State and Trends of Carbon Pricing 2017 Washington DC November 2017 State and Trends of Carbon Pricing 2017 Washington DC November 2017 This report was prepared jointly by the World Bank, Ecofys and Vivid Economics. The World Bank team included Richard Zechter, Alexandre Kossoy, Klaus Oppermann, and Céline Ramstein. The Ecofys team included Long Lam, Noémie Klein, Lindee Wong, Jialiang Zhang, Maurice Quant, Maarten Neelis, and Sam Nierop. The Vivid Economics team included John Ward, Thomas Kansy, Stuart Evans, and Alex Child. © 2017 International Bank for Reconstruction and Translations—If you create a translation of this work, Development / The World Bank please add the following disclaimer along with the attribution: This translation was not created by The World 1818 H Street NW, Washington DC 20433 Bank and should not be considered an official World Bank Telephone: 202-473-1000; Internet: www.worldbank.org translation. 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State and Trends page 59: hxdbzxy / thinkstock.com of Carbon Pricing 2017 (November), by World Bank, Washington, DC. Doi: 10.1596/978-1-4648-1218-7 License: Cover and interior design: Creative Commons Attribution CC BY 3.0 IGO Meike Naumann Visuelle Kommunikation Reflecting the growing momentum for carbon pricing worldwide, the 2017 edition of the State and Trends of Carbon Pricing targets the wide audience of public and private stakeholders engaged in carbon pricing design and implementation. This report also provides critical input for negotiators involved in the implementation of the Paris Agreement, particularly for the meeting of the Conference of the Parties (COP) 23 to be held in Bonn in November 2017. As in the previous editions, the report provides an up-to-date overview of existing and emerging carbon pricing initiatives around the world, including national and subnational initiatives. Furthermore, it gives an overview of current corporate carbon pricing initiatives. Another key focus of the report is on the importance of an integrated approach to climate finance and climate markets, together with domestic policies. The analysis shows how such an integrated approach can be used to mobilize the scale of low-carbon investments needed to achieve the below 2°C temperature target and outlines a transition scenario and the possible role of results- based climate financing to catalyze climate markets. In May 2017, the World Bank launched the Carbon Pricing Dashboard website, adding an interactive dimension to the annual State and Trends of Carbon Pricing reports. This resource provides an up-to-date overview of carbon pricing initiatives and allows users to navigate through the visuals and data of the report. Please visit: http://carbonpricingdashboard.worldbank.org/. The task team responsible for this report intends to select new relevant topics to be explored in future editions or as part of the World Bank’s expanded Carbon Pricing Intelligence program. For example, work is currently underway on an analysis of the interaction of carbon taxes and fiscal policy. The report benefited greatly from the valuable contributions and perspectives of our colleagues in the climate and carbon finance community, ensuring the quality and clarity of this report: Joaquim Barris, Conor Barry, Nicolette Bartlett, Carter Brandon, Karan Capoor, Marcos Castro Rodrigues, Climatic Change Division of the Ministry of Environment and Sustainable Development of Colombia, David Coney, Hannah Cushing, Angelique dePlaa, Nathan Engle, Eduardo Ferreira, Greenhouse Gas Inventory and Research Center of Korea, Government of Alberta, Phillip Hannam, Kelley Hamrick, Huang Xiaochen, Dirk Heine, Sharlin Hemraj, Junki Kawamura, Thomas Kerr, Lai Han, Lisa Lang, Alan Lee, Paige Leuschner, Liu Ying, Frank Melum, Aya Naito, Norwegian Ministry of Finance, Kiyoshi Okumura, Qian Guoqiang, Ulrika Raab, Isabel Saldarriaga Arango, Rajinder Sahota, Herman Sips, William Space, Thailand Greenhouse Gas Management Organization, Massamba Thioye, Michael Toman, Johannes Trueby, Xiaodong Wang, Tom Witt, and Peter Zapfel. Oversight and guidance on drafting was provided respectively by Alexandre Kossoy for Section 2 on carbon pricing initiatives around the world and Klaus Oppermann for Section 3 on climate finance and climate markets, and by Richard Zechter and Céline Ramstein for the whole report. We also acknowledge the support from the Partnership for Market Readiness for the preparation of this report, and from the Carbon Pricing Leadership Coalition for the preparation of the Carbon Pricing Dashboard. 4 List of abbreviations and acronyms °C Degrees Celsius G GCF Green Climate Fund GDP Gross Domestic Product C CAR Clean Air Rule GGIRCA Greenhouse Gas Industrial CCER Chinese Certified Emission Reporting and Control Act Reduction GHG Greenhouse gas CPP Clean Power Plan GtCO2e Gigaton of carbon dioxide CDM Clean Development Mechanism equivalent CER Certified Emission Reduction Ci-Dev Carbon Initiative for Development I ICAO International Civil Aviation CMA Conference of the Parties serving Organization as the Meeting of the Parties to IEA International Energy Agency the Paris Agreement IFC International Finance Corporation CO2 Carbon dioxide IMO International Maritime CO2e Carbon dioxide equivalent Organization COP Conference of the Parties INDC Intended Nationally Determined CORSIA Carbon Offset and Reduction Contribution Scheme for International Aviation IPCC Intergovernmental Panel on CP1 First Commitment Period under Climate Change the Kyoto Protocol ITMO Internationally Transferred Mitigation Outcome E EIB European Investment Bank ERPA Emissions Reduction Purchase J JCM Joint Crediting Mechanism Agreement ERU Emission Reduction Unit K ktCO2e Kiloton of carbon dioxide ETS Emissions Trading System equivalent EU European Union EU ETS European Union Emissions Trading System F FSB Financial Stability Board 5 M MRV Monitoring, Reporting and S SBSTA Subsidiary Body for Scientific and Verification Technological Advice Mt Megaton MtCO2e Megaton of carbon dioxide T t Ton (note that, unless specified equivalent otherwise, ton in this report refers to a metric ton = 1,000 kg) N NDC Nationally Determined TCAF Transformative Carbon Asset Contribution Facility NDRC China’s National Development