the presence of multiple policies 3.3 Key conclusions 77 4 Building an international carbon market after Paris 79 4.1 The benefits of an international carbon market 82 4.1.1 Short-term: Benefits to 2030 83 4.1.2 Long-term: Benefits to 2050 and 2100 86 4.2 Barriers to establishing an international carbon market 88 4.2.1 Introduction 88 4.2.2 Market uncertainty 89 4.2.3 Loss of environmental integrity 89 4.2.4 Potential loss of co-benefits 90 4.2.5 Comparability of effort and prices 90 4.2.6 Loss of regulatory control 91 4.2.7 Undesirable distributional implications 92 6 4.3 Beyond barriers: potential ways forward 93 4.3.1 Collaboration and market design 93 4.3.2 Finance 93 4.3.3 Comparing mitigation effort 94 4.3.4 Sectoral approaches 95 4.3.5 International standards 96 4.4 Evolution towards a new international carbon market 96 Annex I – Conversion rates 98 Annex II – Existing platforms for 99 international cooperation Annex III – Overview of carbon pricing in INDCs 101 Annex IV– Modeling tools to support 110 policy alignment and effectiveness Annex V – Detailed modeling results and comparisons 114 Annex VI – Calculation of implications 118 of using an international carbon market for meeting mitigation targets Glossary 129 7 Contents Figures 1 Summary map of existing, emerging and potential regional, 12 ­ national and subnational carbon pricing initiatives (ETS and tax) 2 Regional, national and subnational carbon pricing initiatives: 13 share of global emissions covered 3 Prices in existing carbon pricing initiatives 14 4 Summary map of existing, emerging and potential regional, 25 national and subnational carbon pricing initiatives (ETS and tax) ­ 5 Regional, national and subnational carbon pricing initiatives: 26 share of global emissions covered 6 Prices in existing carbon pricing initiatives 27 7 Carbon price and emissions coverage of implemented 28 carbon pricing initiatives 8 Map of countries that have signed and/or ratified the 32 Paris Agreement 9 Self-reported INDC implementation costs per region 34 (in US$ trillion) 10 Potential supply of CERs until 2020 38 11 Annual and cumulative CER and ERU issuance, secondary CER 38 prices (left), and voluntary offset issuance and prices (right) 12 Carbon pricing initiatives implemented or scheduled for 43 ­ implementation, with sectoral coverage and GHG emissions covered 13 Mandatory carbon prices in several jurisdictions compared to 55 internal carbon prices publicly disclosed to CDP 14 2030 regional resource and emission flows under full international 84 trading 15 2050 regional resource and emission flows under full international 87 trading 16 Transition scenario: Bottom-up pathway to greater international 97 cooperation 17 Traditional techno-economic models allow for qualitative policy 111 ­ assessment “on the side” 18 Agent-based models show more realistically expected emission 112 reductions resulting from the current distorted policy and market incentives 19 Impact on policy distortions and policy reforms on the switching 113 costs between a solar PV and coal generation 20 High-level structure of TIAM 119 8 Tables 1 Market update of mechanisms under the Kyoto Protocol 37 2 Key developments in the Chinese pilot ETSs 46 3 Opportunities for better alignment of carbon pricing 77 4 International carbon market options 81 5 Annual cost savings from international cooperation 83 6 2050 cost savings from international cooperation 86 7 An overview of approaches, barriers and solutions 96 8 Currency conversion rates, as of August 1, 2016 98 9 Unconditional and conditional targets and intended use of carbon 101 pricing and/or market instruments stated in INDCs 10 Regional emissions and financial flows in 2030 under full IET 114 11 Regional emissions and financial flows under full IET in 2050 115 based on equal per capita emissions 12 Cost savings from the use of international carbon markets in 2050 117 13 Details of countries in each of the 14 TIAM-Grantham regions 120 14 Regional economic growth rates used in modeling analysis 122 15 Derived 2020 targets for CO2 from fossil fuel combustion and 122 industrial processes for each TIAM-Grantham region, under weak/ unilateral Cancún pledges 16 Derived 2030 targets for CO2 from fossil fuel combustion and 124 industrial processes for each TIAM-Grantham region, under INDCs 17 2050 CO2 emissions from fossil fuel combustion and industrial 127 processes for TIAM-Grantham regions under equal per capita emissions for CO2 from fossil fuel combustion Boxes 1 Carbon pricing in numbers 24 2 Self-determined INDC implementation costs 34 3 Summary of selected changes in regional, national and subnational 52 carbon pricing initiatives 4 Use of internal carbon pricing by governments in decision making 56 5 Air quality benefits of fuel switching 62 6 Demand-side abatement and ETS in the Republic of Korea ETS 65 7 France is pioneering legislation on carbon-related disclosure 67 requirements ­ 8 Ongoing climate policy institutions in Australia 73 9 Mexico’s energy reform combines fossil fuel subsidy removal with 75 introducing carbon pricing 10 Burden sharing assumptions 85 11 Heterogeneous linkage 95 9 Executive summary CARBON PRICING INITIATIVES The vast majority of governments around the AROUND THE WORLD globe—189 countries representing 96 percent of global greenhouse gas (GHG) emissions and 98 percent of the world’s population2—have committed to reduce their 2  015 witnessed an historic global step forward in taking action on climate change. In Paris, world leaders reached an agreement at the 21st Conference of GHG emissions and adapt to the changing climate through their Intended Nationally Determined Contributions (INDCs).3 The urgent priority now is for governments to the Parties (COP 21) to the United Nations Framework ensure implementation of these commitments, requiring Convention on Climate Change (UNFCCC) to keep the sustained efforts to influence investment and