Carbon pricing is growing up but still needs support from its parents

This week I’m in sunny Barcelona for the Carbon Expo, the world’s largest event on carbon pricing, emissions trading, and climate finance. There are an impressive 2,000 people from all over the world attending the event. The crowds were particularly noticeable when all gathered together to pass through metal detectors on the opening morning.

The heightened security was the result of the King of Spain, Felipe VI, welcoming the delegates alongside senior officials from the World Bank, United Nations, and a number of other national and local government organisations.

It was enthusing to hear, in the run up to the crucial Paris climate change conference this December, yet another head of state express that climate change is the greatest challenge our society faces today. And the sense of momentum is palpable, coming just one week after the strong ambition expressed by Francois Hollande.

The Expo has been running annually since 2004, making this its twelfth edition. But speaking with a colleague – who first attended the Expo six years ago, in the run up to the Copenhagen climate change summit – I am told that the event was about ten times the size back then, with vehicles needed to take attendees between different exhibition halls.

Indeed, people were very excited about its birth of carbon pricing as a market mechanism – primarily in the form of cap and trade schemes, or carbon taxes – to encourage sustainable development. They were full of hope about what it might achieve in the future.

But it seems that today carbon pricing is in the middle of a difficult adolescence, uncertain of what it will be when it matures and grows up. The Australian government repealed its carbon tax and proposed emissions trading scheme in 2014. And the cost for a tonne of carbon under the EU Emissions Trading Scheme is less than a third of its peak in 2008.

Perhaps the reason that fewer people are attending and exhibiting is that the expected lucrative commercial opportunities in carbon trading did not last long. The market experienced an initial boom period with high demand, particularly for the purchase of credits under the Clean Development Mechanism established by the Kyoto Protocol. But then came a bust. After the financial crisis then lower productivity meant that the caps set on cap and trade schemes became more achievable, so the cost of carbon plummeted.

The leading example is the EU Emissions Trading Scheme, which is the world’s largest carbon market, up and running since 2005. In 2008 the market was buoyant and a tonne of carbon was trading at €34 a tonne. Then came the financial crisis. By 2014 the market was in the doldrums, at around €8 a tonne, although it has picked up slightly since thanks the introduction of a back-loading mechanism to solve oversupply issues, and the proposed Market Stability Reserve starting in 2019.

There are, however, very positive signs that with the right nurture and support that the carbon pricing can meet its as-yet-unrealised potential, playing a key role in the transition to a sustainable, low carbon economy.

Despite Australia’s exit, new schemes have more than filled the gap. In the past year we have seen Mexico, France, Korea, and Portugal introduce new carbon pricing, as well as the provinces of Hubei and municipality of Chongquing in China on a sub-national level. Chile and South Africa have also announced new carbon taxes that are not yet implemented. And Quebec and California are planning to link their emissions trading schemes.

In fact carbon pricing now covers around 12 percent of all global carbon emissions – from Kazakhstan to California. The total amount of emissions covered by initiatives has tripled over the past decade and are now worth around $50 billion.

This is good news, but it is also not enough. According to a survey undertaken by PWC of members of the International Emissions Trading Association then prices are expected to rise to an average of over €18 a tonne between 2020 and 2030. China is also expected to have a full national scheme operational by 2020, although the price may be less than that in Europe currently. The challenge is that a price of around €30 is believed to be required to drive a meaningful shift to lower carbon business.

Carbon pricing could help us create a brighter, cleaner future. But it needs to grow up fast. When the price is right, and the rules are properly enforced, then market forces can be incredibly powerful. Businesses are supportive, and an increasing number of large corporates – such as Microsoft, BP, Mars, and Disney – are starting to prepare by introducing internal carbon pricing into their planning and decision-making.

But to succeed then carbon pricing needs support from its parents – the international institutions and governments that have set a price on carbon – to give an extra helping hand by providing certainty and stability for the market. This will help the awkward, adolescent carbon pricing mechanisms to fully mature and succeed in fulfilling their potential.