TCFD Task Force on Climate-related and Reform Commission Financial Disclosures tce tons of standard coal equivalent O ODA Official Development Assistance tCO2 Ton of carbon dioxide OECD Organisation for Economic ­ tCO2e Ton of carbon dioxide equivalent Co-operation and Development U UK United Kingdom P PAF Pilot Auction Facility for Methane UNFCCC United Nations Framework and Climate Change Mitigation Convention on Climate Change PMR Partnership for Market Readiness US United States ppm Parts per million Y y Year R RBCF Results-Based Climate Finance REDD Reducing Emissions from Deforestation and Forest Degradation REDD+ Extends REDD by including sustainable forest management, conservation of forests, and enhancement of carbon sinks RGGI Regional Greenhouse Gas Initiative 6 Table of contents 4 List of abbreviations 21 2. Existing and and acronyms emerging carbon pricing initiatives 10 Executive summary around the world 17 1. Introduction 22 2.1. Overview, recent developments, and emerging trends 22 2.1.1 Global overview of carbon pricing initiatives 31 2.1.2 Recent developments and ­ emerging trends 36 2.2. International carbon pricing initiatives 43 2.3. Regional, national, and subnational carbon pricing initiatives 55 2.4. Internal carbon pricing initiatives 7 59 3. Climate finance 82 Annex I Conversion rates and climate markets: toward an integrated 83 Annex II  approach Analysis of NDCs 62 3.1. An integrated approach to climate finance and 89 Annex III Summary of Parties’ views international climate markets on the operationalization of 62 3.1.1 Roles for climate finance Articles 6.2 and 6.4 of the 64 3.1.2 Roles for international climate markets Paris Agreement 64 3.1.3 Combining climate finance and international climate markets 91 Annex IV 68 3.2. Results-Based Climate Cost and investment concepts Finance to support the 91 Concepts creation of climate markets 91 Incremental investment required and transition to an inter-­ 92 Gross investment required national carbon market 93 The economic cost of climate change 68 3.2.1 Transitioning from climate finance impacts to climate markets 70 72 3.2.2 Defining RBCF 3.2.3 How RBCF can support building climate 94 Glossary markets and help the transition to an international carbon market 75 3.2.4 RBCF and resource mobilization 77 3.3. Illustration - An integrated approach to accelerating the transition to clean energy 8 Figures 12 1 Summary map of regional, national and subnational carbon pricing initiatives implemented, scheduled for implementation and under consideration (ETS and carbon tax) 13 2 Regional, national and subnational carbon pricing initiatives: share of global annual GHG emissions covered 14 3 Prices in implemented carbon pricing initiatives 26 4 Summary map of regional, national and subnational carbon pricing initiatives implemented, scheduled for implementation and under consideration (ETS and carbon tax) 27 5 Regional, national and subnational carbon pricing initiatives: share of global annual GHG emissions covered 28 6 Prices in implemented carbon pricing initiatives 29 7 Carbon price and emissions coverage of implemented carbon pricing initiatives 30 8 Carbon price, share of emissions covered and carbon pricing revenues of implemented carbon pricing initiatives 37 9 Status of NDC submissions 44 10 Carbon pricing initiatives implemented or scheduled for implementation, with sectoral coverage and GHG emissions covered 57 11 Internal carbon prices of utilities publicly disclosed to CDP compared to Paris-compatible 61 12 An integrated policy approach 72 13 Channels through which RBCF supports prerequisites for climate markets 75 14 Absolute and relative crediting of CERs in the first commitment period of the Kyoto Protocol (CP1) 77 15 Estimated disbursements from the 12 largest RBCF funds 78 16 A policy mix consistent with the reduction of coal-fired power generation Table of contents 9 Tables 40 1 Market update of mechanisms under the Kyoto Protocol 46 2 Key carbon pricing developments in the Canadian provinces and territories 48 3 Key developments in the Chinese pilot ETSs 82 4 Currency conversion rates, as of August 1, 2017 83 5 Unconditional and conditional targets and intended use of carbon pricing and/or market instruments stated in NDCs 89 6 Summary of Parties‘ views on the operationalization of Articles 6.2 and 6.4 of the Paris Agreement Boxes 25 1 Carbon pricing in numbers 54 2 Summary of selected changes in regional, national and subnational carbon pricing initiatives 58 3 Use of internal carbon pricing by multilateral banks in project evaluations 65 4 Elements for integrating climate finance and international climate markets 69 5 The maturing of technology markets enables a shift to market-based finance 71 6 A stylized RBCF program to reduce emissions by increasing the uptake of residential solar power systems 80 7 RBCF to support the development of regional climate markets 10 Executive summary T here has been continued progress on carbon pricing initiatives over the last year The Paris Agreement entered into force on November 4, 2016, less than one year after it at the regional, national and subnational levels. was adopted. Negotiations are now underway to Despite these important positive steps, further develop the Paris Agreement guidelines. Country- action is necessary for carbon pricing to make a level pledges to reduce GHG emissions under the substantial contribution to the Paris Agreement Paris Agreement are formalized through Nationally pledge, which aims to keep the global average Determined Contributions (NDCs). Carbon pricing plays temperature increase to well below 2°C and a prominent role in many of these NDCs, with 81 Parties pursue efforts to hold the increase to 1.5°C. planning or considering its use to drive GHG mitigation. Among other functions, the Paris Agreement guidelines The key priorities for action are: will provide operational guidance on cooperative −− Expanding coverage through the development of approaches to emissions mitigation under Article 6, new initiatives and the broadening of greenhouse thereby shaping the way forward for international gas (GHG) emissions coverage in existing initiatives; market mechanisms and the linking of domestic carbon −− Deepening impact by raising carbon prices, pricing