consumption global average temperature increase to well below 2°C decisions made every day by firms and households. and pursue efforts to hold the increase to 1.5°C. The Paris Agreement encouraged all countries, for the first time, to While implementation of INDCs will rely on a range make individual, voluntary commitments to contribute of policies and programs, carbon pricing initiatives to this global goal, marking the beginning of a new era will play an increasing role, with about 100 Parties in the cooperative effort to limit climate change. On —accounting for 58 percent of global GHG emissions— October 5, 2016—less than a year after the agreement planning or considering these instruments. The pivotal was adopted—the conditions for the Paris Agreement to role of carbon pricing in supporting efforts to decarbonize take effect were met.1 The Paris Agreement will enter into is also reflected in the Paris Agreement. Article 6 of the force on November 4, 2016. Agreement provides a basis for facilitating international recognition of cooperative carbon pricing approaches and identifies new concepts that may pave the way for this cooperation to be pursued. 1 While this report covers the period from January 1, 2015 until September 1, 2016, the authors decided to include the entry into force of the Paris Agreement given its global significance. The authors recognize that other significant developments have occurred after September 1, 2016 and before the publication of the report. These developments include the agreement reached at the 39th Assembly of the International Civil Aviation Organization (ICAO) on a global market-based measure to control CO2 emissions from international aviation (see footnote 103 in the International aviation section in Section 2.2 for further details), the announcement of a minimum federal carbon price in Canada, and the adoption of the carbon pricing legislation in Washington State, which happened after September 1, 2016 and before the publication of the report. They will be discussed in the 2017 edition of the Carbon Pricing Watch and the State and Trends of Carbon Pricing report. 2 As of September 1, 2016. The 189 countries submitted 162 INDCs, with the European Union submitting an INDC on behalf of its 28 member states. 3 INDCs are voluntary statements which were invited by the COP without prescription related to form. Nationally Determined Contributions (NDCs) are legally ­ greement as and when it enters into force. They will be governed by Article 4 of the Agreement. Each Party to the UNFCCC distinct and will be under the Paris A that wishes to become a Party to the Agreement will have an obligation to communicate an NDC. The level of prescription attached to these will be determined by the negotiations of the operative elements of Article 4, which mainly take place under the Ad Hoc Working Group on the Paris Agreement. 10 Already, about 40 national jurisdictions and over (see Figure 3), with about three quarters of the covered 20 cities, states, and regions are putting a price on emissions priced below US$10/tCO2e. The total carbon (see Figure 1). This translates to a total coverage value of ETSs and carbon taxes in 2016 is just under of around 7   gigatons of carbon dioxide equivalent US$50   billion, remaining at 2015 levels. This relative (GtCO2e) or about 13 percent of global GHG emissions stability is due to increases in various carbon tax rates (see Figure  2). The share of global emissions covered being offset by lower carbon prices in most ETSs. by carbon pricing initiatives has increased threefold over the past decade. This year saw the launch of two In addition to growth in the number of mandatory new carbon pricing initiatives: British Columbia put carbon pricing initiatives, the number of companies that a price on emissions from liquefied natural gas plants reported to CDP in 2016 that they are implementing alongside its carbon tax, and Australia implemented internal carbon pricing has also increased. In 2016, the a safeguard mechanism to the Emissions Reduction number of companies that are using an internal price on Fund, requiring large emitters that exceed their set carbon has more than tripled compared to 2014. The limit to offset excess emissions. Furthermore, advances internal carbon prices in use are diverse, with reported in carbon pricing were made in 2015, including the values ranging from US$0.3/tCO2e to US$893/tCO2e. launch of the emissions trading system (ETS) in the About 80 percent of the reported internal carbon prices Republic of Korea and the carbon tax in Portugal. range between US$5/tCO2e and US$50/tCO2e. There have also been new carbon pricing developments at a regional level, with Mexico expressing interest in Further building momentum for the use of carbon a North American carbon market and carbon pricing pricing to mitigate climate change and enhance climate dialogues starting in the context of the Pacific Alliance.4 resilience, a number of new international platforms At the same time, in the last year Kazakhstan suspended were introduced over the past year. These include, its ETS temporarily from 2016–2018 and South Africa among others, the Carbon Pricing Leadership Coalition delayed the start of its carbon tax to 2017. and the New Zealand-led Ministerial Declaration on Carbon Pricing. These platforms are reinforced by other Looking ahead, 2017 could see the largest ever developments that encourage the uptake of carbon increase in the share of global emissions covered by pricing around the world, including the opening of carbon pricing initiatives in a single year. If the Chinese membership to the G7 Carbon Market Platform to national ETS is implemented in 2017 as announced, countries outside the G7. In addition, the High Level initial unofficial estimates show that emissions covered Panel on Carbon Pricing, a group of government leaders by carbon pricing initiatives could