Cost of offsetting carbon emissions needs to increase “significantly”, while regulated sector faces “political challenges”.
Carbon pricing in both the voluntary and regulated emissions reduction markets is too low, according to two recent studies.
A study by independent research and data company Trove and University College London (UCL) found prices in the voluntary carbon market were “unsustainably low” and must increase “significantly” to secure high environmental integrity. Meanwhile, a World Bank report said while carbon pricing had generated US$53 billion in revenue in 2020-21, regulated schemes are “not on track to meet Paris Agreement goals”.
While momentum has been growing behind pricing carbon pollution as a means to lower emission levels and encourage investment into cleaner energy, the mechanics of carbon pricing are still hotly debated, with asset owners and managers concerned about a lack of transparency, particularly in the voluntary market. In the regulated sector, carbon pricing is a leading policymaker priority, but official schemes still cover a fraction of global emissions.
Supply excess forces down prices in voluntary sector
The Trove/UCL study said low prices were in part due to an excess of supply and issues around additionality (reductions that would not have occurred in the absence of a market for offset credit), which enabled credits to be created at extremely low costs. Without the surplus, said the study, prices would be at least US$10/tCO2e higher than the current US$3-5/tCO2e level.
The scale and dynamics of the voluntary carbon market had been poorly understood, said the study, and companies setting climate targets and using carbon credits in their corporate communications had “little understanding of long-term strategic implications of these commitments”.
Trove/UCL made five recommendations for the development of the voluntary market: price as a measure of environmental integrity; reduction of emissions by participants before using the voluntary market; implementation of nature-based solutions (NBS); improved and independent regulation of the voluntary market; and the application of corresponding adjustments (to prevent double counting of emission reduction schemes) to the voluntary market.
A “clean-up and independent regulation” of the voluntary market was required, said Professor Simon Lewis of UCL. “This is because in reality it is costly to remove carbon dioxide from the atmosphere. Overall it will be cheaper in the long-run to invest in moving to zero emissions rather than relying on offsets. But for those emissions that remain, the true price of removing carbon from the atmosphere must be paid, as the alternative is greenwash.”
Regulated sector carbon pricing falls short
In the regulated sector, the World Bank study said countries’ Nationally Determined Contributions continued to fall short of what was needed to meet the goals of the Paris Agreement. This is reflected in low carbon prices, with only 3.76% of emissions covered by a carbon price above US$40/tCO2e (the bottom range of 2020 prices recommended to be Paris compliant and meet the 2 degrees Celsius global warming goal).
The World Bank describes carbon pricing as a necessary but “not sufficient” policy. While it can play a role in incentivising low-carbon action by internalising the cost of greenhouse gas emissions, it must be sufficiently ambitious (i.e., meet the US$40/tCO2e goal), be well designed and adapted to the jurisdictional context and form part of a supportive policy package.
Mari Pangestu, Managing Director of Development Policy and Partnerships, World Bank, said regulated or certified carbon pricing systems collectively price about one quarter of global carbon emissions, falling short of achieving national and international climate objectives. “Carbon pricing often encounters political challenges, and the current average explicit carbon price in the world economy is estimated at just US$2 per ton of CO2. The 2017 Stern-Stiglitz Commission on Carbon Pricing found that carbon prices should rise to between US$50 and US$100 per ton of CO2 by 2030, to meet the Paris Agreement targets cost-effectively.”