initiatives under the new international climate which will send a stronger price signal, triggering accord. However, negotiations to date have yielded little more investments in low-carbon technologies; progress; there is substantial pressure to move rapidly −− Aligning carbon pricing with complementary and toward consensus, given that the provisions of the Paris enabling policies at the domestic level to ensure Agreement are scheduled to finalize at the end of 2018. coherence with the broader policy framework; −− Progressing the guidelines of the Paris In parallel to these international developments, Agreement to pave the way towards linking regional, national and subnational jurisdictions domestic pricing schemes and enabling usage of continue to implement new initiatives. Since 2016, international market mechanisms; and eight new initiatives have been launched and two more −− Using climate finance in a more strategic and initiatives are scheduled for implementation in 2018. integrated way to catalyze climate markets that This brings the total number of carbon pricing initiatives support transformative climate change mitigation implemented or scheduled for implementation to 47. policies and investments. Overall, 67 jurisdictions—representing about half of the global economy and more than a quarter of global Accelerating the pace of action on these priorities GHG emissions—are putting a price on carbon, as in the coming years will be important for achieving shown in Figure 1. Carbon pricing initiatives cover about a reduction in GHG emissions in line with the 2°C half of these jurisdictions’ GHG emissions on average, objective. which translates to about 8 gigatons of carbon dioxide 11 equivalent (GtCO2e) or 15 percent of global GHG level actions, including Washington State’s launch of emissions as shown in Figure 2. Once the Chinese a baseline-and-credit ETS in 2017 and the extension national ETS is implemented—it is currently planned of the California ETS until 2030. In addition, RGGI is to launch at the end of 2017—this will expand the looking to strengthen its ETS after 2020, Massachusetts emissions covered by carbon pricing to between 20 is scheduled to launch its own state-level ETS which to 25 percent of global GHG emissions. will operate alongside RGGI in 2018, and Oregon and Virginia are working to introduce carbon pricing. Developments in the Americas have been particularly notable. In Canada, the government Companies are also taking climate action by put forward a pan-Canadian approach to carbon setting internal carbon prices. The number of pricing in 2016, requiring all provinces and territories companies that have reported that they are doing so to have a carbon price initiative in place by 2018 that has grown by 11  percent since 2016. Further adoption meets a set of federal criteria. British Columbia had of internal carbon pricing is anticipated following the already launched a baseline-and-credit emissions recommendations of the Financial Stability Board’s trading system (ETS) in 2016, in addition to its pre- Task Force on Climate-related Financial Disclosures. existing carbon tax. Alberta and Ontario followed a These recommendations advise companies and year later, implementing a carbon tax and an ETS, investors to disclose climate-related financial risks and respectively. Jurisdictions that do not already have opportunities, and report the internal carbon prices existing carbon pricing initiatives have taken steps to used. implement the national carbon pricing requirement. A national carbon pricing system—currently under While these developments highlight the growth development—will apply to provinces and territories of carbon pricing in recent years, several that do not meet the federal criteria. Furthermore, indicators demonstrate that significant strides Mexico will start an ETS simulation in preparation for are needed to align these initiatives with the its pilot ETS launch in 2018, while Colombia and Chile ambition of the Paris Agreement. As shown in are both investigating the introduction of ETSs. These Figure 3, the observed carbon prices range from ETS developments follow the carbon taxes that were less than US$1 up to U ­ S$140/tCO2e. About three implemented in these jurisdictions over the past quarters of emissions covered by carbon pricing are three years. priced at less than US$10/tCO2e. This is substantially lower than the price levels that are consistent While climate action in the United States with achieving the temperature goal of the Paris (US) at the federal level has been set back, Agreement, in the range of US$40–80/tCO2e in 2020.1 there have been positive developments at Currently, only 1 percent of emissions covered by a the subnational level. The intended withdrawal carbon pricing initiative are priced within that range. of the US from the Paris Agreement and its review Additionally, the vast majority of emissions are not of energy- and climate-related policies, including covered by carbon pricing. Coverage is still far from the Climate Action Plan and the Clean Power Plan, the global target identified by the High-Level Panel dampens the ambition of the federal government’s on Carbon Pricing2 of 50  percent within the next policies on climate change mitigation. In response decade. While it is clear that very low carbon prices to these national developments, the America’s have little immediate impact, it is encouraging to see Pledge initiative is bringing together states, cities, that even moderate price levels can have a significant companies, universities and other actors to highlight impact; the United Kingdom’s consumption of coal the continued support of the Paris Agreement goals for electricity generation decreased by 76 percent in by compiling and quantifying their efforts to reduce 2016 compared to 2013, when the Carbon Price Floor GHG emissions. These actions are reinforced by state was introduced—the lowest level since 1934. 1 Source: High-Level Commission on Carbon Prices, Report of the High-Level Commission on Carbon Prices, 2017, Washington, DC: World Bank. 2 Source: World Bank, Leaders Set Landmark Global Goals for Pricing Carbon Pollution, April 21, 2016, http://www.worldbank.org/en/news/press- release/2016/04/21/leaders-set-landmark-global-goals-for-pricing-carbon-pollution. 