potentially increase and international organizations, has set forward a global from 13 percent to between 20 to 25 percent of global target to double the emissions covered by carbon pricing GHG emissions. This is reflected in Figure 2. The initiatives to 25 percent by 2020 and to double this Chinese national ETS would become the largest carbon coverage again within a decade.5 pricing initiative in the world, passing the EU ETS. Other initiatives scheduled to commence next year While carbon pricing has expanded significantly include an ETS in Ontario, a carbon tax in Alberta that in recent years, in many instances these initiatives are will be implemented alongside its existing ETS and still at an early stage in achieving impact. To mobilize carbon taxes in Chile and South Africa. Also, France political support, some policymakers have introduced is planning to introduce a carbon price floor in 2017. carbon prices at relatively low levels. However, implementation of a carbon pricing policy framework The range of carbon prices across existing initiatives and institutional structure is nonetheless a first step that continues to be broad. This year, observed carbon prices can lay the groundwork for future increases in ambition span from less than US$1/tCO2e to US$131/tCO2e and impact. 4 The Pacific Alliance consists of Chile, Colombia, Mexico and Peru. 5 Source: World Bank, Leaders Set Landmark Global Goals for Pricing Carbon Pollution, April 12, 2016, http://www.worldbank.org/en/news/press-release/ 2016/04/21/leaders-set-landmark-global-goals-for-pricing-carbon-pollution. 11 Executive summary Figure 1 Summary map of existing, emerging and potential regional, national and subnational carbon pricing initiatives (ETS and tax) ALBERTA MANITOBA CANADA ONTARIO ICELAND KAZAKHSTAN REPUBLIC BRITISH QUÉBEC EU UKRAINE OF KOREA COLUMBIA WASHINGTON OREGON JAPAN NEWFOUND- CALIFORNIA RGGI LAND AND LABRADOR TURKEY CHINA MEXICO THAILAND COLOMBIA BRAZIL RIO DE JANEIRO SÃO PAULO NEW CHILE SOUTH AFRICA AUSTRALIA ZEALAND NORWAY SWEDEN REPUBLIC DENMARK FINLAND OF KOREA UK ESTONIA IRELAND LATVIA BEIJING KYOTO POLAND SAITAMA TIANJIN TOKYO HUBEI PORTUGAL SHANGHAI CHONG- GUANGDONG QING TAIWAN FRANCE SLOVENIA SHENZHEN SWITZERLAND Tally of carbon pricing initiatives ETS implemented or scheduled ETS and carbon tax implemented or scheduled for implementation Carbon tax implemented or scheduled ETS implemented or scheduled, tax under consideration for implementation ETS or carbon tax under consideration Carbon tax implemented or scheduled, ETS under consideration 14 The circles represent subnational jurisdictions: subnational regions are shown in large circles and cities are shown in small circles. The circles are not representative of the size of the carbon pricing initiative. 4 2 40 Note: Carbon pricing initiatives are considered “scheduled for implementation” once they have been formally adopted through ­legislation and have an official, planned start date. Carbon pricing initiatives are considered “under consideration” if the government has announced its intention to work towards the implementation of a carbon pricing initiative and this has 22 22 24 been formally confirmed by official government sources. Jurisdictions that only mention carbon pricing in their INDCs are not included as different interpretations of the INDC text are possible. The carbon pricing initiatives have been classified in ETSs and carbon taxes according to how they operate technically. ETS does not only refer to cap-and-trade systems, but also baseline-and-credit systems such as in British Columbia and baseline-and-offset systems such as in Australia. Carbon pricing National level Subnational level has evolved over the years and initiatives do not necessarily follow the two categories in a strict sense. The authors recognize that other classifications are possible. 12 Figure 2 Regional, national and subnational carbon pricing initiatives: share of global GHG emissions covered 25% 20% 15% 42 38 36 35 10% 31 23 Share of global GHG emissions 5% 15 18 20 Number of 9 10 14 implemented initiatives 2 4 5 6 7 8 0% 1991 2001 2011 1997 2007 2017 1994 1995 2004 2005 2014 2015 1992 2002 2012 1993 2003 2013 1999 2009 1998 2008 1996 2006 2016 1990 2000 2010 Finland carbon tax (1990 ) Iceland carbon tax (2010 ) Guangdong Pilot ETS (2013 ) Poland carbon tax (1990 ) Ireland carbon tax (2010 ) Hubei Pilot ETS (2014 ) Sweden carbon tax (1991 ) Tokyo CaT (2010 ) Chongqing Pilot ETS (2014 ) Norway carbon tax (1991 ) Saitama ETS (2011 ) France carbon tax (2014 ) Denmark carbon tax (1992 ) Kyoto ETS (2011 ) Mexico carbon tax (2014 ) Latvia carbon tax (1995 ) California CaT (2012 ) Korea ETS (2015 ) Slovenia carbon tax (1996 ) Japan carbon tax (2012 ) Portugal carbon tax (2015 ) Estonia carbon tax (2000 ) Australia CPM (2012 - 2014) BC GGIRCA (2016 ) EU ETS (2005 ) Québec CaT (2013 ) Australia ERF (safeguard mechanism) (2016 ) Alberta SGER (2007 ) Kazakhstan ETS (2013 ) South Africa carbon tax (2017 ) Switzerland ETS (2008 ) UK carbon price floor (2013 ) Chile carbon tax (2017 ) New Zealand ETS (2008 ) Shenzhen Pilot ETS (2013 ) Ontario CaT (2017 ) BC carbon tax (2008 ) Shanghai Pilot ETS (2013 ) Alberta carbon tax (2017 ) Switzerland carbon tax (2008 ) Beijing Pilot ETS (2013 ) China national ETS (2017 ) RGGI (2009 ) Tianjin Pilot ETS (2013 ) Note: Only the introduction or removal of an ETS or carbon tax is shown. Emissions are given as a share of global GHG emissions in 2012. Annual changes in global, ­ regional, national, and subnational GHG emissions are not shown in the graph. Data on the coverage of the city-level Kyoto ETS were not accessible and the British Columbia Greenhouse Gas Industrial Reporting and Control Act (GGIRCA) does not cover any emissions yet; their coverages are therefore shown as zero. The information on the Chinese ­ national ETS represents early unofficial estimates based on the Chinese President’s announcement in September 2015. 