COP26: Stronger commitments on carbon pricing needed

Isabella Goldstein, Campaign Manager at the Zero Carbon Campaign explains why stronger policy commitments on carbon pricing are essential – with the mechanism already endorsed by global leaders such as Angela Merkel and Justin Trudeau, those attending the summit should follow suit.

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Isabella Goldstein

World leaders, activists, businesses and international organisations have all used COP26 to call for stronger action on carbon emissions – but pretty words will only be meaningful if they’re backed by strengthened policy commitments, says Isabella Goldstein, Senior Campaign Manager at the Zero Carbon Campaign.

Carbon pricing is having a moment. In the last few weeks alone, the mechanism – which sees a cost attached to the production of greenhouse gas emissions – has been endorsed by the IMF’s Managing Director Kristina Georgieva, European Commission President Ursula Von Der Leyen, Canadian President Justin Trudeau and the International Chamber of Commerce. German Chancellor Angela Merkel even used her last ever climate speech at COP26 to ‘make a clear plea for the pricing of carbon emissions.’

Momentum is clearly building, but the chances of this rhetoric being effectively translated into action depend on the way in which these policy commitments are implemented. This was highlighted in a recent Parliamentary debate on the introduction of charges on carbon emissions, which was triggered by the Zero Carbon Campaign’s e-petition. The debate saw a cross-section of MPs make the case for an equitable approach towards the introduction of strengthened carbon pricing policies, which spread the costs and benefits of decarbonisation more fairly across society. Three core themes emerged:

Supporting a fair and just transition 

For all its benefits, carbon pricing is not a panacea. We need only look to the gilet jaunes protests across the channel to remind ourselves that – unless introduced alongside complementary policies to offset their distributional impacts – carbon prices run the risk of hitting the poorest the hardest. 

It is therefore essential that wherever carbon pricing mechanisms are introduced, equity is at the heart of their design. This is at once a moral imperative, and a necessary condition for public support; with polling by the Zero Carbon Campaign finding strong support for increasing carbon taxes on producers of pollution, provided that revenues are recycled to cushion low-income households from cost increases and help all households fund the switch to low carbon living. In practice, this might mean using carbon pricing revenues to fund an uplift in Universal Credit, as well as grants for electric vehicles, energy efficiency improvements and clean heat. 

As the findings of our latest report have highlighted – revenue redistribution is just one piece of the puzzle. The poverty risks of the net-zero transition stretch beyond finance to include poor information, failure to address skills, capacity and confidence, and insufficient attention to different people’s needs. To be truly effective in stimulating a fair and just transition, Governments must therefore combine the introduction of carbon prices with other fiscal, regulatory and educational measures that help incentivise all actors towards decarbonisation – ensuring everyone can participate in the net-zero transition, regardless of circumstance. 

Driving the global shift to net-zero 

Only 22 per cent of global greenhouse gas emissions currently have a cost attached to their production, and the average global carbon price is just $2 US per tonne. As a result, the cost of green technologies remains high relative to emissions-intensive practices, which is a major barrier to uptake. The challenge this poses was brought into sharp focus last week, when leaders of over 40 nations agreed to coordinate the global introduction of clean technologies in order to rapidly drive down their costs and expand their accessibility. 

By pledging to significantly increase global average carbon price, these very same world leaders could correct the market failures that sustain the fossil fuel economy, and turbocharge the transition to net-zero. As the Sustainable Markets Initiative’s latest report suggests, a global carbon price of just $30-70 a tonne would see coal priced out by gas and renewable energy. At $70-$120 a tonne, steel and cement industries would be incentivised to decarbonise their operations.

In short, if world leaders’ pledged to introduce stronger and more extensive carbon pricing policies, it would help direct (and de-risk) the flow of the world’s estimated $100tn investible global capital towards green ventures, fuelling the emergence of new green innovations and driving long-term emissions reductions. 

Protecting against emissions offshoring 

Domestic or ‘unilateral’ action on carbon pricing could also result in ambitious nations being out-competed by cheaper and more carbon-intensive imports. Concern about this driving the ‘offshoring’ of operations from jurisdictions with high carbon costs to those with weaker ones has led the European Commission to propose the application of a Carbon Border Adjustment Mechanism (CBAM) – a tariff on imports equal to the cost of carbon under the EU ETS (Europe’s carbon pricing scheme). 

Europe isn’t the only jurisdiction considering applying carbon charges at the border – US President Joe Biden put the measure at the heart of his election platform – and UK Environment Secretary George Eustice confirmed in a recent interview that officials from the Treasury and BEIS are exploring models of how a carbon border tax might work.

While carbon-based border tariffs may be a necessary precondition for increasing carbon costs on domestic producers, it is worth noting that CBAMs do risk limiting market access for exporters in developing or lower developed countries who have limited scope to reduce the emissions intensity of their operations. This could inadvertently sabotage global progress on emissions reduction by incentivising said producers to sell in markets with lower standards. 

Navigating these complexities will require Governments to agree best practice principles around CBAM implementation that can appease those who have been outspoken against the policy. This includes the potential for exemptions for developing nations, as well as the use of revenues; for example, committing to using a proportion of the money raised to help developing nations finance their low-carbon transitions. 

COP26 has already produced the world’s first carbon-based trade agreement; this diplomacy may also prove successful in producing a global agreement on carbon pricing that promotes environmental ambition across borders. 

In conclusion

All eyes are rightly on the outcomes of the COP26 conference. To have any chance of limiting global warming to 1.5C, we need leaders to come forward with pollution pricing commitments that deliver across three key areas: they must be high and expansive enough to give businesses the confidence to invest in the net-zero transition and bring down the cost of low-carbon alternatives for consumers; they must protect those who are most vulnerable to the unequal impact of climate policies – domestically and internationally, and they must include measures to prevent emissions offshoring with broad international buy-in. Anything less amounts to the ‘greening’ of the west at the expense of developing nations, and risks triggering a carbon-intensive import boom. 

Leaders at home and abroad know that it is time to turn pretty words into tangible action – by delivering carbon pricing pledges in accordance with these considerations, they can prove that they mean it.