12 Figure 1 / Summary map of regional, national and subnational carbon pricing initiatives implemented, scheduled for implementation and under consideration (ETS and carbon tax) Northwest Territories Manitoba Alberta Ontario Iceland Canada Eu Kazakhstan Republic British Québec Newfound- Ukraine of Korea Columbia land and labrador Washington Prince RGGI Oregon Edward Japan Island California Virginia Nova Scotia New Turkey China ­Brunswick Mexico Massachusetts Thailand Vietnam Colombia Brazil Rio de Janeiro São Paulo New Chile South Africa Australia Zealand Norway Sweden Denmark Finland Beijing UK Tianjin Saitama Estonia Tokyo Ireland Latvia Hubei Poland Shanghai Chongqing Fujian Guangdong Taiwan Portugal Shenzhen France Slovenia Singapore Liechtenstein Switzerland Tally of carbon pricing initiatives ETS implemented or scheduled for implementation ETS and carbon tax implemented or scheduled implemented or scheduled for Carbon tax implemented or scheduled for implementation Carbon tax implemented or scheduled, ETS under implementation consideration ETS or carbon tax under consideration 15 ­ epresentative of the size of the carbon pricing The circles represent subnational jurisdictions. The circles are not r instrument, but show the subnational regions (large circles) and cities (small circles). Note: Carbon pricing initiatives are considered “scheduled for implementation” once they have been formally 6 2 adopted through legislation and have an official, planned start date. Carbon pricing initiatives are considered “under 42 consideration” if the government has announced its intention to work towards the implementation of a carbon pricing initiative and this has been formally confirmed by official government sources. The carbon pricing initiatives have been 23 25 classified in ETSs and carbon taxes according to how they operate technically. ETS does not only refer to cap-and-trade 21 systems, but also baseline-and-credit systems such as in British Columbia and baseline-and-offset systems such as in Australia. The authors recognize that other classifications are possible. Due to the dynamic approach to continuously improve data quality, changes to the map do not only reflect new developments, but also corrections following new National level Subnational level information from official government sources, resulting in changes for Liechtenstein, Ukraine and Kyoto. Executive summary 13 Figure 2 / Regional, national and subnational carbon pricing initiatives: share of global annual GHG emissions covered 25% Share of global annual GHG emissions 20% 47 15% 45 40 37 36 32 10% 24 5% 21 16 19 9 10 15 Number of implemented initiatives 2 4 5 6 7 8 0% 1991 2001 2011 1997 2007 2017 1995 2005 2015 1992 2002 2012 1996 2006 2016 1993 1994 2003 2004 2013 2014 1998 1999 2008 2009 2018 1990 2000 2010 Finland carbon tax (1990 ) Iceland carbon tax (2010 ) France carbon tax (2014 ) Poland carbon tax (1990 ) Tokyo CaT (2010 ) Mexico carbon tax (2014 ) Norway carbon tax (1991 ) Ireland carbon tax (2010 ) Hubei pilot ETS (2014 ) Sweden carbon tax (1991 ) Ukraine carbon tax (2011 ) Chongqing pilot ETS (2014 ) Denmark carbon tax (1992 ) Saitama ETS (2011 ) Korea ETS (2015 ) Slovenia carbon tax (1996 ) California CaT (2012 ) Portugal carbon tax (2015 ) Estonia carbon tax (2000 ) Japan carbon tax (2012 ) BC GGIRCA (2016 ) Latvia carbon tax (2004 ) Australia CPM (2012 - 2014) Australia ERF Safeguard Mechanism (2016 ) EU ETS (2005 ) Québec CaT (2013 ) Fujian pilot ETS (2016 ) Alberta SGER (2007 ) Kazakhstan ETS (2013 ) Washington CAR (2017 ) Switzerland ETS (2008 ) UK carbon price floor (2013 ) Ontario CaT (2017 ) New Zealand ETS (2008 ) Shenzhen pilot ETS (2013 ) Alberta carbon tax (2017 ) Switzerland carbon tax (2008 ) Shanghai pilot ETS (2013 ) Chile carbon tax (2017 ) Liechtenstein carbon tax (2008 ) Beijing pilot ETS (2013 ) Colombia carbon tax (2017 ) BC carbon tax (2008 ) Guangdong pilot ETS (2013 ) Massachusetts ETS (2018 ) RGGI (2009 ) Tianjin pilot ETS (2013 ) South Africa carbon tax (2018 ) China national ETS (2017 ) Note: Only the introduction or removal of an ETS or carbon tax is shown. Emissions are presented as a share of global GHG emissions in 2012. Annual changes in global, regional, national, and subnational GHG emissions are not shown in the graph. Due to the dynamic approach to continuously improve data quality using official government sources, the carbon pricing initiatives in Liechtenstein and Ukraine were added, the city-level Kyoto ETS was removed, and the start date of the Latvia carbon tax was corrected. The information on the Chinese national ETS represents early unofficial estimates based on the Chinese President’s announcement in September 2015. The National Treasury of South Africa will submit a revised carbon tax bill to Parliament later this year and the new implementation date of the carbon tax will be determined by the Minister of Finance. 14 Figure 3 / Prices in implemented carbon pricing initiatives US$ 140/ tCO2e 140 Sweden carbon tax Note: Nominal prices on August 1, 2017, shown for illustrative purpose only. The Australia ERF Safeguard Mechanism, British Columbia GGIRCA, Kazakhstan ETS and Washington CAR are not shown in this graph as price information is not available for those initiatives. Prices are not necessarily comparable between carbon pricing initiatives because of differences in US$ 130/ the sectors covered and allocation methods applied, specific exemptions, tCO2e and different compensation methods. US$ 120/ tCO2e US$ 110/ tCO2e US$ 100/ tCO2e US$/tCO2e US$ 90/ Alberta SGER, BC carbon tax, tCO2e UK carbon price floor, 24 Switzerland carbon tax, 87 Ireland carbon tax Liechtenstein carbon tax US$ 80/ tCO2e 20 Slovenia carbon tax 73 Finland carbon tax (Liquid transport fuels) US$ 70/ tCO2e 69 Finland carbon tax (Other fossil fuels) Korea ETS 18 US$ 60/ tCO2e 16 Alberta carbon tax 56 Norway carbon tax (upper) Québec CaT, California CaT, Ontario CaT 15 14 Saitama ETS, Tokyo CaT US$ 50/ tCO2e New Zealand ETS 13 12 Iceland carbon tax US$ 40/ tCO2e 36 France carbon tax US$ 30/ Portugal carbon tax, tCO2e 8 Beijing pilot ETS 27 Denmark carbon tax 7 Switzerland ETS EU ETS, 6 Latvia carbon tax, US$ 20/ Shenzhen pilot ETS Fujian pilot ETS, tCO2e 5 Colombia carbon