13 Executive summary Figure 3 Prices in existing carbon pricing initiatives US$140/ tCO2e 131 Sweden carbon tax … … 86 Switzerland carbon tax US$80/ tCO2e US$/tCO2e 65 Finland carbon tax (liquid fuels) New Zealand ETS, Québec CaT , 13 California CaT US$60/ 60 Finland carbon tax (other fossil fuels) tCO2e 10 Iceland carbon tax Switzerland ETS 9 52 Norway carbon tax (upper) 8 Beijing Pilot ETS Portugal carbon tax 7 6 Shenzhen Pilot ETS RGGI, EU ETS 5 4 Latvia carbon tax US$40/ Norway carbon tax (lower), tCO2e Japan carbon tax, 3 Mexico carbon tax (upper) Estonia carbon tax, 2 Tianjin Pilot ETS, Hubei Pilot ETS Guangdong Pilot ETS, 1 Shanghai Pilot ETS, <1 Mexico carbon tax (lower), Chongqing Pilot ETS Poland carbon tax 26 Denmark carbon tax 25 France carbon tax 24 UK carbon price floor 23 BC carbon tax 22 Ireland carbon tax US$20/ tCO2e 19 Slovenia carbon tax Alberta SGER, Korea ETS, 15 Saitama ETS, Tokyo CaT 13 Note: Nominal prices on August 1, 2016, shown for illustrative purpose only. The 10 Australia ERF (safeguard mechanism), British Columbia GGIRCA, Kazakhstan ETS 9 and Kyoto ETS are not shown in this graph as price information is not available 8 7 for those initiatives. The figures given in the Carbon Pricing Watch 2016 have 6 been updated to August 1, 2016. The differences with the Carbon Pricing Watch 5 2016 are due to the daily c ­ hanges in prices and exchange rates. Prices are not 4 3 necessarily comparable between carbon pricing initiatives because of differences in 2 the number of sectors covered and allocation methods applied, specific exemptions, US$0/ 1 <1 and different compensation methods. tCO2e 14 ALIGNING CARBON PRICING Facilitating access to long-term financing of upfront WITH THE capital costs can also be essential for carbon pricing to BROADER POLICY LANDSCAPE increase the rate at which abatement opportunities are adopted. Finally, it should be noted that carbon prices can help achieve other objectives—for instance by Carbon pricing can be most effective and acceptable increasing the efficiency of raising tax revenue or helping to the public when it is well aligned with the broader to reduce local air pollution. policy context in a country. By necessity, policymakers must balance multiple objectives, of which climate Policymakers also have to manage overlapping mitigation is just one. An integrated package of climate policies that operate in parallel with carbon pricing. mitigation policies that also supports other key objectives For example, renewable and energy efficiency support is more likely to gain widespread support and to be measures, while motivated by other objectives, can implemented more effectively than inconsistent policies provide the same incentive effect as carbon pricing. There that work at cross-purposes. In order for carbon pricing is a wide range of legitimate reasons for these overlapping to have an optimum impact, policymakers should policies, such as green industrial policy, supporting maximize the synergies with complementary policies, penetration of certain transformational technologies, or manage potential tensions with overlapping policies and avoiding lock-in of capital in assets that may be stranded address any trade-offs associated with countervailing in the future. However, these policies represent an policies.6 Section 3 of the report discusses these issues implicit carbon cost, which can far exceed the level of in depth. the explicit carbon price and increase the overall social cost of reducing emissions. Policymakers can manage A key objective is to combine carbon pricing with the interactions between these policies and carbon complementary policies in a way that enhances the pricing in a way that exploits their parallel objectives, performance of each of the policies. This will ensure that while mitigating unwanted effects and minimizing costs. carbon pricing is effective in changing behaviors and that its consequences are acceptable to society. Opportunities Finally, policymakers may have to address the challenge for synergies exist: in the power sector carbon pricing of a range of countervailing policies that adversely affect works best in the context of efficient electricity markets, the impact of carbon prices on the behavior of investors where producers and consumers respond to full and consumers. Often, as with the case of fossil fuel cost-covering price signals to allocate resources. At subsidies, these policies are unsuccessful or inefficient in the same time, when carbon pricing encourages an achieving their stated objectives, e.g. lowering the cost increasing share of renewables in fast growing, relatively of energy for less affluent households. There are ways to small power systems, the challenges can be addressed achieve these objectives without distorting the intended successfully with complementary policies supporting carbon price signal. Carbon pricing does not have to wait flexibility of the system and its ability to incorporate for the phasing out of countervailing policies. Instead power from renewable sources. To encourage the efficient it can be used as part of a package of gradual reforms use of energy and increased use of public transport, a of fossil fuel subsidies, for example by using revenues carbon price needs to be accompanied by additional to help address some of the political economy barriers measures to remove barriers and to provide infrastructure to subsidy removal. However, in other instances, such that enables consumers to respond to the price signal. as where regulations protect banking or fiscal prudency 6 Source: OECD and World Bank Group, The FASTER Principles for Successful Carbon Pricing: An Approach Based on Initial Experience, 2015. 