In today’s era, as the world is grappling with the gruesome threat of climate change, the need for efficient carbon pricing instruments have never been more crucial. A report by The World Bank‘s “State and Trends of Carbon Pricing 2024”, brings forth a comprehensive overview of the present state of carbon pricing globally, along with the challenges that follows. Since the window to limiting global warming to 1.5°C is rapidly closing, it’s essential that we fasten up the pace to transition towards a low-carbon economy. To achieve this, carbon pricing plays an essential role.
What is Carbon Pricing?
It refers to the price on emissions and/or provides and incentive to emit less. It helps in reducing greenhouse gas emissions as it puts a price on carbon dioxide (CO2) emissions and shifts the cost of burden back to the emitters. This economic indicator allows emitters to choose between reducing their emissions or paying for the damage they cause.
“10 years ago, carbon pricing policies covered only 7% of global emissions. Today, approximately, a quarter are covered by these instruments”.
Growth and Expansion of Carbon Pricing
Over the past 10 years, carbon pricing instruments have seen considerable growth. What was mere 7% of global emissions in 2010, now encompasses nearly a quarter of global emissions. It reflects the recognition of carbon pricing as a suitable mechanism for incentivizing reduction emission and supporting climate goals.
In 2023 itself, total revenue generated from carbon pricing was $104 billion, which a noteworthy portion allocated to climate and nature-related schemes. It underscores the benefit of carbon pricing not only as a regulatory tool but also one of the means of financing sustainable development initiatives. Additionally, the total number of implemented instruments has increased: today, there are 75 carbon pricing instruments which includes recent additions from Australia, Hungary, Slovenia, and Mexico.
Growth and Expansion of Carbon Pricing
Carbon pricing initiatives have seen fundamental development. Currently, 24% of global emissions are covered as per the 2024 report. According to the report, large middle-income countries such as Brazil, India, Chile, Turkey and Colombia are making constant strides in carbon pricing implementations. Even though established industries and sectors like power still rule the market, new industries and sectors like waste management, shipping, and aviation are starting to take carbon pricing into account. Moreover, the EU’s Carbon Border Adjustment Mechanism, is also encouraging the government to consider carbon pricing for hard-to-abate such as electricity, fertilizers, aluminium, cement, iron and steel.
Globally, there is growing momentum for carbon pricing instruments:
· At the moment, 40 national and 25 sub-national jurisdictions have carbon pricing instruments.
· These initiatives cover 8 gigatons of carbon-di-oxide which equals to 15 percent of global greenhouse emissions.
· Out of 46 carbon pricing initiatives, 23 are Emissions Trading Systems (ETSs) mainly used in subnational areas, while 23 are carbon taxes, primarily implemented at the national level.
Different Carbon Pricing Methods
There are primarily four methods of carbon pricing:
1) Emissions Trading System (ETS): It refers to the system that allows emitters to exchange emission units to attain their emission goals. It sets a market price for GHG emissions by generating supply and demand of its units. It’s two primary varieties are:
- Cap-and-trade systems, it places a ceiling or an upper bound on the emissions within the ETS, and the number of emissions equal to the cap is allocated as emissions allowances, typically for free or through auctions.
- Baseline-and-credit systems, where baseline emissions levels are defined for individual regulated entities and credits are issued to entities that have reduced their emissions below this level. It can be later sold to other entities who have exceeded their baseline emission levels.
4) Carbon Tax:By establishing an explicit tax rate on greenhouse gas emissions or, more frequently, on the carbon content of fossil fuels, or a price per tCO2e, a carbon tax directly sets a price on carbon. Unlike an ETS, a carbon tax has a predetermined carbon price rather than an emission reduction target.
5) RBCF: When it comes to managing climate change, such as delivering and verifying emission reductions, RBCF is a funding approach where payments are made only after pre-defined outputs or outcomes are achieved. Numerous RBCF initiatives seek to purchase verified reductions in greenhouse gas emissions while also lowering poverty, expanding access to clean energy, and providing advantages for the community’s health.
The Role of Indian Government in Carbon Pricing
Currently, the Indian government is actively promoting carbon pricing through various programmes to integrate into its climate strategy. According to Business Line, in addition to establishing the institutional framework for the system over the past year, which outlines the roles and responsibilities of the various governing authorities, India adopted the legal basis for a carbon market (including an ETS) in 2022 and plans to implement a carbon credit trading scheme by 2026.
However, to succeed, the country needs to push ahead all sectors of the economy and greening the power. India needs to propel towards a decarbonized economy by shifting towards green hydrogen and biomass-based fuels. Additionally, the implementation of India’s green credit mechanism and carbon credit trading programmes are some of the initiatives via which the transition could be accelerated.
Conclusion
Despite having exceptional record of revenue and growth, the global carbon price coverage and levels remains considerably low to meet the Paris Agreement goals. Presently, less than 1% of global greenhouse emissions is catered by direct carbon price at or above the range recommended by the High-level Commission on Carbon Prices to limit temperature rise to well below 2ºC. Although carbon pricing is an important weapon in the fight against climate change, much more needs to be done. Global carbon pricing initiatives must be strengthened and continued to be implemented as we move towards a sustainable future.
In conclusion, a variety of strategies and growing worldwide adoption will define carbon pricing in 2024. To meet global climate targets and make the transition to a low-carbon economy possible, carbon pricing is essential, provide that innovation and collaboration continue to grow.