tax, Chile carbon tax, RGGI, Norway carbon tax (lower) 4 Shanghai pilot ETS Mexico carbon tax (upper), US$ 10/ Estonia carbon tax, 3 Japan carbon tax tCO2e Guangdong pilot ETS, Hubei pilot ETS 2 Mexico carbon tax (lower), 1 Tianjin pilot ETS US$ 0/ Chongqing pilot ETS, <1 tCO2e Poland carbon tax, Ukraine carbon tax Executive summary 15 Several common issues need to be overcome Paris Agreement together with substantial to expand, deepen and accelerate carbon economic benefits. This “win-win” development pricing initiatives. path is possible when well-designed domestic −− Domestically, one key concern is the potential policies are supported by international cooperation. impact of carbon pricing on the international It is important that an integrated policy response competitiveness of some domestic industrial be developed that combines domestic carbon sectors, as discussed in the 2015 edition of the prices, other domestic policies, climate finance and State and Trends of Carbon Pricing.3 Related to this international market approaches. issue is the persisting focus on costs to regulated companies and consumers in the carbon To reach this low-carbon development path, pricing discourse. Equal consideration of the an annual level of incremental low-carbon potential benefits of carbon pricing, such as the investments on the order of US$700 billion identification of investments that could benefit will be required by 2030. These incremental from the low-carbon transition and the number investments will have to be mobilized through a of jobs that could be created, would yield a more combination of policy reforms, climate markets and balanced debate.4 climate finance. In addition, planned investment will −− Carbon pricing is also held back by the uncertain need to be shifted from high-carbon technologies standing of climate policy and carbon pricing to a range of low-carbon alternatives. initiatives in the long term, due to policy changes such as those witnessed in the US. More This amount is substantially lower than the broadly, carbon pricing can be most effective and long-run environmental and economic benefits acceptable to the public when it is well aligned with that can be achieved; however, mobilizing the broader context in a country.5 This challenges these resources is a major challenge. Domestic policymakers to balance multiple objectives, of resource mobilization will need to make the largest which GHG emissions mitigation is just one. This contribution. This can be enabled by domestic issue is examined in the 2016 edition of the State policies and measures, including carbon pricing, to and Trends of Carbon Pricing.6 catalyze private sector investment. Revenues from −− At the international level, cooperation through carbon pricing could also generate significant fiscal international market mechanisms and linking of benefits. domestic carbon pricing initiatives will require the development of trust between parties.7 These domestic actions must be complemented Accordingly, accounting rules (such as avoidance by effective and efficient international of “double counting”) will need to ensure that the cooperation. Following the analysis provided in the generated mitigation outcomes correspond to 2016 edition of the State and Trends of Carbon Pricing, mitigation actions.8 In the absence of such trust, an international carbon market implemented by trading and crediting would likely stall. 2030 has the potential to mobilize annual resource flows of US$220 billion, corresponding to about Overcoming the issues that impede the one third of the incremental investment needs of implementation of carbon pricing is important US$700 billion. International cooperation will also to achieve a low-carbon development path reduce the costs of achieving emission reduction that delivers the mitigation targets of the targets. 3 Source: World Bank and Ecofys, State and Trends of Carbon Pricing 2015, September 2015. 4 Source: WRI, Putting a Price on Carbon: A Handbook for U.S. Policymakers, April 2015. 5 Source: Baranzini et al., Carbon pricing in climate policy: seven reasons, complementary instruments, and political economy considerations, March 31, 2017. 6 Source: World Bank, Ecofys and Vivid Economics, State and Trends of Carbon Pricing 2016, October 2016. 7 Source: Fuessler et al., Market Mechanisms: Incentives and Integration in the Post-2020 World, November 2015. 8 Source: World Bank, Networking Carbon Markets— Key Elements of the Process, July 2016. 16 Climate finance can play a crucial role in Results-based climate finance (RBCF) can global resource mobilization to achieve a low- support such an integrated approach to climate carbon development path by complementing finance and markets. RBCF is a form of climate and catalyzing domestic policies and climate finance where funds are disbursed by the provider of markets. In order to do so climate finance needs climate finance to the recipient upon achievement of to be seen in a broader context of policy support, a pre-agreed set of climate results. These results are market building and leveraging private sector typically defined as an output—for example, per unit engagement. of installed renewable capacity—or as an outcome— for example, per unit of emission reduction. RBCF This calls for an integrated approach to can support building climate markets and help climate finance and climate markets, in the transition to an international carbon market which climate finance helps catalyze the by: facilitating a private sector response to carbon development of climate markets, and as pricing, including encouraging the ecosystem of climate markets develop they play a larger role business services required for climate markets, in the mobilization of resources for low-carbon supporting domestic policy processes and building investments. Policy makers can optimize the use targeted implementation capacity; developing of climate finance in this transition by ensuring monitoring, reporting and verification systems 1) that climate finance is provided on concessional that are needed in both RBCF and market designs; terms only to the extent required to deliver the and piloting programs based on the principles of intervention; 2) that climate finance and climate Article  6 of the Paris Agreement. While RBCF is markets become compatible through the use of already delivered through various facilities, it would common standards and definitions; 3) that climate have to be deployed at a larger scale than at present markets are efficient and environmentally robust; to enable transformative impacts in a broad range and 4) as climate markets become more developed, of economic sectors. they are utilized ahead of climate finance to mobilize low-carbon investments, so that public resources are used efficiently. 