15 Executive summary that discourages low-carbon investments, there may be mitigation costs by 50 percent. At the same time, the a legitimate trade-off with carbon prices. Policymakers analysis highlights that some of the poorer regions in will need to determine whether there are ways to manage the world may be able to generate financial flows from these tensions at the margin and/or decide which selling emission reductions amounting to 2–5 percent objective should take precedence. of gross domestic product in 2050. These benefits might be realized while also promoting greater knowledge The dynamic nature of the complex interactions sharing and technical cooperation, and increasing between carbon pricing, other climate change policies political and public commitment to pursue low-carbon and the broader domestic policy landscape means growth. Another co-benefit of an international carbon that problems cannot always be fully anticipated. The market is that it increases the ability of policymakers to management of these interactions will be an evolutionary address the challenges of carbon leakage and the impact and iterative process. Understanding this, policymakers on competitiveness that domestic carbon pricing creates. should incorporate regular processes of review and evaluation so as to be able to respond to challenges The development of mechanisms that will realize that may emerge, without causing inconsistent policy these opportunities has been given renewed impetus twists and turns that could undermine the confidence 6 of the Paris Agreement. However, there by Article   of businesses to plan and invest. There are analytical are a number of legitimate barriers must be addressed. tools that policymakers can use to better understand In particular, sellers may fear that selling emission the effectiveness of carbon pricing and its complex reductions today will make it more difficult to realize interaction with multiple policies jointly influencing their NDCs or other commitments in the future. This, choices made by economic actors. in turn, could cause potential buyers to be concerned that there will not be a robust and liquid carbon market BUILDING AN which they can access. Other challenges include concerns INTERNATIONAL CARBON MARKET about losing control of the value of the domestic carbon AFTER PARIS price and the political challenges created by the scale of international transfers that may be generated. The latter issue particularly relates to fears that countries with As well as being a powerful tool to realize domestic low ambition may be rewarded through the receipt of abatement opportunities, carbon pricing can support international transfers. Another concern is the loss of the international cooperation on mitigation through the co-benefits associated with reducing emissions. establishment of an international carbon market. Such a market allows those who have the financial responsibility Given these barriers, the same learning-by-doing for reducing emissions to purchase emission reductions process that policymakers could adopt to promote wherever this is most cost-effective. This flexibility can domestic alignment between carbon pricing and significantly reduce costs, allowing for an increase in other domestic policies and objectives can also yield ambition. dividends in the development of an international carbon market. Solutions to many of these barriers include Modeling analysis undertaken for this report shows technical cooperation, results-based climate finance, that an international market could reduce the cost of sectoral approaches, mechanisms to measure and reflect delivering the emission reductions identified in the differential ambition and the greater use of international current INDCs by about a third by 2030. The modeling standards. The use of a combination of these approaches also finds that by the middle of the century, an is one possible route to the development of an international market has the potential to reduce global international carbon market. 16 section 1 Introduction 1 Introduction T  he Paris Agreement will enter into force on November 4, 2016, less than a year after its adoption at the 21st Conference of the Parties (COP   21) to the Contributions (INDCs). Parties that have submitted INDCs account for 96 percent of the world’s GHG emissions and 98  percent of the global population.9 United Nations Framework Convention on Climate The urgent priority now is for governments to Change (UNFCCC) in Paris.7 At COP   21, world ensure implementation of these commitments, leaders agreed to keep the global average temperature requiring sustained efforts to influence investment increase well below 2°C. Also, ambition was ramped up, and consumption decisions made every day by firms with consensus reached on pursuing efforts to hold the and households. Despite the large number of INDCs increase to 1.5°C.8 The Paris Agreement has been lauded that have been put forward so far, the global average as a significant global step forward in taking action on temperature rise resulting from their implementation climate change. will reach 2.7°C,10 falling short of the goal.11 The decision in the Paris Agreement to gradually ratchet Parties have been conveying their commitments to up ambition in future years through a five year revision reduce greenhouse gas (GHG) emissions and adapt cycle will therefore be important to meet the long term their development plans to the changing climate temperature objective. through their Intended Nationally Determined 7 While this report covers the period from January 1, 2015 until September 1, 2016, the authors decided to include the entry into force of the Paris Agreement given its global significance. The authors recognize that other significant developments have occurred after September 1, 2016 and before the publication of the report. These developments include the agreement reached at the 39th Assembly of the International Civil Aviation Organization (ICAO) on a global market-based measure to control CO2 emissions from international aviation, the announcement of a minimum federal carbon price in Canada, and the adoption of the carbon pricing legislation in Washington State, which happened after September 1, 2016 and before the publication of the report. They will be discussed in the 2017 edition of the Carbon Pricing Watch and the State and Trends of Carbon Pricing report. 