More needed on carbon pricing to hit net zero

Held on 3 November to coincide with COP26, the webinar was part of the OECD’s Virtual Pavilion and included Fabrizia Lapecorella, the Director General of Italy’s Ministry of Economy and Finance, and Helen Mountford, VP for Climate and Economics at the World Resources Institute, alongside OECD speakers on tax and the environment.

The webinar discussed the OECD’s recent publication Carbon Pricing in times of COVID-19, which highlights that 49% of the world’s energy production activities are now covered by some form of carbon pricing arrangement, with 28% consisting of explicit carbon pricing and the remainder being mostly some form of fuel excise duty. Twelve of the G20 countries have implemented carbon pricing instruments.

However, it also confirms that the carbon price set varies significantly across different territories. The G20 average is €4 per-tonne of CO2, but it is as high as €30 in Germany. Such unevenness in price can lead to competitiveness concerns and carbon leakage.

Carbon pricing is essentially an instrument that captures the external cost of greenhouse gas emissions and ties them to a price, usually in the form of a price paid by businesses based on the amount of CO2 they emit.

The OECD estimates that carbon prices could raise G20 countries the equivalent of 1.5% of average GDP in the future, if set at €60 per tonne. Currently the figure stands at less than 1%. Commitment to targets like these would provide long-term reassurance for potential investors. 

Emerging economies have a lot to do to catch up in setting carbon prices and here it was suggested that the G20 could play an important role in financial and technological support in bridging the information gap.

Ingrid Barnsley, OECD’s Deputy Director, Environment Directorate, closed the contributions by the panel highlighting evidence that indicates that effective carbon pricing can help to reduce emissions without leading to a reduction in net wealth. She pointed to examples of carbon pricing schemes introduced in France and Indonesia that have helped to reduce emissions in manufacturing sectors of around 5% without reducing productivity or profitability. However, the webinar acknowledged that there are some sectors that will need support in the face of rising energy costs.

Barnsley also discussed OECD research that found that carbon pricing can boost innovation, noting that mature technologies will only achieve half the emissions reduction needed to meet current targets and so new technologies will be needed to fill the gap.

While carbon pricing is an important tool, the panellists agreed that governments must take a broader approach.

“We need to make the most of not only explicit pricing tools, but we also need to be looking beyond them to understand implicit price efforts of non-pricing policies, such as regulations and standards,” said Barnsley. “At the end of the day, carbon pricing alone, at least in its current form, is not going to be sufficient. We need a whole of economy approach and a whole of government response if we are to address this.”

She concluded: “Reform packages need to allow for prioritisation and sequencing of policies over time. They need to be informed by impact analysis and assessment of these trade-offs and they need to consider complementarities with other policy domains. This applies to carbon pricing, we cannot consider it in a vacuum. And we need to take account of those wellbeing, equity and public confidence components, and that’s where the OECD is really trying to apply its work now.”

Find out more:

• ICAEW articles on COP26
• Watch the free OECD webinar (registration is needed to access).
• Read OECD’s Carbon Pricing in Times of COVID-19: What has changed in G20 economies.
• Read about carbon pricing from the World Bank.