1 / Introduction 17 1 Introduction 18 1 Introduction “I nstead of pitting the environment versus the economy, let’s consider market principles Agreement and the eight new carbon pricing initiatives that have been implemented in national and economic growth. … We believe that by changing and subnational jurisdictions. Developments in the way we think and talk about climate change, the Americas have been particularly prominent; we can lower the temperature of the debate—and of the eight new carbon pricing initiatives launched accomplish a whole lot more,” asserted Michael since the beginning of 2016, six came from this Bloomberg and Carl Pope.9 Carbon pricing plays region. These advances in the region represent a an important role in such response to tackling significant achievement, especially given the climate change as it requires the cost of greenhouse political opposition to carbon pricing initiatives at gas (GHG) emissions to be considered in financial the national level in some of these jurisdictions. decisions. This levels the playing field between emission-intensive and low-carbon economic Despite these carbon pricing developments, activities, triggering more investments in low- substantial progress is needed on three key carbon technologies. Carbon pricing is therefore dimensions to reach the goal of the Paris key to mobilizing the US$700 billion of incremental Agreement: the coverage of GHG emissions must investments needed annually by 2030 to transition expand, deeper impacts on emission reductions to a low-carbon economy.10 need to be triggered by raising carbon prices, and the speed of these actions should accelerate in line Carbon pricing initiatives continue to spread, with Paris Agreement compatible pathways. The despite the headwinds hampering more ambitious current level of carbon prices is substantially lower climate action in some jurisdictions. Substantial than the level that the High-Level Commission progress has been made over the past two on Carbon Prices found to be consistent with years, including the entry into force of the Paris the temperature goal of the Paris Agreement. In 9 Source: Bloomberg M. and Pope C., Climate of Hope: How Cities, Businesses, and Citizens Can Save the Planet, St. Martin’s Press, April 18, 2017, 10 See Section 3 of this report. 19 addition, while 15 percent of global GHG emissions (RBCF). These initiatives are examined in Section 2 are covered by an emissions trading system (ETS) of this report on subnational, national, regional and or carbon tax, a much higher coverage combined international levels, the latter of which includes the with international cooperation on climate markets existing Kyoto mechanisms and new approaches is essential to mobilizing the large volume of under Article 6 of the Paris Agreement, as well as resources required to finance the transition to a initiatives outside of the United Nations Framework decarbonized economy and bring down the costs of Convention on Climate Change (UNFCCC). In low-carbon technology through economies of scale. addition, this section reports on the internal carbon Issues that may be holding back further progress prices set by public and private organizations to price include concerns about the impact of carbon pricing carbon for decision making purposes. on international competitiveness, and costs to regulated companies and consumers. Uncertainty Section 3 of this report explores how the two main surrounding climate policy and the challenge of modalities of international cooperation – climate aligning carbon pricing with a country’s broader finance and climate markets – can be used in policy objectives are other possible constraints to an integrated approach to enable, support and more accelerated action. complement domestic policies to mobilize the flow of resources needed to meet the temperature The report takes stock of the latest trends and goal of the Paris Agreement. The section further developments in carbon pricing initiatives. It covers discusses what role RBCF can play in transitioning initiatives that explicitly apply a price on a unit of towards such an integrated approach. The GHG emission, including ETSs—both cap-and-trade integrated approach and the role of RBCF will then and baseline-and-credit systems, carbon taxes, offset be illustrated in using the example of accelerating mechanisms and results-based climate finance the transition to clean energy. 20 » More and more politicians, policy makers and business actors are calling for a carbon price as the green economy’s missing link. Putting a price on carbon at a global scale could unleash innovation and provide the incentives that industries and consumers need to make sustainable choices. « António Guterres, Secretary-General of the United Nations » Carbon pricing reinforces the full realization of the nationally determined contributions and is an essential key for a strong, real, useful implementation of the Paris Agreement. « Patricia Espinosa, Executive Secretary of the United Nations Framework Convention on Climate Change 2 / Existing and emerging carbon pricing initiatives around the world 21 2 Existing and emerging carbon pricing initiatives around the world 22 2 Existing and emerging carbon pricing initiatives around the world 2.1 The International Civil Aviation Organization’s (ICAO) adoption of the Carbon Offsetting and Overview, recent Reduction Scheme for International Aviation developments, and (CORSIA) in 2016 marked the first instance of a global sectoral carbon pricing initiative. CORSIA emerging trends will cap GHG emissions from international aviation at 2020 levels. The pilot phase is planned to start in 2021. Efforts are now also being made to develop 2.1.1 a GHG reduction strategy for the international