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Why A Price On Carbon Is Inevitable

A primer on carbon pricing and its importance

A coal fired power station operated by AGL Energy ( Photographer: Carla Gottgens/ Bloomberg)
A coal fired power station operated by AGL Energy ( Photographer: Carla Gottgens/ Bloomberg)

Mahindra & Mahindra became the first Indian company to put a price on carbon earlier this month as it looks to cut greenhouse gas emissions. The company has set itself a goal to reduce emissions by 25 percent over the next three years and has accordingly, announced an internal carbon price of $10 per tonne of carbon emitted, Anirban Ghosh, chief sustainability officer of Mahindra Group said in a conversation with BloombergQuint.

So what does it mean to put a price on carbon and how does it help tackle the global climate change challenge?

What Is Carbon Pricing?

In a key moment in the global effort against climate change, 195 world leaders at the twenty-first session of the Conference of Parties (COP21) in Paris in December 2015 arrived at a deal to attempt to limit the global temperature rise this century well below 2 degrees Celsius and to drive efforts to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels. The pact was the first to commit all countries to cut carbon emissions.

One of the foremost steps in tackling climate change is to keep greenhouse gas emissions - which include carbon dioxide (CO2), ozone, methane, nitrous oxide and even water vapour - under check. This is where idea of carbon pricing springs from.

According to the World Bank, it involves putting a price on carbon pollution as a means of bringing down emissions and driving investment into cleaner technology. It is essentially a policy adopted by business entities or governments to reduce the carbon footprint of the company, and is a price that a company pays for the right to emit one tonne of carbon dioxide into the atmosphere.

According to a report published by the Organization for Economic Cooperation and Development (OECD) it is the most effective and cheapest form of policy available.

Carbon pricing is not the only policy that can check the global greenhouse gas emissions - there are other levers that must also be used. But it is a powerful and direct one.
Thomas Michael Kerr, Director - Carbon Pricing Leadership Coalition, World Bank Group

How Is Carbon Price Calculated?

To determine this price, the World Bank has specified two instruments to determine the carbon price – emissions trading systems (ETS) and carbon taxes.

An ETS caps the total level of greenhouse gas emissions and allows those industries with low emissions to sell their extra allowances to larger emitters. By creating supply and demand for emissions allowances, an ETS establishes a market price for greenhouse gas emissions. The cap helps ensure that the required emission reductions will take place to keep the emitters (in aggregate) within their pre-allocated carbon budget, information on World Bank’s website suggests.

Carbon tax rates vary on a case-to-case basis because it is set for various sources of fossil fuels on the basis of its carbon content, according to the OECD report cited above. Unlike ETS, here the emission reduction outcome is not pre-defined but the carbon price is.

“Our recommendation, particularly for emerging economies or businesses, is to put in place a starting (carbon) price of $5-20 per tonne of carbon dioxide and work to gain public/industry acceptance of the price,” Thomas Michael Kerr, director of Carbon Pricing Leadership Coalition at the World Bank Group said in the report.

“Carbon pricing calculation varies from business to business and depends on the (carbon emission) goal set by the company,” Anirban Ghosh of Mahindra said. Mahindra & Mahindra arrived at the internal carbon price after doing the math based on its goal to reduce the greenhouse emissions by 25 percent over the next three years,

According to the latest report released by the World Bank, the total value of emission trading schemes and carbon taxes in 2016 is just below $50 billion.

Why Is Carbon Pricing Important?

According to an analysis by NASA, 2015 was the warmest year recorded since record keeping began in 1800.

Ian Parry, a principal environmental fiscal policy expert at the International Monetary Fund in his report titled ‘The Right Price’ argues that unless the earth’s temperature is kept under control, it could grow by three to four degrees by 2100.

It thus becomes imperative to price carbon as it increases the price of carbon-based energy, thus effectively decreasing the demand for it.

According to OECD, among the various tools available to reduce CO2 emissions, carbon prices are most likely to generate short-term economic growth and increase the level of productivity in a country.

How Many Countries Have Determined Their Carbon Price?

Currently, about 41 major countries and 20 cities, states and provinces have determined their carbon prices, according to the OECD report. This includes 34 OECD countries and seven selected partner economies such as China, India, Argentina, Brazil, Indonesia, Russia, and South Africa.

These countries accounted for 80 percent of the total global carbon dioxide emissions from energy use in 2012, the OECD report added.

According to the World Bank, over 1,000 companies reported their emissions to the U.K.-based Carbon Disclosure Project (CDP), in 2015. Of these, 435 companies disclosed their internal carbon pricing in 2015, three times the number in 2014.

CDP expects more than 500 companies to disclose their carbon prices by 2017, according to information on their website.

The Top Rankers

According to the OECD report, the top five biggest emitters - China, India, Russia, Japan, and the US - account for 70 percent of the total greenhouse gas emissions. But these countries have priced their carbon emissions very low.

For example, the U.S. has a price of €0.76 per tonne of carbon dioxide emission while India has a carbon price of €0.96 . In contrast, the Netherlands has a carbon price of €54.63 per tonne and Norway a price of €46.74 per tonne.

In 2015, China decided to develop plans on implementing a national ETS system, the World Bank report on ‘Carbon Price Watch’ said. If the Chinese initiative is implemented, the annual value of carbon price initiatives would increase potentially by $100 billion, which is currently just under $50 billion, the report added.