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Carbon Pricing
Context:
State and Trends of Carbon Pricing 2024, show encouraging advancements, yet further efforts are necessary to meet the desired objectives.
More on News:
- Carbon pricing and carbon markets are progressing and expanding, with the introduction of new schemes and instruments.
- A decade ago, carbon pricing policies accounted for just 7% of global emissions.
- Revenues from carbon pricing reached a record $104 billion in 2023.
- The majority of these revenues were allocated to climate and nature-related programs.
Developments in Carbon Pricing Instruments:
- The number of implemented carbon pricing instruments has increased to 75, with new efforts seen in Australia, Hungary, Slovenia, and Mexico.
- These policies are becoming more adaptable to national contexts and new sectors.
- Significant progress towards emissions trading schemes is being made by large middle-income countries such as Brazil, India, Chile, Colombia, and Türkiye.
- The power and industrial sectors remain the primary focus, but there are advances in sectors like international aviation, shipping, and waste.
- Countries like China, Vietnam, Thailand, and Singapore are working to integrate carbon pricing policies and carbon markets by incorporating carbon crediting frameworks.
Annual State and Trends Report Impacts and Goals:
- The report provides objective and up-to-date information on key developments in carbon pricing.
- It reflects efforts to become a world-class Knowledge Bank.
- The report is part of a broader effort to help countries understand and develop a comprehensive range of carbon pricing policies.
- This effort includes the Partnership for Market Implementation program.
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Carbon prices remain insufficient despite a decade of strong growth.
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Understanding Carbon Pricing:
- It captures the external costs of GHG emissions, such as crop damage, healthcare costs, and property loss, and links them to their sources via a CO2 price.
- It shifts the burden of GHG damage to those responsible, allowing emitters to choose between reducing emissions or paying for them.
- The price signal created shifts in consumption and investment patterns, making economic development compatible with climate protection.
- Carbon pricing can mobilise financial investments for clean technology and market innovation, driving low-carbon economic growth.
Carbon pricing has become a major tool for addressing climate change and climate action (SDG13).
Major Types of Carbon Pricing Mechanisms:
- Carbon Tax:
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- It puts a direct price on GHG emissions.
- Requires economic actors to pay for every ton of carbon pollution emitted.
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- Emission Trading System (ETS):
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- Also known as a cap-and-trade system.
- Sets a cap on total direct GHG emissions from specific sectors.
- Establishes a market where carbon permits or allowances are traded.
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- Crediting Mechanism:
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- Emissions reductions from projects or policies are assigned credits.
- Credits can be bought or sold to offset actual emissions.
- Requires a recognized third-party verifier to approve the emission reduction before it is credited.
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- Results-Based Climate Finance (RBCF):
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- Entities receive funds when they meet pre-defined climate-related goals, such as emissions reductions.
- Requires independent verifiers to confirm that a goal has been met.
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- Internal Carbon Pricing:
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- Governments, firms, and other entities assign an internal price to carbon use, influencing investment decisions.
- Encourages investment in low-carbon technologies and prepares for future climate policies and regulations.Two types:
- Shadow Price: Hypothetical cost of carbon calculated to manage climate risks and identify opportunities to lower emissions.
- Internal Carbon Fee: Voluntary fee companies charge their business units for emissions, with funds directed to cleaner technologies and greener activities.
Carbon Pricing under Article 6 of the Paris Agreement:
- Framework for Global Cooperation:
- Encourages international carbon markets due to national and regional carbon pricing successes.
Aims to keep global temperature rise well below 2ºC (the Paris Agreement).
India’s Carbon Scenario:
- India is the third-largest energy consumer globally.Emits 7.3% of global carbon emissions.
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- CO2 equivalent per capita shows a declining trend, at 2.29 in 2020 (ClimateWatch, 2023).
- Non-renewable sources meet 80% of India’s energy demand.
- Despite having 17.7% of the global population, India consumes only 6.1% of global primary energy (IEA, 2021).
- India, at the 26th session of the United Nations Framework Convention on Climate Change (COP 26) in November, 2021, announced its target to achieve net zero by 2070.
- India is a Party to the United Nations Framework Convention on Climate Change (UNFCCC), its Kyoto Protocol (KP) and the Paris Agreement (PA).
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- Pathway of Carbon Pricing
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- Current Taxation on Energy: Excise duty and value-added tax on petroleum products account for 3.3% of GDP (2021-22) (RBI, 2023).
- A clean energy cess on coal was introduced in 2010, reaching USD 4 per tonne of CO2e in 2016.
- The clean energy cess has been replaced by Goods and Services Tax (GST).
- Potential Carbon Pricing: India should consider moving towards carbon pricing.
- Implementing a carbon tax is suggested to be more effective for India than feebates or an Emission Trading System (ETS).
- Current Taxation on Energy: Excise duty and value-added tax on petroleum products account for 3.3% of GDP (2021-22) (RBI, 2023).
Challenges and Future Needs:
- Higher pricing and wider coverage are crucial to fully leverage carbon pricing potential.
- Requires political commitment, stronger global frameworks, and best practice sharing initiatives.
Urgent action is needed for countries to accelerate emission reductions and ensure a livable planet.