8 Source: UNFCCC, Historic Paris Agreement on Climate Change - 195 Nations Set Path to Keep Temperature Rise Well Below 2 Degrees Celsius, December 12, 2015, http://newsroom.unfccc.int/unfccc-newsroom/finale-cop21/. 9 As of August 1, 2016. The share of global GHG emissions based on the 2012 GHG emissions in the Emissions Database for Global Atmospheric Research (EDGAR) database, including international transport emissions. 10 Source: Climate Action Tracker, Climate Pledges Will Bring 2.7 °C of Warming, Potential for More Action, December 8, 2015, http://climateactiontracker.org/ news/253/Climate-pledges-will-bring-2.7C-of-warming-potential-for-more-action.html; IEA, World Energy Outlook Special Briefing for COP21, November 26, 2015. 11 The aggregate impact of these INDCs will be continued growth of emissions, from the 2014 level of 53 GtCO2e to 56 GtCO2e in 2030. Compared to emissions levels under a least cost trajectory for 2°C, the emissions level from the implementation of INDCs is 15 GtCO2e higher in 2030. This emissions level is projected following the implementation of unconditional and conditional pledges. Source: UNFCCC, Synthesis Report on the Aggregate Effect of the Intended Nationally Determined Contributions: An Update, May 2, 2016. 18 This growing momentum to address climate change the emissions covered by carbon pricing initiatives to comes at a time when empirical evidence continues to 25 percent by 2020 and to double this coverage again mount on the impact of anthropogenic GHG emissions within a decade.17 The latest trends and developments on on natural systems. Global temperatures in the 21st century carbon pricing initiatives that this target builds upon are are breaking historical records: 15 of the 16 warmest years discussed in Section 2. on record occurred during this century.12 The diverse physical impacts of the changing climate—from melting This report covers initiatives that explicitly apply a glaciers, extreme weather events and erosion to drought price on a unit of GHG emission, including ETSs— and desertification—are already being felt. These impacts both cap-and-trade and baseline-and-credit systems,18 threaten to derail efforts to eradicate poverty and push carbon taxes, offset mechanisms and results-based more than 100 million people back into poverty over the climate finance (RBCF). These initiatives are examined next 15 years, as the poor are often the most exposed to in this report on subnational, national, regional and these climate-induced changes.13 international levels, the latter of which includes the existing Kyoto mechanisms and new approaches under Carbon pricing can play a pivotal role to realize the Article 6 of the Paris Agreement, as well as initiatives ambitions of the Paris Agreement and implement the outside of the UNFCCC. In addition, this section Nationally Determined Contributions (NDCs). Many reports on the internal carbon prices set by companies as of the plans submitted to the UNFCCC recognize well as the approach taken by some governments to price this, with about 100 INDCs including proposals for carbon for decision making purposes. emissions trading systems (ETSs), carbon taxes and other carbon pricing or market mechanisms.14 Carbon GHG emissions can be priced explicitly through pricing enables countries to cooperate on reducing carbon pricing or implicitly through domestic policy emissions and mobilize the required financial resources instruments such as energy taxes, energy efficiency to meet their NDCs. 54 countries reported their total trading and support for renewable energy.19 Moreover, cost of implementing their INDC, which amounts to carbon pricing operates within a broader policy landscape US$5 trillion.15 Even more financial resources will be with multiple objectives. Consequently, carbon pricing required to keep the temperature increase below 2°C. needs to be aligned with this range of other policies in Considering the power sector alone, studies show that order to operate effectively. This topic is explored in cumulative additional investment of US$9   trillion over Section 3, with a focus on policies that complement 2016–2050 is needed to decarbonize. 16 or overlap with a domestic carbon pricing instrument and their potential synergistic or countervailing impact. The High Level Panel on Carbon Pricing, a group Tools to support policy alignment are also evaluated in of government leaders and international organizations, this section. set forward in April 2016 a global target to double 12 Source: NOAA National Centers for Environmental Information, State of the Climate: Global Analysis for Annual 2015, March 2016. 13 Source: World Bank, Shock Waves: Managing the Impacts of Climate Change on Poverty, May 25, 2016; United Nations, Sustainable Development Goals, accessed June 14, 2016, http://www.un.org/sustainabledevelopment/sustainable-development-goals/. ­ 14 See Annex III for the list of INDCs planning or considering the use of carbon pricing, which include carbon and other market mechanisms. 15 Based on the self-reported implementation costs by 54 countries in their INDC. The basis for INDC cost estimates is not uniform, and may include costs for mitigation, adaptation and other costs required to implemented the INDCs. Source: World Bank NDC Working Group, Interactive (I)NDC Database, August 2016, www.indc.worldbank.org. 16 Source: IEA, Energy Technology Perspective 2016: Executive Summary, May 30, 2016. 17 Source: World Bank, Leaders Set Landmark Global Goals for Pricing Carbon Pollution, April 12, 2016, http://www.worldbank.org/en/news/press-release/ 2016/04/21/leaders-set-landmark-global-goals-for-pricing-carbon-pollution. 