“You pollute, you pay the price”: COP leaders push for carbon pricing

Leaders of key international organisations have called for a global carbon price, a move they say is essential for decarbonisation, innovation and a just transition.

“We believe that a carbon price has the potential to raise revenues in a way that is equitable – because the more you consume, the more you pollute, the more you pay – and it also provides an incentive to accelerate decarbonisation,” said Kristalina Georgieva, president of the International Monetary Fund (IMF), during COP28.

Both consumption and production “would adapt to this incentive,” she continued.

Spanish president Pedro Sanchez, director general of the World Trade Organisation (WTO) Ngozi Okonjo-Iweala, World Bank president Ajay Banga, and EU Commission president Ursula von Leyen also advocated for a global carbon price at the same event.

Their arguments were similar: carbon pricing works.

"Carbon pricing is the centrepiece of the European Green Deal," said von der Leyen. "In the European Union, if you pollute, you have to pay a price for that. If you want to avoid paying that price, you innovate and invest in clean technologies."

Since 2005, the EU Emissions Trading Scheme (ETS) has reduced emissions in the sectors covered by over 37%, and raised more than €175 billion.

Okonjo-Iweala called it a "potent policy instrument", while von Leyen said it was “one of the most powerful” decarbonisation tools available to policymakers.

Carbon pricing has also won over climate-conscious asset owners. For example, Dutch pension fund ABP told Net Zero Investor that it “couldn’t get to net zero” on its own, and the policy support of "extensions to emissions trading schemes and carbon taxes" are critical.

Ways to set a carbon price include carbon taxes, emissions trading schemes, and regulatory frameworks.

Regarding the incentives to innovate, Sanchez claimed that emissions from Spanish industry have fallen by half thanks to the ETS. 

Debt not a viable path

The IMF's position is that taking on extra debt is “not a viable” path to funding the wholesale transformation of economies necessary for meeting net zero targets, according to Georgieva.

Carbon pricing, on the other hand, is "pragmatic, equitable and generates revenues" that can support the wider transformation and vulnerable communities.

In the International Energy Agency's net zero pathway, global clean energy spending rises from $1.8 trillion in 2023 to $4.5 trillion annually by the early 2030s.

Carbon pricing can help fill that gap.

Limited uptake

Despite the insistence of long-term proponents like the IMF, carbon pricing still covers only 25% of global emissions, a testament to the geopolitical challenges that stymy international co-ordination.

Moreover, the global carbon price needs to hit $80 per ton by 2030 to keep the 1.5 degrees warming target alive, according to IMF calculations.

Since 75% of emissions are unpriced, the equivalent global price is currently around $5 per tonne.

The European Commission has said it will continue to provide technical support to countries that wish to introduce carbon pricing regimes in their domestic legislation.

International co-ordination

International co-ordination efforts pivot around the concept of equivalency – making sure richer countries pay more for carbon than poorer countries.

The IMF proposal sets price floors per ton of carbon at $25 for low-income countries, $50 for middle-income countries, and $75 for high-income countries.

A failure to co-operate internationally could not only imperil the transition to net zero but also generate trade tensions.

“We don’t want actors coming to the WTO dispute settlement system over fragmented carbon prices,"  said Okonjo-Iweala.

In the absence of international co-ordination, measures such as a Carbon Border Adjustment Mechanism (CBAM) are available to jurisdictions that impose carbon prices but fear that doing so may reduce the competitiveness of their high-emitting sectors. 

Credibility in voluntary markets

Bolstering the credibility of voluntary markets via regulation should be another priority for policymakers, the panellists at separate COP event argued.

Creating global rules in a fragmented world is a Herculean endeavour. Yet voluntary carbon markets are global and ideally need global rules.

Independent crediting programs are also stepping up their game. During COP28, six of the world’s leading independent carbon crediting standards announced a collaboration to increase the impact of activities under their standards.

They include ACR, ART, Climate Action Reserve, Global Carbon Council, Gold Standard, and Verra.

While the compliance markets amount to $850 billion in market value (90% of which is the EU’s ETS), the voluntary markets peaked at $2 billion in 2021.

Controversies around the quality and the fairness of the credits have led some asset owners to take a cautious approach. 

UK defined contribution mastertrust NEST, for example, told Net Zero Investor that it has excluded carbon credits from its net zero plans due to the greenwashing and reputational risks attached to the credits.

“We have operated for many years without regulation,” said Pedro Martins Barrata, associate vice president of the Environmental Defence Fund and co-chair of the expert panel for the Integrity Council for the Voluntary Carbon Market (IC-VCM).

"A lot was done, a lot claimed, but not a lot checked. We only got away with it because we were small. God knows what would have happened if we had reached the size of the crypto bubble."

The market has fallen dramatically since it peaked in 2021.

Both the rapid growth of the market and negative press stories have attracted the scrutiny of regulators.

Barrata’s solution is a threefold “end-to-end credibility” of supply, demand and transaction.

“Just one media story that exposes a community exploited out of its carbon rights” could ruin the market, he added.

Andrea Bonzanni, international policy director at International Emissions Trading Association, said the market is at a “make or break” point. Either the market matures, secures credibility, and grows, or it becomes "irrelevant and falls to the margins" of climate finance.

There are six main challenges to achieving that essential credibility, according to the European University Institute.

Firstly, there needs to be more scientific integrity and transparency, especially around the use of credits in avoided emission claims (emissions savings that occur outside a company's own value chain).

Secondly, credits need to guarantee wider social, biodiversity and ecosystem benefits.

Thirdly, there is the issue of non-permanent removals. For example, companies can offset today’s emissions against new forest growth that may not begin to store significant amounts of carbon for another 70 years and which might not grow successfully at all.

This leads into the fourth problem: monitoring. It's no use claiming a certain amount of avoided emissions if the trees that generated the credit have never grown or the forest chopped down. But the areas that host the carbon credit are usually far removed from the corporates that purchase them and checks can be difficult to verify.

Fifthly, claiming carbon offsetting without guaranteeing adequate renumeration to community and/or just treatment of the land and its inhabitants have led to claims of "carbon grabbing" and even "carbon colonialism". It is typically rich countries from the global north that look to offset their emissions in the global south.

Lastly, greater efforts need to be made to put local actors at the forefront of the projects.