Authors
Zoe Knight, Wai-Shin Chan and Ashim Paun
A global carbon price - one that assigns a specific value to greenhouse gas emissions - has long been hailed as the panacea to confront global climate change. In theory, pricing CO2 means less will be emitted, keeping temperatures down. Carbon pricing implies putting a cost on CO2 emitted, or, in other words, putting a value on avoiding the addition of greenhouse gas (GHG) emissions to the atmosphere from man-made (anthropogenic) sources.
Economic tools – taxes and ‘cap and trade’ schemes – have provided a starting framework for pricing, but politics, industry lobbying, and trading scheme design faults have so far hindered widespread implementation. Now, this is changing because companies that are exposed to the existing piecemeal pricing and lack of competitiveness it can bring are looking for a more level playing field globally. Clearer policy signals would help. With the Paris talks looming, more impetus for a global carbon price is emerging from politicians, investors, climate advocacy groups, and industry. In this report, we look at how carbon is taxed, how trading works, fossil fuel subsidies and potential winners and losers. Pricing carbon is a sensitive issue since its purpose is to change behaviour so that GHG emissions are reduced. Pricing should change the economics of high-carbon activities such that they become less competitive with low-carbon ones. The difficulty is that, on the surface, high-carbon activities are embedded into our energy and economic systems, and provide tax revenues and employment. If carbon pricing were a zero sum game, it would already have been implemented. A deeper analysis reveals that energy subsidies actually support high-carbon, which artificially makes high-carbon more profitable, in our view. Removing subsidies would provide a more even playing field and, the authors believe, would make lower-carbon activities more competitive.
Whilst some entities that resist change could fall by the wayside, the authors believe that existing high-carbon entities can manage an orderly transition to low-carbon by providing clear disclosure on future investment plans (to enable shareholders to make up their own minds on company alignment with a 2°C world and allocate capital accordingly). There is no escaping the point that damaging the profitability of high-carbon activity would result in some losers, but for long-term investors the aim is to ascertain which companies will be thriving in five, ten, and twenty years.