We must double down on carbon pricing to keep net zero alive

Higher carbon prices are good news for green investment as well as the climate, writes Climate Focus’ Darragh Conway

Positive news on climate change is painfully rare. While we are regularly treated to governments and corporates telling us how ambitious their climate policies are, anyone looking past these (largely self-serving) announcements will have grown acccustomed to news of ambition gaps, missed targets, and ever more dire warnings from climate scientists .

The latest World Bank report on carbon pricing therefore provides some welcome respite to long-suffering climate watchers. Until recently defined by low prices and unfulfilled potential, the report shows that carbon prices -set by carbon taxes and emissions trading systems – have reached record levels in the past year. This is particularly true in advanced such as the European Union, Canada, California, and New Zealand, though prices are also beginning to climb in emerging such as Africa.

Higher carbon prices are good news for green investment. Pricing emissions steers finance away from fossil fuels and toward clean energy. But low prices have limited impact – a fact which has led investors managing more than $10tr to call for a global minimum price on carbon.

A recent survey of climate economists indicates that prices in the order of $100/tCO2e are needed, along with other policies, to reduce emissions to net zero by 2050 – the level scientists say is needed to avoid the worst effects of climate change. Until recently only a handful of small, rich countries had reached these levels. But early this year prices in the European Union Emissions Trading Scheme – the world’s largest by value – surpassed the $100 mark, and Canada’s carbon price is set to reach this threshold in the second half of this decade.

Record high prices also mean record high carbon revenues. Governments collected a cool $84bn from polluters in 2021. Much of this is used to further spur green investment through subsidies and innovation funds, and to limit the impacts of the energy transition on poorer households and regions.

Never has a strong carbon price been more crucial to would-be responsible investors. Rising energy prices and energy security concerns triggered by Russia’s invasion of Ukraine have seen major asset managers such as Blackrock signal increased support for fossil fuel investments. Meanwhile, the value of “green stocks” has fallen sharply in the past 12 months.

Any such moves toward increasing fossil fuel investment would be disastrous for the climate. The International Energy Agency has warned that reaching net zero emissions by 2050 immediately halting investments in new oil and gas fields and rapidly scaling down overall fossil fuel investment overall in the coming decade. And the latest report from the Intergovernmental Panel on Climate Change (IPCC) cautions that continuing to install fossil fuel infrastructure will ‘lock in’ greenhouse gas emissions at a time when the window to avert climate catastrophe is rapidly closing.

Worryingly, policymakers are showing signs of watering down carbon prices just when they are most needed. The European Commission last week proposed selling between 200mn and 250mn surplus EU ETS allowances to help pay for Europe’s move away from Russian oil and gas, which risks flooding the market and pushing prices down. Meanwhile, Indonesia has delayed the introduction of its carbon tax – initially due to take effect on 1 April – and countries such as Italy and Ireland have reduced fuel taxes in a bid to lower energy costs.

There is little doubt that governments must act swiftly to reduce reliance on Russian gas and ease pressure on households amid soaring energy prices and VAT. But this should not come at the expense of action to avert the climate crisis.

This is particularly true when perfectly viable solutions are available to address both simultaneously. Doubling down on carbon pricing while investing revenues in accelerating the energy transition and ensuring that transition is fair – for instance through providing cheap, efficient public transport, creating green jobs, and retrofitting homes – can enable governments to meet climate targets, reduce reliance on imported fossil fuels, and reduce overall energy costs for households and businesses.

Two years ago, governments faced with the addressing the economic shocks brought on by the Covid-19 pandemic had a golden industries opportunity to invest recovery funds in sustainable, thereby addressing two major crises in one go. Unfortunately, most chose instead to prop up incumbent industries, many of them major polluters.

The present crisis presents us with a similar opportunity. We must not less this one pass.


Darragh Conway is lead legal counsel at Climate Focus


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