Comment: Günther Thallinger of the Net-Zero Asset Owner Alliance is hoping that this week’s G20 meeting in Venice will make progress on carbon pricing, which he argues is the strongest tool to get us on track for net zero
The past few years have seen an extraordinary acceleration in governments’ net-zero emission reduction commitments. More than 34 countries, including half the G20, have made policy commitments to net zero. More importantly, 13 of these countries have followed up with 2030 targets to provide much-needed nearer term accountability for these targets.
And ahead of the Glasgow climate summit, COP26, in November, more countries are likely to join them.
All this represents welcome progress that seemed unimaginable only a few years ago. Yet, in efforts to avoid dangerous climate change and get on track with a 1.5C pathway, these developments are, as a recent UN report made clear, also far from enough. The world still needs a policy breakthrough on climate change if we are to avoid the worst consequences of global warming.
About 80% of global carbon emissions are not yet covered by carbon-pricing mechanisms
Policymaker decisions both in the lead-up to COP26, and at the conference itself in November, will have a monumental impact on the efforts to solve the climate conundrum. Asset owners need them to redouble their efforts to develop and publish credible emission reductions plans for how these commitments will be achieved.
A topic that should be high on policymakers’ agendas is a rethink of the carbon-pricing landscape. Despite carbon-pricing being viewed as arguably the most efficient way for nations to reduce emissions, about 80% of global carbon emissions are not yet covered by carbon-pricing mechanisms such as emission-trading schemes or taxes.
While carbon pricing hinges on many variables, including the choice of technology pathway, research by the International Energy Agency (IEA) and others suggests a floor price level of between $80-$130 will be needed by 2030, across the G20. Currently, only Europe has pricing remotely close to this level. Clearly, current instruments and regulations are not fit for purpose. One solution could be the introduction of a hybrid scheme between emissions trading, or cap-and-trade schemes, and carbon taxes or levies, such as that proposed in a new discussion paper from the UN-convened Net-Zero Asset Owner Alliance.
The mechanism would be a binding price corridor, which would rise over time, harmonised across national borders. A minimum market price would provide certainty to investors and a guardrail against price crashes. A maximum market price would safeguard against rapid price increases, thereby preventing backlash that could undermine political support for carbon-pricing more broadly.
Additionally, both the floor and ceiling of the price corridor would be transparently raised over time to provide sufficient mid-term price signals. Essentially, it would give greater certainty of future price levels for efficient capital allocation, while also providing stable and reliable incentives for stakeholders to adopt or develop low-carbon technology.
Such a carbon-pricing mechanism would lessen climate transition financial risks, and revenues from pricing schemes could be used to drive a more equitable transition – for instance in the form of carbon dividends. By creating millions of new jobs in clean energy, it would move the world towards a just energy transition by protecting lower income groups.
The effectiveness of carbon-pricing mechanisms has been hindered in the past by carbon leakage, stemming from more lax emission constraints in some countries. Currently, only 64 countries, regions, and states have implemented carbon-pricing initiatives, which covers just 16% of global emissions.
With G20 members gathered for the Venice Climate Summit on 11 July, the stage is set for the world’s largest economies to show leadership
A rethink is needed, and the introduction of carbon border adjustment mechanisms (CBAM) (or “green tariffs”), targeted at a limited number of sectors, could help keep a level playing field between countries and regions by theoretically pricing all emissions from those sectors, including those embedded in imports, as well as stimulating a renewed policy discussion on carbon pricing. Now is the time for the G7 and G20 to show global leadership, align on CBAMs and the need for robust carbon pricing to achieve a net-zero transition.
They will also need to be designed cautiously and be mindful of societal implications, as CBAMs are complex and will have an impact on global trade patterns. So they must comply with World Trade Organisation rules.
A restructuring of carbon-pricing instruments, harmonised across borders, could unlock tremendous investment in low- or zero-carbon technology for critical high-emitting sectors and play a central role in the transition to a net-zero future. According to the recent IEA report on net-zero, 80% of the technologies needed for 2030 already exist and require only scaling. Carbon pricing can have an impact here; however, it should not be viewed as a universal solution to combatting climate change. A holistic approach will be required where governments set ambitious climate targets, provide policy support for R&D for low-carbon technologies, utilise robust and transparent carbon-pricing instruments, and accelerate programmes that drive large-scale deployment of zero-emission infrastructure.
Priority will need to be placed on sectoral regulation, ensuring that policy instruments do not contradict each other, and that double-counting of emissions is avoided. Many countries have been simultaneously subsidising both fossil fuels and renewables while taxing carbon. Progress on reaching climate targets will be severely compromised if market distortions, such as fossil-fuel subsidies, continue through direct transfer of government funds, price supports, and tax expenditures.
With G20 members gathered in Italy for the Venice Climate Summit on 11 July, the stage is set for policymakers from the world’s largest economies to show leadership and deliver a just transition. In 2007, G20 members pledged to the phasing out of fossil fuel subsidies, but 14 years on, this pledge has yet to be implemented.
As we speed forward in the “Decade of Action” we will need policymakers to both raise ambitions and walk their talk in the fight against climate change. Rethinking the carbon-pricing landscape offers an opportunity for a policy breakthrough that could accelerate our journey to net zero, and deliver a just transition. Governments need to simultaneously push for carbon pricing, while working with industries to secure the infrastructure required for the transition that carbon prices will trigger.
Günther Thallinger is member of the board of management Allianz SE and chair of the Net-Zero Asset Owner Alliance.
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