Danish ship owner Maersk, Swiss commodity trading house Trafigura and US beverage manufacturer PepsiCo are among hundreds of companies calling on governments to roll out a global carbon pricing scheme to redouble efforts to slow global warming.
Carbon pricing aims to quicken the pace of decarbonisation by making emissions more costly and giving financial incentives for businesses to switch to non-fossil fuel alternatives.
Despite its rich promise, carbon pricing has so far failed to take off since it was first proposed nearly half a century ago.
Existing schemes cover barely a quarter of all annual global greenhouse gas emissions.1 The world’s biggest economy, the US, does not even participate at the federal level.
Prices are also far too low. The IMF estimates that they currently average at only USD3 per tonne of CO2, with vast differences between regions.2
That stands in contrast to the USD100 per tonne which the International Energy Agency says is required to achieve the Paris Agreement goal of limiting temperature rises to 2 degrees Celsius above pre-industrial levels.
Fierce opposition from the coal, oil and gas sectors, have played a major part in slowing the development of carbon pricing schemes.
The American Petroleum Institute, the top fossil fuel lobby representing nearly 600 corporations, famously killed a landmark legislation in 2009 to put a price on carbon emissions across the US.
But that was then.
Now, the API is endorsing the introduction of carbon prices in a major policy reversal that underscored seriousness of tackling climate change.
This follows a similar announcement of support for carbon taxation by the Business Roundtable, a lobbying group of 200 CEOs, including the leaders of Chevron and ConocoPhillips, and the US Chamber of Commerce, another powerful lobbying group.
These U-turns are certainly to be welcomed. But it begs the question: why should someone ask to be taxed?
Renewable energy expert Chris Goodall says these firms, hesitant to act alone without risking a decline in their market capitalisation, tend to want global carbon regulations that will affect all companies – including their competitors – equally.
At the same time, being a vocal proponent of the scheme gives them a competitive edge as a zero-carbon business.
For example, Maersk has called for a USD150-a-tonne carbon levy on shipping fuel that it says would bridge the gap between the fossil fuels consumed by vessels today and greener and more expensive alternatives.
The world’s largest container shipping line has shrunk its CO2 footprint by nearly 50 per cent from 2008 levels, meeting the requirement from the International Maritime Organization for 2030.
“Maersk’s customers want to be able to show their buyers that all aspects of the supply chain are decarbonising. By pushing its peers in the shipping supply chain to agree to a global carbon price, even without government action, Maersk is demonstrating to its customers that staying with the global leader in low-carbon shipping won’t add more costs,” says Goodall, author of several books on sustainability and the environment.
“I expect some individual industries to plan their taxation proposals and move faster than governments or international organisations. My guess… is that this will pattern will spread across industrial sectors as diverse as agriculture, steel and clothing.”
The World Bank says several multi-national companies, including Google, Walmart and Shell are already using an internal “shadow carbon price”, which help them incorporate emissions into their profit and loss statements, reduce carbon inefficiencies and encourage a greener shift.
What’s more, the CDP, a non-profit body promoting corporate disclosure on sustainability, says the number of companies planning or using an internal carbon price has topped 2,000, up 80 per cent from just five years ago. The combined market capitalisation of these companies now exceeds USD27 trillion.3
European standards
Stubbornly low carbon prices have been also blamed for the mechanism’s failure to incentivise businesses to emit less.
But here too, signs are encouraging.
China, the globe’s No.1 emitter, has launched a national carbon market, which has the potential to overtake the EU as the world’s biggest. Market participants expect the price to average RMB66/tonne (USD10) in 2025 before rising to RMB77 by the end of the decade.
In Europe, the world’s biggest and oldest market, carbon prices have risen more than six-fold since 2018 to a record high of over EUR60 in September.
And European prices are widely expected to rise further.
This is because Brussels is about to expand its emission trading system (ETS) in line with the European Green Deal and its new target to reduce greenhouse gas emissions by at least 55 per cent by 2030.
In what is the biggest overhaul of the market to date, the Commission wants to phase maritime transport into the ETS from 2023 and improve a mechanism to control the supply of carbon permits.
The reform will also toughen the rules on getting carbon allowances for free – closing a loophole for polluting industries to avoid paying the full cost of emissions.
What’s more, the EU is expected to propose a carbon border adjustment mechanism, designed to put the region’s firms on an equal footing with competitors in countries with weaker carbon policies and prevent “carbon leakage”, or relocation of companies out of Europe in search for looser emissions standards.
The reform, phased in from 2023 for a full implementation from 2026, will apply to steel, iron, cement, fertilisers, aluminium and electricity industries.
Goodall says the border tariffs scheme would be simple to implement for energy importers and represents the first step towards a global carbon tax.
But the plan could come unstuck for manufactured, goods given varying carbon intensity of the production processes, he adds.
“Checking on the true carbon footprint of a device assembled in China with components from perhaps ten other countries will be almost impossibly complex. Will the border tax be imposed on the basis of the manufacturers’ own assessment of the carbon footprint of the computer? Unlikely, but we have yet to work out what the right alternative is,” he says.
Road to Glasgow
The discussion on carbon pricing and credits is likely to feature prominently during the landmark UN climate talks in Glasgow later this year as a potential cornerstone to supporting climate goals.Goodall says carbon prices cannot garner wider support if policymakers ignore the social dimension of such measures.
The tax would fail, he says, if it is added to the net living cost of poorer households, for whom energy takes up a relatively large share of their budgets. Instead, he explains, the government should return the proceeds to the population in the form of annual rebates – a policy adopted by Canada.
“Problems arising in social equity from taxing emissions will have to be dealt with by revisions to general taxation policy. For example, a tax on natural gas in the UK will have to be accompanied by redistributive measures, such as per capita payments, to poorer households,” Goodall says.
“Everybody might get USD1,000 per head, for example. This would mean that in the case of a small number of individuals, the tax will fall most heavily on the well-off and people, for example, who don’t fly will be clear net beneficiaries.”
The World Bank estimates that more than 40 per cent of global revenues from carbon taxation have been allocated to environmental projects; proceeds have also funded general budget and tax cuts, development-related projects, and direct transfers for households and businesses.
“If we want the world to continue to operate an essentially free trade economic system, and at the same time cut back emissions at an unprecedented rate of at least 5 per cent a year, the absolute imperative is a universally agreed level of taxation,” Goodall says.
“This isn’t going to happen quickly or painlessly. I think we are likely to see a decade or more of faltering and highly contested steps towards a uniform world-wide carbon price.” [1] Carbon Pricing Dashboard, World Bank
[2] Data as of June 2021. https://blogs.imf.org/2021/06/18/a-proposal-to-scale-up-global-carbon-pricing/
[3] https://www.cdp.net/en/research/global-reports/putting-a-price-on-carbon
[4] China Carbon Pricing Survey 2020
