This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.
Author: Stefan Ellerbeck, Senior Writer, Formative Content
- Carbon-pricing is regarded as one of the most powerful tools to help countries limit CO2 emissions and reach net-zero targets.
- Denmark has approved a new corporate carbon tax which will become the highest in Europe.
- Some of the world’s biggest emitters of CO2 have either not imposed a carbon tax or have introduced emissions trading systems instead.
In the race to net-zero more countries are looking at ways to reduce their CO2 emissions.
Carbon pricing is one option governments are using to help reduce pollution from fossil fuels and encourage investment in cleaner technology.
A carbon tax is levied on the carbon emissions required to produce goods and services. It generally only covers CO2 emissions, but can also apply to other greenhouse gases such as methane or nitrogen oxides – by taxing emissions based on their potential to contribute towards global warming.
According to the World Bank there are 68 direct carbon pricing instruments operating as of June 2022 in 46 national jurisdictions around the world. These comprise 36 carbon tax regimes and 32 emissions trading systems (ETS). These are tradable-permit systems which set a cap on the amount of greenhouse gases that can be emitted. Businesses and entities have the flexibility of buying and selling emissions units.
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What are voluntary carbon markets?
Activities that demonstrate their capacity to remove CO2 from the atmosphere or prevent CO2 from being emitted are verified by an independent standard and issued as carbon credit certificates (representing one metric ton of carbon dioxide equivalent).
Standards are organizations, usually NGOs, which certify that a particular project meets its stated objectives and its stated volume of emissions. Some of the most prominent standards include the UN Clean Development Mechanism, Verra, the American Carbon Registry, Climate Action Reserve and Gold Standard.
Carbon credits can be grouped into three large categories: avoidance projects (they avoid emitting greenhouse gasses altogether), reduction (they reduce the volume of greenhouse gasses emitted into the atmosphere) and removal (they remove greenhouse gasses directly from the atmosphere).
Forestry avoidance projects or programmes known as REDD+ (Reduced emissions from deforestation and forest degradation) prevent deforestation or wetland destruction. Other examples include soil management practices in farming that limit greenhouse gas emissions — such as projects aiming to avoid emissions from dairy cows and beef cattle through different diets.
Carbon removal from the atmosphere can include afforestation and reforestation projects and wetland management, which, as they grow, turn CO2 into solid carbon stored in their trunks and roots.
The reduction category includes projects that mostly centre on reducing the demand for energy efficiency, including cookstove projects, fuel efficiency, or the development of energy-efficient buildings.
International voluntary carbon markets (VCM) provide a platform for individuals and organizations to offset/balance their unavoidable and residual emissions by purchasing and retiring (cancel in a registry after which it can no longer be sold) carbon credits issued by sellers who have a surplus carbon budget — either because they’ve avoided emissions or undertaken some additional activities that reduce or removed emissions.
While compliance markets are currently limited to carbon credits from a specific region, voluntary carbon credits are significantly more fluid, unrestrained by boundaries set by nation-states or political unions. They also can be accessed by every sector of the economy instead of a limited number of industries. The Taskforce on Scaling Voluntary Carbon Markets estimates that the market for carbon credits could be worth upward of $50 billion as soon as 2030.
What are the world’s biggest CO2 emitters doing about carbon pricing?
European Union
The Danish parliament has recently approved a new corporate carbon tax which is reported to become the highest in Europe. Denmark has already set an ambitious target of cutting greenhouse gas emissions by 70% from 1990 levels by 2030. The Danish government says it will target companies both in and outside the EU’s carbon quota system.
The EU ETS is the largest multi-sector ETS in the world. It includes 11,000 power stations and industrial plants across the EU and operates in all member states as well as the UK, Norway, Iceland and Liechtenstein. Under the “cap and trade” principle a maximum limit is placed on the right to emit certain pollutants and companies can trade emission allowances within the zone.
China
The world’s biggest emitter of CO2 launched the world’s largest carbon market in 2021 – three times the size of the European Union’s. China’s ETS is based on a cap-and-trade model initially involving coal- and gas-fired energy plants. It plans to soon add heavy industry and manufacturing to the scheme which would cover more emissions than the rest of the world’s carbon markets put together. China has a 2030 target for peak emissions and a goal of reaching net-zero emissions by 2060.
United States
Despite being one of the world’s biggest CO2 emitters, the US currently doesn’t have a carbon tax at a national level. But several states, including California, Oregon, Washington, Hawaii, Pennsylvania and Massachusetts, have introduced carbon pricing schemes that cover emissions within their territory. President Biden has pledged to cut emissions by 50% by 2030 and achieve net-zero by 2050. But the concept of a carbon tax is regarded by his administration as politically risky and difficult to get passed in the US Congress.
India
India contributes roughly 7% of the world’s CO2 emissions, making it the third highest in the world after China and the US. It does not tax carbon emissions directly but has placed a tax on both imported and domestically produced coal since 2010. Coal powers more than half of the country’s electricity generation.
Carbon pricing is complicated
Other countries are considering introducing some form of carbon tax, but there are many reasons governments might be reluctant to do so. Instigating them can be politically difficult because some sectors of the business community and their allies may be opposed to them for financial reasons. Carbon taxes are also often regarded as being regressive as they can penalize poorer members of society by contributing to price rises. Another complicating factor is the issue of so-called “carbon-leakage” where businesses may try to move their operations to other countries with less stringent emissions policies. This could increase the countries’ total emissions.
It’s up to richer nations, which cause the most emissions, to lead by example, says OECD Secretary-General Mathias Cormann: “G20 economies are lifting their ambition and efforts, including through the explicit and implicit pricing of carbon emissions. However progress remains uneven across countries and sectors and is not well enough coordinated globally. We need a globally more coherent approach which enables countries to lift their ambition and effort to the level required to meet global net-zero by 2050”.
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