Seventy-three countries and more than 1,000 companies signed the World Bank’s Putting a Price on Carbon statement, presented ahead of the UN climate summit on 23 September, including the world’s largest emitter, China. The governments that signed represent 54 per cent of global greenhouse gas emissions, many having already implemented carbon taxes or emission trading schemes domestically. Almost 50 jurisdictions around the world have implemented emission trading schemes, and the World Bank’s initiative confirms increasing support for use of market instruments to reduce emissions.
But do carbon markets work? Nearly all domestic or regional carbon markets are currently oversupplied. The global financial crisis is often the main reason for this, but many markets have also been created to achieve modest political ambition, where caps have been set close to historic emissions. Oversupply has pushed allowance prices to low levels across the world, and none of the carbon markets are generating much abatement in the short term. Although these measures ensure that emissions stay below the politically agreed cap, it is currently questionable whether they send the right signal for long-term investments.
Accordingly, carbon markets have received a lot of criticism, but some of this is for the wrong reasons. There is a tendency to blame the policy instrument itself for the lack of environmental progress. But the ability of a carbon market to deliver abatement or stimulate green investment is ultimately determined by the underlying political ambition. The effectiveness of future emission trading schemes will therefore depend on the reduction targets taken on by national governments in the context of the Paris agreement. Without more ambitious mitigation targets, any pricing mechanism would fall short of achieving a shift to low-carbon technologies and industries.
The fact that countries are increasingly choosing emission trading systems as climate policy instruments means that the regulatory framework for future reductions is in place. It is now up to policymakers to raise the ambition and put carbon markets to work to ensure much larger reductions in the period up to 2030.
Hæge Fjellheim, senior analyst, Point Carbon at Thomson Reuters