Global climate goal could be in peril without carbon price reform

According to managers representing $10.6 trillion in investments, without a global review of carbon prices, climate goals could be compromised. Currently, less than 25% of global emissions are covered by carbon credits, and their price varies widely across regions, and is generally relatively low to effectively influence change. In a document released ahead of the G7 Leaders Summit in Berlin (26-28 June 2022), attended by Ministers of the Environment along with Ministers of Climate and Energy, the Net-Zero Asset Owner Alliance (NZAOA) established five principles to underpin a redesign of government policies and encourage a shift away from high-emissions activities. Are they:

1. Ensure adequate coverage and ambition: more policymakers should consider implementing carbon pricing that are legally binding and aligned with scientific evidence

2. Deliver a just transition: policymakers must design carbon pricing instruments to reduce or compensate communities and sectors impacted by carbon markets

3. Predictability of the carbon price: that the trajectory of carbon prices allows for a planned and orderly transition to a low carbon economy. Carbon taxes are expected to increase but in a predictable way. Likewise, the Emission Trading System (ETS) should be designed to include market stability measures, including price floors, ceilings or bands, to avoid excessive volatility and provide long-term predictability of carbon prices.

4. Minimize competitive distortions: Carbon pricing policies should be designed to prevent leakage*, implementing appropriate protection measures and targeting emissions-intensive companies exposed to trade. Also carbon border adjustment mechanisms (CBAMs) to minimise competitive distortions.

5. Promote international cooperation: including the creation of international "climate clubs" where members work together to encourage robust carbon prices

* Leakage: moving a production process to a jurisdiction with no carbon pricing (or a lower carbon price) to reduce your carbon costs

Click below to access the publication "NZAOA Position Paper on Governmental Carbon Pricing".