Global overview of carbon pricing shipping sector through the International Maritime initiatives Organization (IMO). At the international level, 81 of the 155 Parties that At the national and subnational levels, new initiatives have submitted their Nationally Determined can build on substantial progress and experience Contributions (NDCs) to date have stated with carbon pricing over the last 25 years.13 As that they are planning or considering the of 2017, 42 national and 25 subnational use of carbon pricing as a tool to meet their jurisdictions14 are putting a price on carbon, as commitments,11 as shown in Box 1 and detailed shown in Figure 4. Over the past decade, the number further in Section 2.2. These Parties account for of jurisdictions with carbon pricing initiatives has 55  percent of global GHG emissions. Among doubled. These jurisdictions account for about half the Parties planning or considering the use of of the global economy15 and more than a quarter carbon pricing are three of the world’s five largest of global GHG emissions. On average, carbon economies: China, Japan and India.12 11 For the purpose of this report, carbon pricing includes all market mechanisms. The authors recognize that different interpretations are possible since references to market mechanisms in NDCs are not always presented in a clear and consistent manner. These are different from the 101 INDCs planning or considering the use of carbon pricing reported in the 2016 edition of the State and Trends of Carbon Pricing as an INDC only becomes their first NDC upon ratification of the Paris Agreement, unless the Party decides to revise it. As of September 1, 2017, five Parties which have ratified the Paris Agreement indicated that they do not want their INDC to become their NDC and still have to submit their first NDC. 12 The other two Parties, the United States (US) and the EU, did not state the use of carbon pricing in their NDCs, despite carbon pricing initiatives already being implemented in those jurisdictions at a regional, national and/or subnational level. The number of Parties planning or considering the use of carbon pricing in their NDCs is therefore not comparable with the jurisdictions with carbon pricing initiatives implemented, scheduled or under consideration. 13 The authors have kept the format of presenting this information consistent with the previous editions of the State and Trends of Carbon Pricing for comparison purposes. 14 Cities, states, and subnational regions. 15 Authors’ calculations based on the 2014 gross domestic product of the national and subnational jurisdictions putting a price on carbon. 23 pricing initiatives implemented and scheduled for In addition, once the Chinese national ETS is implementation cover about half of the emissions launched—currently planned for the end of 2017— in these jurisdictions. These numbers translate it will be the largest carbon pricing initiative in the to a total coverage of about 8 gigatons of world, surpassing the European Union ETS (EU ETS). carbon dioxide equivalent (GtCO2e) or about Already, the eight Chinese ETS pilots collectively 15  percent of global GHG emissions, as displayed cover 1.3 GtCO2e. While this coverage represents in Figure  5. As a result of the growth in the number only about ten percent of the country’s annual of initiatives as well as expanded coverage of GHG emissions, it nonetheless constitutes a existing initiatives, the emissions covered by carbon substantial volume of GHG emissions; for example, pricing have increased almost fourfold over the past this coverage is greater than the total GHG emissions decade. Figure 5 shows that the number of carbon from Canada. Following the launch of the Chinese pricing initiatives implemented or scheduled for national ETS, the emissions coverage of the world’s implementation has quadrupled in the past decade largest GHG emitter could increase fourfold.18 and almost doubled over the last five years, reaching While the Chinese government has stepped up 47 in 2017.16 Half of the new initiatives implemented on the world stage to become a climate leader, or scheduled for implementation in the last five Chinese companies continue to drive the expansion years were in upper-middle-income economies, of coal-fired power plants both domestically and while prior to 2013, carbon pricing initiatives were abroad. Realization of their expansion plans would implemented almost exclusively in high-income see the world’s coal power capacity increase by economies.17 In the past two years, the Americas 43 percent.19 These developments emphasize the have been the main contributor to growth in the need to level the playing field between emission- number of carbon pricing initiatives implemented or intensive and low-carbon technology. Carbon scheduled for implementation, with three  quarters pricing can help to achieve this by making emission- of the newly implemented initiatives—six out intensive investments more expensive. Carbon of eight—coming from this region. The number pricing revenues can be used to finance low-carbon of carbon pricing initiatives in the Americas has technology and lower their costs through developing doubled to 12 initiatives over 2016–2017, and this economies of scale. number will double again if all initiatives scheduled for implementation and under consideration are In 2016, governments raised about US$22 billion implemented. in carbon pricing revenues from allowance auctions, direct payments to meet compliance obligations and carbon tax receipts, a decrease » As of 2017, 42 national compared to the US$26 billion raised in 2015. This drop is largely due to the lower carbon prices in and 25 subnational the EU ETS and Regional Greenhouse Gas Initiative jurisdictions are putting (RGGI) and a large amount of unsold allowances in California and Québec. The decline in revenues a price on carbon. These can also be partially attributed to a reduction in jurisdictions account for revenues from some carbon taxes, in particular about half of the global economy. « 16 In 2007, 10 carbon pricing initiatives were implemented or scheduled for implementation, increasing to 24 in 2012 and 47 in 2017. 