The idea of a global carbon price applied worldwide is necessary but must be accompained by a global policy. As Stern-Stiglitz report recommends, a differentiated approach must be chosen by our leaders in an example of geopolitical realism.

A brief introduction

In May 2017, the Report of the High-Level Commission on Carbon Prices was published. This report was requested following a specific recommendation submitted during the COP21 summit that took place in Paris. Economists Lord Nicholas Stern and Joseph Stiglitz presided the group of worldwide reputed analysts that prepared the report.

Report contains a synthetic analysis that holds in fifty pages. Many economists, politics and climatologists recommend carefully reading it as it proposes a clear, simple and technically accurate analysis (see link to the report below, in references paragraph).

Major principles of the report

Tackling climate change is an urgent and fundamental challenge. At COP21 in Paris, in December 2015, nearly 200 countries agreed to hold “the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C.” The goal of stabilizing the temperature increase well under 2°C is largely motivated by concerns over the immense potential scale of economic, social, and ecological damages that could result from the failure to manage climate change effectively.

A well-designed carbon price is an indispensable part of a strategy for reducing emissions in an efficient way. Carbon prices are intended to incentivize the changes needed in investment, production, and consumption patterns, and to induce the kind of technological progress that can bring down future abatement costs. There are different ways to introduce a carbon price. Greenhouse gas (GHG) emissions can be priced explicitly through a carbon tax or a cap-and-trade system. Carbon pricing can also be implemented by embedding notional prices in, among other things, financial instruments and incentives that foster low-carbon programs and projects. For instance, specific project-based credits, building upon the experience of the Clean Development Mechanism (CDM) of the Kyoto Protocol and on the mechanism established under Article 6 of the Paris Agreement, can provide similar incentives by applying a price to a unit of GHG emissions. Explicit carbon pricing can be usefully complemented by shadow pricing in public sector activities and internal pricing in firms. Reducing fossil fuel subsidies is another essential step toward carbon pricing—in effect, these subsidies are similar to a negative emissions price.

Commission proposes prices ranging from 40-80 USD per tCO 2 in 2020 to 50-100 USD per tCO 2 in 2030. The scale would be agreed depending on country capacities and social situation.

Achieving the Paris objectives will require all countries to implement climate policy packages. These packages can include policies that complement carbon pricing and tackle market failures other than the GHG externality.

Pricing by itself may not be sufficient to induce change at the pace and on the scale required for the Paris target to be met, and may need to be complemented by other well-designed policies tackling various market and government failures, as well as other imperfections. A combination of policies is likely to be more dynamically efficient and attractive than a single policy. These policies could include investing in public transportation infrastructure and urban planning; laying the groundwork for renewable-based power generation; introducing or raising efficiency standards, adapting city design, and land and forest management; investing in relevant R&D initiatives; and developing financial devices to reduce the risk-weighted capital costs of low-carbon technologies and projects. Adopting other cost-effective policies can mean that a given emission reduction may be induced with lower carbon prices than if those policies were absent.

Conclusion

Countries may choose different instruments to implement their climate policies, depending on national and local circumstances and on the support they receive. Based on industry and policy experience, and the literature reviewed, duly considering the respective strengths and limitations of these information sources, this Commission concludes that the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40–80/tCO 2 by 2020 and US$50–100/tCO 2 by 2030, provided a supportive policy environment is in place. However, the introduction of the carbon market and the associated transversal policies to reach Paris agreement have to act as enablers of the major objective: an initial conception to enable economic progress and poverty reduction.

My interpretation

This report evokes a major aspect to be considered in the path to achieve COP21 environmental objectives: the single tax on CO 2 is necessary but not enough. Everybody agrees on the need of a tax to establish a source of fund for social development and encourage the alignment with 2030 objectives. This tax will also tickle the basic offer and demand laws, discouraging users of high emission items to invest in them, preferring other technologies.

A large specter of policies, investments, education programs, etc. also has to be deployed to reach a deep global mindset evolution. Environmental objectives will not be reached by a unique carbon tax. Nevertheless, and in order to propose a realistic approach, two aspects should be analyzed by our leaders.

Close the loop: a tax that can fund mindset change

First of all, this “initiation tax” for CO 2 can fund the implantation of these policies. As the report recommends, modifying the standards for public transportation, updating urban programs, integrating housing and urbanism decisions into an environmentally friendly policy, law and legal framework adaptation… Actions that induce a cost. And a cost that could be funded by the CO 2 tax.

Be realistic: a global price for carbon cannot exist but actions have to be undertaken

Considering the diversity of political situations across the world and the multiple strategic vectors (access to basic food and water, social empowerment, economic recession, armed conflicts…) considered by governments, it is highly realistic to think that a unique, globally agreed, price for unit of carbon emitted is not achievable.

On the contrary, cooperation with variable geometry could enable the expansion of the carbon price across the world in the medium and long term. We have to consider that today, 87% of carbon emissions are not submitted to any price. 75% of the remaining emissions are taxed to a price below 10 USD per ton of CO 2. As the European market. According to COP21 agreements, the world should reach taxing 21% of emissions in 2021 if China establishes its market.

Taxing coverage continues to grow and the trend seems good and aligned with objectives but prices remain too low.

The future and the short term choices

To conclude, I would like to use the United Kingdom example. Its law imposed a base cost for carbon emission to the industrial and electrical sector. With a base price of 20,40€ per ton emitted, the use of coal has decreased by 71% since 2013. Another positive example are the “local energetic operators”. Young entities that are integrating the energetic transition inside their core business: supplying renewable energies and solutions to manage consumption to individuals, companies… The CLER shows examples of French, German and Austrian companies.

In Europe, Emmanuel Macron would like to establish a higher price (currently around 5€ per ton of CO 2 ) across Europe following the UK model. He needs the support of German government with whom he will be able to discuss after the elections. But in any case, considering the franco-german energetic scheme, Mr. Macron will certainly have to reduce France nuclear dependence to start a negotiation about a carbon tax with Germany.

It is the time to make choices for our leaders. Not jumping on the shuttle of energetic transition now will certainly have a negative impact on our world but also on countries technological frame. The leadership than Europe can lose now as a lighthouse of use of new technologies regarding energy consumption can be a trap for the future. With an economy highly based on innovation and new technologies as a differentiation factor with Asian countries, not encouraging enough this development and thus, transferring it away, may lead to a complete change in the economic situation, knocking over Europe.

In the other side, investing in the energetic transition may open new labor opportunities, work for our future, deploy a sustained economy (avoiding bubbles)…

References:

Carbon Pricing Leadership Coalition – Stern-Stiglitz report. Link to official report

Alternatives Economiques – July-August 2017 – nº 370, “Plancher sur les prix du CO2”, p.96