Why carbon pricing is an effective enabler in the transition to a low carbon economy
Imagine paying less if you choose to drive a cleaner car or use a more efficient heating system — would you think twice? People are encouraged to do less of something when extra charges are incurred which is why carbon pricing policies have gained so much popularity as an effective enabler in addressing climate change. By putting a price on carbon, countries and industries are encouraged to limit their use of fossil fuels, thus shifting to cleaner energy sources and technologies and, consequentially, reducing their contribution to the climate crisis. A group of 11,000 scientists have, in fact, listed carbon pricing as one of their six recommendations for saving the planet.
Yet, as outlined in a recent report from the Carbon Pricing Leadership Coalition, there are several barriers to the wide-scale adoption of carbon pricing. These include concerns surrounding industrial competitiveness due to pricing differentials between jurisdictions. Although the global average price of carbon is $2 a tonne, which is insufficient to reduce emissions at the required levels, some countries have imposed higher carbon prices. Take Sweden for example, where a tonne of CO2 costs $127 — the highest carbon tax in the world. This price is far less in other countries such as Canada where CO2 costs $15–30 a tonne. Meanwhile many countries, Turkey included, have imposed no policy at all. In fact, as of April 2019, only 46 national jurisdictions were covered by carbon pricing initiatives, accounting for just 20% of global GHG emissions.
As a result, countries with carbon prices are now finding themselves competing with foreign businesses that face lower (or no) carbon prices. One of the biggest risks associated with these pricing differentials is if businesses decide to relocate their industrial activities to avoid carbon pricing policies altogether. As a consequence, high-carbon economies could end up shifting between regions; from regions with a higher carbon price to regions with a lower one. Not only would this result in widespread disruption and economic loss for the source country as businesses and jobs move abroad but it would also undermine the intended outcome: to reduce carbon emissions. This shift, referred to as carbon leakage, would be a “lose-lose” scenario — a loss of competitiveness without any environmental gain. However, it is important to note that there is little evidence to date that carbon pricing has resulted in the relocation of the production of goods and services or investment.
There are many policy options for addressing the carbon leakage risk. Fundamental to any policy is flexibility and cost minimisation, thus allowing a business to make its own low-carbon transition while maintaining competitiveness. Market linkages are one such example that enable businesses in different jurisdictions to access a common market place. This is already the case in Europe through the European Emissions Trading System. In this example, no business has a cost advantage that could otherwise arise from different carbon pricing policies. Interestingly, Europe is also exploring a Border Carbon Adjustment (BCA) to prevent carbon leakage — a policy that would see a carbon price added to international products at the EU’s borders.
But the onus should not just sit with those that face a carbon price which is why some businesses (Microsoft and Arçelik included) have demonstrated their commitment to accelerating a low-carbon future by implementing their own internal carbon price despite not having any obligatory legislations to do so. At Arçelik, as we implement an internal carbon price, we are redirecting resources, scaling up investments in renewable energies and driving innovations towards low-carbon technologies. As a result, our energy consumption per product had declined by 40% in 2018 vs a 2010 baseline. Even bigger — investors are now taking climate action into account when making decisions, meaning that the companies that haven’t yet adopted an internal price may soon find themselves having to do so.
Despite concerns around competitiveness, we must not lose sight of the fact that carbon pricing is an effective approach to reducing emissions. Not only because businesses facing carbon costs will look to efficiencies to reduce their emissions but also because carbon pricing will incentivise innovation and investment. As the 2018 Nobel prize winner William Nordhaus said, the industries and businesses that face charges on emissions are likely to be the ones who innovate and invest in low-carbon solutions. And they must do so because carbon pricing alone will not solve the climate crisis: it is the efficiencies, innovations and investments that will make the real difference, ensuring long-term sustainable growth. With the right policies in place, carbon pricing should be seen and celebrated as an effective enabler that can help businesses across the world accelerate the necessary transition to a low-carbon economy, resulting in a win-win scenario for both the business world and the natural world alike.