17 Since 2013, 12 of the 24 new carbon pricing initiatives were implemented or scheduled for implementation in upper-middle-income economies. Source: Authors’ calculations based on the World Bank Country and Lending Groups Country Classifications as of September 1, 2017. 18 The emissions to be covered under the Chinese national ETS are estimated to be about half of China’s national GHG emissions, based on the sector scope, as stated in the “US-China Joint Presidential Statement on Climate Change”, and public emissions data from the International Energy Agency. This estimate has not been validated by Chinese authorities. Informed researchers have judged that the GHG emissions coverage could potentially be about 40 percent of China’s total GHG emissions. 19 Source: Coalswarm, Sierra Club and Greenpeace, Boom and Bust 2017, March 2017. 24 the United Kingdom (UK) Carbon Price Floor, which tax, which has risen from €22/tCO2e (US$26/tCO2e) was lower than in the previous years due to large to €31/tCO2e (US$37/tCO2e) over 2016-2017, and in GHG emission reductions in the power sector. The the Republic of Korea ETS, where allowance prices UK’s consumption of coal for electricity generation have increased from KRW17,000/tCO2e (US$15/tCO2e) decreased by 76 percent in 2016 compared to 2013 to KRW20,350/tCO2e (US$18/tCO2e) over the same when the Carbon Price Floor was introduced—the period. lowest level since 1934.20 Thus, despite a decrease in total revenues, this trend highlights the positive Momentum is also building for carbon pricing in contribution of carbon pricing in changing the energy the private sector, where an increasing number mix, especially when supported by appropriate of companies are using internal carbon pricing complementary policies. The EU ETS remains the to actively manage climate-related risks. The largest source of carbon pricing revenues due to its number of companies that reported to CDP that size, followed by the carbon taxes in France, Sweden they are currently using an internal price on carbon and Japan as illustrated in Figure 8. This figure also in 2017 or planning to do so within two years has shows that many initiatives could increase their increased by 11 percent compared to 2016.22 revenues by raising carbon prices or expanding their coverage. The number of carbon pricing initiatives and their global coverage has grown significantly over the The total value of ETSs and carbon taxes in past few years, with increasing support from both 2017 is US$52 billion,21 an increase of seven the public and private sector. However, the pace of percent compared to the 2016 value of US$49 billion. these developments needs to accelerate. To help This growth is primarily due to the launch of several meet the temperature goal of the Paris Agreement, carbon pricing initiatives at the end of 2016 and in the High-Level Commission on Carbon Prices 2017. Part of the increase is offset by lower carbon identified that prices will have to be in the range of prices and declining caps in some ETSs. US$40–80/tCO2e in 2020 and US$50–100/tCO2e by 2030.23 In the same context, the High-Level Panel The observed carbon prices span a wide range, on Carbon Pricing24 set a global target to achieve 50 from less than US$1 to up to US$140/tCO2e, percent coverage of emissions under carbon pricing as shown in Figure 7. Price levels have increased in initiatives within the next decade, which entails a some newer initiatives such as in the France carbon much higher coverage than today’s level. 20 Source: UK government, Energy Trends: solid fuels and derived gases – Coal consumption and coal stocks, accessed March 15, 2017. 21 The total value of ETS markets was estimated by multiplying each ETS’ annual allowance or credit volume for 2017, or the most recent yearly volume data, with the price of the emission unit on April 1, 2017. The total value for carbon taxes was derived from official government budgets for 2017. Where the allowance or credit volume (for an ETS) or budget information (for a carbon tax) was unavailable, the value of the carbon pricing initiative was calculated by multiplying the GHG emissions covered with the nominal carbon price on April 1, 2017. No information was available on the amount of emission reduction credits which could be generated by facilities under the Washington State Clean Air Rule or offsets under the Australian safeguard mechanism. Also, the Chinese national ETS is yet to be implemented. Therefore, these were not included in the value calculation: The values presented in the Carbon Pricing Watch 2017 were not updated to August 1, 2017, because no other new carbon pricing initiatives were implemented nor have any changes occurred in the existing initiatives since the release of that brief in May 2017. Moreover, daily changes in prices and exchange rates over a 5-month period cannot be used as an indicator of the evolution of global carbon pricing initiatives. 22 Source: CDP, Putting a price on carbon - Integrating climate risk into business, October 2017. 23 The Commission recognizes that the target carbon price may differ across countries. It considers that achieving the Paris objectives will require all countries to implement climate policy packages. These policy packages include complementary policies to carbon pricing to tackle other market failures beyond the GHG externality that take into account: knowledge spillovers (and research & development), network effects, imperfect capital markets and unpriced co-benefits such as reduced pollution. 24 Source: World Bank, Leaders Set Landmark Global Goals for Pricing Carbon Pollution, April 21, 2016, http://www.worldbank.org/en/news/press- release/2016/04/21/leaders-set-landmark-global-goals-for-pricing-carbon-pollution. 2 / Existing and emerging carbon pricing initiatives around the world 25 Box 1 / Carbon pricing in numbers INTERNATIONAL CARBON PRICING INITIATIVES 81 NDCs 55% include carbon pricing of global GHG emissions (domestic and/or international) are covered by these NDCs REGIONAL, NATIONAL AND SUBNATIONAL CARBON PRICING INITIATIVES 42 NATIONAL 25 SUBNATIONAL 47 CARBON PRICING INITIATIVES jurisdictions with carbon pricing initiatives implemented or scheduled for implementation COVERING ANNUAL GLOBAL GHG EMISSIONS OF 8 GtCO2e = 15% PRICES IN THE IMPLEMENTED INITIATIVES US$1-140/tCO2e Three quarters of the emissions covered are priced