A total of 64 carbon pricing instruments are now in operation around the world, covering over 20% of global greenhouse gas emissions and generating $53 billion in revenue.
According to the World Bank’s annual “State and Trends of Carbon Pricing” report released today, these advances represent a 17% increase in revenue from last year, However the full potential of carbon pricing remains largely untapped.
Revenue growth is driven mainly by the rise in EU allowance prices – a program that caps emissions, requiring countries that exceed these limits to purchase additional allowances.. Emissions trading systems have been also largely resilient to reduced economic activity during the COVID-19 pandemic, and likely helped by their price or supply adjustment mechanisms.
“It is encouraging to see how governments and companies are integrating carbon pricing into their climate strategies,” said Bernice Van Bronkhorst, Global Director for Climate Change at the World Bank.
“But the potential of carbon pricing is still largely untapped, despite the fact that it can be effective in driving decarbonization for countries in all stages of development. If implemented carefully, these policies can also be redirected to support lower income communities, getting resources to those who need them the most.”
Key highlights in the report include the operational launch of China’s national Emissions Trading System (ETS) in January 2021 and the upcoming changes to the EU ETS as part of the European Green Deal recovery package.
The report also finds that the majority of carbon prices remain far below the $40-80/tCO2e range recommended for 2020 to meet the ‘well below 2°C’ temperature goal of the Paris Agreement. At this point, carbon prices in the recommended range cover less than 5% of global emissions.
The report was launched at Innovate4Climate, the World Bank Group’s flagship annual event on climate finance, investment, and markets, held virtually this year from May 25 to 27. Now in its fifth year, the conference will bring together leaders from government, business, policy, and finance to discuss innovative climate finance solutions.
State and Trends of Carbon Pricing 2021 calculates greenhouse gas emissions covered by implemented pricing mechanisms only, a change from previous editions of the report, which based calculations on instruments in operation and those scheduled for implementation. In the period covered by the report, the following are the new carbon pricing instruments from the previous year: China ETS, UK ETS, Germany ETS, Netherlands Carbon Tax, Luxembourg Carbon Tax and the Tamaulipas and Baja California subnational Carbon Taxes
A carbon price sends a financial signal that encourages companies and individuals to reduce their emissions. They can play a useful role within a broader suite of policy instruments that tackle other market failures and climate challenges. Research and development or sector-specific regulations, for instance, will also be necessary to reduce emissions outside the coverage of the carbon price or to address barriers apart from price. The State and Trends of Carbon Pricing looks at explicit carbon prices enacted by a government mandate and impose a price based on the carbon content. This includes carbon taxes and emissions trading systems. Crediting mechanisms can also generate credits from voluntarily implemented reduction or removal activities and these are included in the report. Finally, how companies use an internal carbon price to guide investments decisions and/or as an internal carbon fee is also included.
This year’s report focuses on the proliferation of net zero commitments by governments and corporates and its impact on carbon pricing instruments. While the growth in net zero commitments is a positive sign for climate action, these announcements also need to be backed up by ambitious short- and medium-term action to put jurisdictions and companies on a path to achieve net zero in the next thirty years. Against this backdrop, what role will carbon pricing instruments play and how will they be designed in order to reach net zero targets?