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Finance and Policy  
21 September 2015

Carbon pricing: New principles set out in World Bank report

Carbon Pricing. Pic credit CanGEA

Compared to domestic action alone, cooperation and linking of carbon pricing instruments across borders could significantly lower the cost of achieving a 2°C stabilisation goal. Pic credit: CanGEA

Over the weekend, the World Bank together with the OECD and with input from the IMF, released a report, the State and Trends of Carbon Pricing 2015, to assist countries to navigate carbon pricing.

Additionally, the organisations released a report on the FASTER Principles, which are set to help governments and businesses develop efficient and cost-effective carbon pricing instruments.

The research for the reports draws on over a decade of experiences with carbon pricing initiatives around the world, such as emissions trading systems and taxes in places like the European Union, British Columbia, Denmark, Sweden, and the United Kingdom.

According to the World Bank, around the world, about 40 national and 23 city, states and regions are using carbon pricing schemes, like emissions trading systems (ETS) or carbon taxes. These represent about 7 billion tonnes of carbon dioxide, or 12% of global greenhouse emissions, a threefold increase over the past decade.

FASTER principles toolkit

The FASTER principles are: F for fairness; A for alignment of policies and objectives; S for stability and predictability; T for transparency; E for efficiency and cost-effectiveness and R for reliability and environmental integrity.

Angel Gurría, Secretary-General of the OECD, said: “[…] Carbon pricing is central to the quest for a cost-effective transition towards zero net emissions in the second half of the century.

“These principles will help governments to incorporate carbon pricing as a key part of their policy toolkit.”

The FASTER Principles point to what’s been learnt to date. Such as, that well-designed carbon-pricing schemes are a powerful and flexible tool that can cut emissions that cause climate change. Also, if these are adequately designed and implemented, they can play a key role in enhancing innovation and smoothing the transition to a prosperous, low-carbon global economy.

Christine Lagarde, Managing Director of theIMF, said: “Carbon pricing is effective in reducing emissions that cause climate change, is straightforward to administer, can raise valuable revenues for broader fiscal reforms, and can help address local pollution as well as global climate change. […].”

Carbon pricing concerns

There have been concerns that carbon pricing will affect international competitiveness of some industries and lead them to move production, or even whole factories, to other countries or jurisdictions where emission costs are lower, a phenomenon called “carbon leakage”.

The report notes that ex-post analysis of the EU ETS, the biggest cap-and-trade system in place today, shows that so far, the carbon leakage has not materialised on any significant scale.

In the future, the risk of carbon leakage is real as long as carbon price signals are strong and differ significantly between jurisdictions. Also, this risk tends to only affect a limited number of exposed sectors and can be effectively mitigated through policy design.

Carbon pricing savings

The State and Trends report also discusses the enormous savings that can be made through cooperation between countries.

Compared to domestic action alone, cooperation and linking of carbon pricing instruments across borders could significantly lower the cost of achieving a 2°C stabilisation goal. This is due to countries having more flexibility in choosing who undertakes emission reductions, and who pays for them.

Analysing several studies made over the years, the State and Trends report shows that this cooperation can mobilise resources and transfers between countries and investors, and result in net annual flows of financial resources of up to $400 billion by 2030 and up to $2.2 trillion by 2050.

The report also says that carbon prices that converge have a positive impact on competitiveness by favouring more efficient and cleaner sectors, leading to a more efficient economy.

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