18 Two main types of ETSs can be distinguished: a cap-and-trade system, which applies a cap or absolute limit on the emissions within the ETS and emissions allowances are distributed for emissions that will take place, and a baseline and credit system, where baseline emissions levels are defined for individual installations ­ and credits are issued to installations that have reduced their emissions below this level that can be sold to other installations exceeding their baseline emission levels. Source: OECD, Emission Trading Systems, accessed August 18, 2016, http://www.oecd.org/environment/tools-evaluation/emissiontradingsystems.htm. 19 The status of these instruments are not discussed in detail in this report. 19 1   Introduction In addition to driving domestic emission reductions, carbon market. Section 4 evaluates the benefits of an carbon pricing also supports international cooperation international carbon market and analyses the barriers on mitigation. The Paris Agreement lays the basis for that may hold back the establishment of such a market. facilitating international recognition of cross-border Potential ways to move forward to overcome these approaches to cooperation on emissions mitigation, barriers are discussed and a scenario to transition to an including pursuing cooperation through an international international carbon market is presented. » Mexico is convinced that in order to stabilize the increase in global temperature to 1.5°C above pre-industrial levels, a fair and real carbon price must be set. For this reason, my country has implemented different measures to promote a price on carbon such as carbon taxing and clean energy certificates which will allow us to launch a carbon national market by 2018. « Enrique Peña Nieto, President of Mexico » We should now follow up the Paris Agreement with adequate actions, national policies, investment schemes and regional and international initiatives and partnerships. I iterate Ethiopia’s commitment to the global efforts to overcome dangerous climate change and ensure sustainable development. We will use every policy instrument, including carbon pricing, which is found to be effective, efficient and fair. « Hailemariam Dessalegn, Prime Minister of Ethiopia These statements were made on April 21, 2016 in conjunction with a call by the Carbon Pricing Panel for the world to expand carbon pricing to cover 25 percent of global emissions by 2020—double the current level—and to achieve 50 percent coverage within the next decade. 20 section 2 Existing and emerging carbon pricing initiatives around the world 2 Existing and emerging carbon pricing instruments around the world 2.1 in Figure 4 and Box 1. These jurisdictions, which OVERVIEW, RECENT DEVELOPMENTS, include seven out of the world’s ten largest economies,23 AND EMERGING TRENDS are responsible for almost a quarter of global GHG emissions.24 On average, the carbon pricing initiatives 2.1.1 implemented and scheduled for implementation cover Global overview of about half of the emissions in these jurisdictions. This carbon pricing initiatives translates to a total coverage of about 7 gigatons of carbon dioxide equivalent (GtCO2e) or about 13 percent T  he COP invited Parties to submit their INDCs as part of the groundwork for the adoption of the Paris Agreement. About 100 Parties stated in their INDCs of global GHG emissions, as displayed in Figure 5. This figure shows that the emissions covered by carbon pricing have increased threefold over the past decade. that they are planning or considering the use of carbon In addition, the number of initiatives implemented or pricing,20 as specified in Box 1 and detailed further in scheduled for implementation has jumped from 9 to 42 Section 2.2.21 These Parties account for 58 percent of over the same period.25 global GHG emissions. Among the Parties planning or considering the use of carbon pricing are three of the If the Chinese national ETS is implemented in 2017 world’s five largest emitters, i.e. China, India and Brazil.22 as announced26—although coverage data has not been officially released—initial estimates show that emissions On a regional, national and subnational level, about covered by carbon pricing initiatives could potentially 40 national jurisdictions and over 20 cities, states, and increase from 13 percent to between 20 to 25 percent regions are putting a price on carbon in 2016, as displayed of global GHG emissions27 as illustrated in Figure 5. 20 For the purpose of this report, carbon pricing includes carbon and other market mechanisms. The authors recognize that different interpretations are possible since references to market mechanisms in INDCs are not always presented in a clear and consistent manner. 21 As of September 1, 2016. 22 The other two Parties, the United States (US) and the EU, did not state the use of carbon pricing in their INDCs, despite carbon pricing initiatives already being implemented in those jurisdictions at a regional, national and/or subnational level. The number of Parties planning or considering the use of carbon pricing in their INDCs is therefore not comparable with the jurisdictions with carbon pricing initiatives implemented, scheduled or under consideration. 23 The seven economies are the US (carbon pricing initiatives at a subnational level), China, Japan, Germany, UK, France and Italy. The world’s largest economies were determined using the World Bank’s GDP data for 2014. 24 Figures as of August 1, 2016. 25 In 2006, carbon pricing initiatives covered 4 percent of annual global GHG emissions; in 2016, this figure stands at 13 percent. Similarly, 9 carbon pricing ­ initiatives were implemented or scheduled for implementation in 2006, increasing to 42 in 2016. 26 Chinese President Xi Jinping made this announcement on September 25, 2015 as part of the “US-China Joint Presidential Statement on Climate Change”. 