The Net Zero Asset Owners Alliance (NZAOA) has set out five principles for overhauling global carbon pricing, which it said is developing too slowly to align with limiting global warming to 1.5°C.
1. Higher ambition
A report by the group of 73 institutional investors, representing $10.6tn assets under management, cited the fact 68 countries, regions and states have so far implemented or scheduled implementation of carbon taxes and emissions trading systems (ETSs). But the alliance said most of these have set their sights too low.
According to the group, research has estimated a price of $40–80 by 2020 and $50–100 by 2030 would be required to support a pathway well below 2°C. It also noted the IPCC Sixth Assessment Report found a carbon price of $80 per tonne is needed for alignment with a 1.5°C mitigation pathway. Yet currently only 4% of global GHG emissions are covered by a carbon price within or above this range.
“More policymakers should consider implementing carbon prices that are legally binding and set in line with science-based evidence. Jurisdictions with existing systems should consider expanding coverage and ramping up ambition to provide a sufficiently high long-term price signal,” the report stated.
2. Just transition
The NZAOA expressed concerns about global carbon pricing’s role in a just transition and said where carbon pricing drives changes in economic activity that disproportionately impacts disadvantaged communities, those communities should be compensated.
The report suggested, “… revenues raised from carbon pricing can be used to support communities and households disproportionately impacted by these instruments through retraining, lump-sum transfers, or broader policy changes like reducing income taxes.”
3. Predictable price
Uncertainty around pricing was flagged as an issue which could lead to a disorderly transition.
“Carbon taxes can have a steadily increasing rate that is announced well in advance,” NZAOA stated in the report.
Similarly, it said ETSs can have price floors, ceilings and corridors built in, which give a predictable increase in price signal over time.
4. Address carbon leakage
The report highlighted how carbon pricing has the potential to leave gaps for competitive distortions, which can lead to carbon leakage. This can be avoided, according to the NZAOA, by designing policies with “targeted protective measures for trade-exposed emissions-intensive firms” but which still maintain the incentive to abate.
Carbon border adjustment mechanisms (CBAMs) are given as an example of systems used to minimise competitive distortions.
5. International cooperation
NZAOA makes the case that increased cooperation between international actors is needed to raise ambition levels on carbon pricing and meet the Paris Agreement goals. Ways to do this include “linking ETSs, knowledge transfers or setting up international ‘climate clubs’ where members work together to encourage robust carbon pricing,” the report stated.
Perverse incentives
The position paper, published ahead of the G7 summit in Berlin later this month, noted some countries are undoing the benefits of taxing carbon by simultaneously subsidising fossil fuels.
“In 2009, G20 countries pledged to phase out fossil fuel subsidies, a move that investors have long supported. Yet, 13 years on, this pledge is still to be implemented,” the report stated.
Günther Thallinger, board member, Allianz SE and NZAOA chair, said there is no time to waste implementing the five principles.
“The sharp rise in energy prices is putting enormous stress on households and the business sector. Continued government support and relief is needed to bridge these difficult times.
“Yet, in addition to better managing the near term, we also need to better position ourselves to avoid this happening again in the future.
“Accelerating the shift to net zero is essential in this regard. Structural change will need policy incentive, such as carbon pricing. These take time to implement and should not be delayed. This report sets out five design principles for the challenging times that we live in,” said Thallinger.
