Despite opposition from some emerging economies, a new analysis shows that carbon pricing mechanisms that impose costs on carbon-emitting industries such as steel are proving economically effective.
According to the Institute for Energy Economics and Financial Analysis (IEEFA), global revenues from carbon pricing mechanisms are expected to continue to rise, driven by the global trend toward carbon neutrality.
More than two-thirds of the 196 countries that signed the COP21 Paris Agreement are using nationally determined carbon pricing systems.
Carbon pricing mechanisms cover a quarter of global emissions and have raised over $500 billion from polluters. In addition, the Carbon Border Adjustment Mechanism (CBAM) among European countries is expected to encourage other trading partners to adopt some form of carbon pricing.
IEEFA reports that the cost of climate change in 2022 is estimated at $10 trillion, or 10% of global GDP. At the same time, revenues from carbon trading reached $100 billion, which is only about 1% of the global costs imposed on society by these carbon emissions. As the world moves toward a "polluter pays" approach, the cost of emissions is likely to increase significantly in the coming decades.
Researchers point out that carbon pricing is increasingly being used as a policy tool to achieve net-zero emissions, finance a just green transition, redistribute the costs of low-carbon energy, and support the most vulnerable households and businesses. Currently, 66 jurisdictions worldwide have implemented carbon pricing, with 48 countries using some form of revenue-generating CO2 pricing mechanism.
IEEFA notes that this trend is expected to continue as more regions adopt carbon pricing mechanisms as part of their nationally determined policies under the Paris Agreement. Over time, carbon permits will cover more sectors and a larger share of emissions in each country. In addition, the European CBAM and other international trading mechanisms will come into effect.
Analysts also highlight the European system, the EU Emissions Trading System (EU ETS), as a global test case and indicator of the future direction of carbon pricing.
However, a certain amount of trade conflict is expected before carbon pricing mechanisms are fully established.
Following the EU's introduction of CBAM last year, other developed countries such as the UK and Canada have also decided to introduce their own border carbon taxes to protect their domestic steel industries.
However, according to research by the International Emissions Trading Association (IETA), major emerging economies such as China and India are considering retaliatory measures against carbon regulations imposed by developed countries.
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