27 The emissions to be covered under the Chinese national ETS are estimated to be about half of China’s national GHG emissions, based on the sector scope, as stated in the “US-China Joint Presidential Statement on Climate Change”, and public emissions data from the International Energy Agency. This estimate has not been validated by Chinese authorities. Informed researchers have judged that the GHG emissions coverage could potentially be about 40 percent of China’s total GHG emissions. 22 This would represent the largest ever increase in the Over the period covered by this report,30 there were no share of global emissions covered by carbon pricing in clear upward trends in the carbon prices of most ETSs, a single year. while there were increases in some carbon tax rates as detailed in Section 2.3. About three quarters of the emissions covered are priced at less than US$10/tCO2e as shown in Figure 7, thus well below the level required » The emissions covered to effectively support at least a 2°C goal, which has been estimated by various studies to be between­ by carbon pricing have US$80/tCO2e to US$120/tCO2e in 2030.31 increased threefold over the Over 1,200 companies reported to CDP in 2016 that past decade. The number they are currently using an internal price on carbon or of initiatives implemented or plan to do so within the next two years, as shown in Box 1 and detailed further in Section 2.4.32 Of these scheduled for implementation companies, 83 percent are located in countries where has jumped from 9 to 42 mandatory carbon pricing is in place or scheduled at a national or subnational level. The corporate carbon prices over the same period. « reported to CDP in 2016 range from US$0.3/tCO2e to US$893/tCO2e, with about 80 percent of the reported prices ranging between US$5/tCO2e and US$50/tCO2e. In 2015, governments raised about US$26 billion in This indicates that some companies are moving beyond revenues from carbon pricing initiatives. This represents the use of internal carbon pricing as a tool to evaluate a 60 percent increase compared to the revenues raised in the potential cost impact of carbon pricing initiatives on 2014, which was estimated to be about US$16 billion.28 their operations. This trend is primarily attributed to the growth in auction revenue in California and Québec as a result of expanded GHG coverage, and a substantial tax rate increase in France. » If the Chinese national ETS is implemented …, this would The total value of ETSs and carbon taxes in 2016 is just below US$50 billion, similar to the value reported represent the largest ever in the State and Trends of Carbon Pricing 2015.29 This increase in the share of global relative stability is due to increases in various carbon tax rates being offset by lower carbon prices in most ETSs. As emissions covered by carbon shown in Figure 6, the observed carbon prices span a wide pricing in a single year. « range from less than US$1/tCO2e to US$131/tCO2e. 28 Authors’ calculations, based on publically available information, including auction revenue reports of the different ETSs and the annual budget of governments with carbon taxes in place. 29 The total value of the ETS markets was estimated by multiplying each ETS’s annual allowance volume for 2016, or the most recent yearly volume data, with the price of the emission unit on April 1, 2016. The total value for carbon taxes was derived from official government budgets for 2016. Where the allowance volume (for an ETS) or budget information (for a carbon tax) was unavailable, the value of the carbon pricing initiative was calculated by multiplying the GHG emissions covered with the nominal carbon price on April 1, 2016. No information was available on the amount of emission reduction credits which could be generated by facilities under the Australian safeguard mechanism; therefore, this was not included in the value calculation. The values presented in the Carbon Pricing Watch 2016 were not updated to August 1, 2016, because no other new carbon pricing initiatives were implemented nor have any changes occurred in the existing ­ initiatives since the release of that brief in May 2016. Moreover, daily changes in prices and exchange rates over a 5-month period cannot be used as an indicator of the evolution of global carbon pricing initiatives. 30 This report covers the period from January 1, 2015 to September 1, 2016. 31 Most scenario analysis from various studies indicate that a global average carbon price of between US$80/tCO2e and US$120/tCO2e in 2030 would be consistent with the goal of limiting the global temperature increase to 2°C. Source: IPCC, Climate Change 2014: Mitigation of Climate Change, November 27, ­ 2014; IEA, World Energy Outlook, 2015. 32 Source: CDP, Embedding a Carbon Price into Business Strategy, September 2016. 23 2   Existing and emerging carbon pricing initiatives around the world While carbon pricing has expanded significantly in carbon prices at relatively low levels. However, recent years, in many instances these initiatives are still at implementation of a carbon pricing policy framework and an early stage in achieving impact. In order to mobilize institutional structure is nonetheless a first step that can lay political support, some policymakers have introduced the groundwork for future increases in ambition and impact. Box 1 Carbon pricing in numbers INTERNATIONAL CARBON PRICING INITIATIVES 101 INDCS 58% include carbon pricing of global GHG emissions (domestic and/or international) are covered by these INDCs REGIONAL, NATIONAL AND SUBNATIONAL CARBON PRICING INITIATIVES 40 NATIONAL 24 SUBNATIONAL 42 CARBON PRICING INITIATIVES jurisdictions with carbon pricing initiatives implemented or scheduled for implementation COVERING ANNUAL GLOBAL GHG EMISSIONS OF 7 GtCO2e = 13% PRICES IN THE IMPLEMENTED INITIATIVES US$1-131/tCO2e 75% of the emissions covered are prices