BlogCarbon Pricing, Emissions Trading System (ETS)

Navigating carbon pricing  

Written by

Ulf Narloch

Published on

carbon

Carbon pricing is increasingly applied to achieve emissions reductions with a growing relevance for businesses across all sectors. Over 50 countries already have a CO2 price in energy and industry implemented or planned. Navigating this patchwork of CO2 prices becomes key in managing global supply chains. 

Calling for carbon pricing 

Carbon pricing is steadily on the rise. In October, the EU started with the transitional phase of the world’s first Carbon Border Adjustment Mechanism (CBAM). In its Autum statement, the UK announced that it will publish its response on introducing its own carbon border levy shortly.   

These mechanisms also put pressure on countries with close trade relations to the EU and UK to implement their own carbon pricing. Turkey prepares for the implementation of an Emissions Trading System (ETS). In October 2023, Brazil’s senate decided to move ahead with a law to introduce an ETS. 

These new additions are the latest in an unbroken dynamic towards market-based instruments in climate policy. Also assessed by the World Bank in its state and trends of carbon pricing report earlier this year.   

In October, the Coalition of Finance Ministers for Climate Action committed to advancing the implementation of carbon pricing. Also the Carbon Pricing Leadership Coalition (CLPC) unites decisionmakers from businesses and governments to price emissions. 

For a long time, economists have demanded the use of a global carbon price. Statements by leading economists in the US and the European Association of Environmental and Resource Economists consider it the “most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.” 

While a global carbon price is out of reach, the emerging patchwork of national and subnational schemes risks that CO2 is priced very differently across the world. To avoid any disruptions in international trade, WTO has announced to work on a global framework on carbon pricing

In the absence of a global carbon price, an improved understanding of the many national and subnational schemes becomes essential to navigate international trade and manage global supply chains.  

An increasing variety of carbon prices 

CO2 IQ is launching its CO2 price radar to keep track of latest business relevant developments in compliance carbon markets. 

As of November, we count a total of 77 carbon pricing policies, which are implemented or planned. Out of these 10 policies are currently planned either with a fixed starting date, like the EU’s ETS-II for buildings and transport in 2027, and those from Brazil, India and Turkey currently in the political drafting process.  

Two pricing instruments 

Carbon pricing schemes that put a direct price on emissions build on two instruments:  

  1. ETS set a cap on emissions, based on which emission allowances are allocated or auctioned to regulated entities. They can trade these allowances. Out of the existing 43 ETS, many are applied to industry and energy installations as large point sources of emissions.  
  1. Carbon taxes set a fixed levy on emissions. They tend to be charged on fossil fuels and be collected from fuel suppliers. Often these costs are passed on to consumers. Out of the 34 existing carbon taxes many are found in buildings and transport sectors, but they also cover fuels used in industry.  

Geographic scope 

Overall, 55 countries already have a carbon pricing in place or plan one. The EU-ETS is the only scheme covering multiple countries. Beyond EU-27 Iceland, Lichtenstein and Norway are fully integrated into the EU-ETS. Switzerland has a linked system with identical rules. Also, sub-national markets in Quebec and California are linked.  

5 countries apply carbon pricing at sub-national level. Canada has national pricing systems but allows provinces to implement their own equivalent systems. The US does not have a national system, but various subnational schemes apply.  

Sectoral coverage 

Across the five key sectors for decarbonization, carbon pricing is most common in energy and industry. Some countries run several polices in parallel to cover different sectors. Germany, has implemented a national emissions trading system as a tax on fuels in buildings and transport to complement the ETS for industry and energy. 

  1. Energy:  As the largest contributor to emissions, 53 countries apply or plan to apply a carbon price in the energy sector or energy segments.  In 2021, China launched a country wide ETS in the power sector which makes it the world’s largest in terms of covered emissions. 
  1. Industry: With large industrial point sources of emissions, 53 countries already include heavy industries such as iron, steel or cement. In ETS, emission allowances are often allocated for free to industrial players given international costs competition, as used to be the case in the EU-ETS. 
  1. Transport: 43 countries already apply a carbon price on transportation. Domestic aviation is covered by many ETS. The EU ETS is the world’s first one to cover maritime emissions. Countries such as Argentina, Canda, Columbia and others, impose carbon taxes on gasoline and aviation fuels. 
  1. Buildings: Carbon prices on buildings can be found in 38 countries. Austria, Germany and Nordic countries already price fuels used for heating, which is expected to be replaced by the EU-ETS II. Also, subnational schemes in Canada, China and the USA cover the buildings sector. 
  1. Land: With land use as a source of emissions and carbon sink at the same time, its role is different from the other sectors. So far, New Zealand’s ETS is the only one to cover emissions from forestry, with agriculture to be included from 2025. The EU is also assessing options to price agricultural emissions.  

CO2 prices as business factor 

This rising number of carbon pricing policies brings new challenges for businesses with globalized production and supply chains. Not only does it add a new cost factor which varies across places and alters the economics of many products. It also requires business solutions to manage these costs. 

Often the functioning of carbon pricing, coverage of emissions and measurement methodologies differ across countries so that companies need an understanding of carbon pricing policies in each place they operate in. 

Aligning such policies across countries remains a main area to drive climate ambitions while facilitating international trade. As such the climate club initiated by G7 in 2022, was announced to start its work by Germany’s Chancellor Olaf Scholz at COP28. For now, 36 countries form part of this club to coordinate decarbonization efforts in energy-intensive industries.

These coordination efforts are also of high importance for EU importers subject to CBAM. They face a high variety of carbon prices and CO2 measurement methodologies in the countries of origin of their imported goods.  

Already now, these importers face reporting obligations in the transitional period, including for CO2 prices paid by the non-EU producers. In the definitive period from 2026, such information will become critical, as the required CBAM certificates to be surrendered are reduced by the carbon price effectively paid in a third country.  

How and which carbon prices are to be accounted for in EU’s CBAM is still to be defined in an upcoming delegated act. Recently, the European Roundtable on Climate Change and Sustainable Transition (ERCST) outlined relevant considerations for the eligibility of carbon pricing variants for such CBAM reductions.  

Knowledge about carbon prices will increasingly become a critical business factor. CO2 IQ offers market intelligence and in-depth analyses to navigate companies through the world’s patchwork of carbon pricing policies.  

(this blog is frequently updated – last update December 2, 2023)


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