Posted by: Kari Kankaanpää
There is a significant gap between the amount of capital that will be required to finance the transition to a low-carbon and climate-resilient economy and the amount currently being invested. For example, while current investments in clean energy alone are approximately USD 250 billion per year, the International Energy Agency (IEA) has estimated that reaching the two degrees target requires additional investments in clean energy of at least USD 1 trillion per year between now and 2050.
In Europe alone, investments totalling EUR 3,000-4,500 billion will be needed in energy supply and energy efficiency by 2035. At the moment, almost all investments in the energy sector in Europe are based on some kind of subsidies and market-based investments are lacking. The situation in the future should be vice versa.
How can such investment volumes be accomplished? The answer is clear: by letting market forces work through an effective price of carbon.
What is a price for carbon?
In short, carbon price is a tool to charge those who emit greenhouse gas emissions and a way to set economic incentives for clean development.
The price for carbon gives an economic signal and lets emitting companies decide themselves whether to reduce emissions, discontinue their emitting activity, or continue emitting and pay for it. Accordingly, the overall environmental goal is achieved in the most flexible and least costly way to society. The carbon price also stimulates investments in innovative technologies, installations and products – investments made in locations where they deliver the greatest possible climate benefits at the lowest economic cost.
Various instruments, such as domestic emissions trading systems, carbon taxes, use of a social cost of carbon and/or payments for emission reductions, can be used to price carbon to efficiently and cost-effectively reduce emissions.
The momentum is growing
Economists, businesses and also many governments and politicians see the pricing of carbon as the most efficient and cost-effective way to combat emissions. The recent report “New Climate Economy” by Nicholas Stern & co-authors recognises pricing as one of the most important steps forward.
There is progress on many fronts. Today, about 40 national and over 20 sub-national jurisdictions have already implemented or scheduled emissions trading schemes or carbon taxes – accounting for more than 22% of global emissions.
The momentum is growing. Recently, 347 investors representing more than USD 24 trillion in assets signed a statement calling on governments to provide stable, reliable and economically meaningful carbon pricing. Meanwhile, the World Bank’s Putting A Price on Carbon initiative, supported by 73 countries and over 1,000 businesses (including Fortum), was submitted to the UN Climate Summit in New York on September 23. At the Climate Summit, Fortum was one of 25 companies recognised globally as Carbon Pricing Champions.
Step-by-step towards a global market
The most appropriate way to scale up carbon pricing and the market is to link the existing pricing schemes and, consequently, increase the volume and liquidity of the market. The next challenge would be to create a product greater than the sum of its parts by converting fragmented pricing initiatives into internationally integrated carbon pricing approaches.
It is unrealistic to expect a global carbon market covering all nations. The focus should be on a targeted group of economies relevant for carbon abatement. For example, a carbon price and market of G20 countries – representing more than 85% of global greenhouse gas emissions – would be much more effective and realistic to reach. Even G7, which accounts for almost half of global emissions, would be critical in determining the carbon pathway in the future.
Businesses and political leaders alike should recognise that taking decisive action to mitigate climate change is an investment for the future and a pre-condition for sustained economic growth. Collectively, we all should confirm a role for markets in the 2015 Paris climate agreement through their support of carbon pricing.