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UN-affiliated Net-Zero Asset Owner Alliance calls for global carbon price
07 July 2021IHS Markit Energy Expert
The United Nations-backed Net-Zero Asset Owner Alliance called for the
rapid imposition of a binding global carbon price with a minimum
price and a ceiling. The 43 institutional investors in the alliance
manage $6.6 trillion in assets.
Citing a study in 2018 for the Organisation for Economic
Co-operation and Development (OECD), the alliance said a carbon
price of $147/mt is required by 2030 to reach net-zero emissions by
2050. That compares to the current price of about €59/mt
($69.56/mt) in the EU's Emissions Trading System, the largest in
the world today. Prices have been rising steadily since fall 2020,
from under €24/mt at the start of November.
The alliance's members have each committed to transitioning
their investment portfolios to net-zero GHG emissions by 2050 to
limit global warming to 1.5 degrees Celsius above pre-industrial
levels, the aspirational goal of the Paris Agreement.
A carbon pricing mechanism would complement existing emissions
trading programs, taxes, and levies, they said in a position paper published 6
July.
The paper came out a month after the US and EU launched the High-Level Climate Action
Group, which is designed to raise pressure on nations around
the world to be "ambitious" with elevating their emissions goals in
advance of the COP26 meeting in November in Scotland.
The carbon tax as proposed would act as a "price corridor" for
fossil fuels, giving investors greater certainty about pricing. The
carbon trading programs in place today have the perverse effect of
reducing demand for fossil fuels, but also reducing their cost,
incentivizing ongoing use by keeping them price-competitive with
alternatives. "This is where carbon pricing comes into play as it
makes fossil fuels and other high-emission activities more
expensive," the report said.
Source: Net-Zero Asset Owner Alliance
By keeping fossil fuels relatively expensive, governments can
send "a broad signal across the different industries and associated
investments" that they are committed to a net-zero transition, the
alliance said.
This would complement the many efforts by governments and
private stakeholders—in the US, EU, China, and elsewhere—to
put pressure on investors to incorporate climate risk into their
decision-making and to increase their disclosure of exposure to
climate risks (see articles here and here).
"A minimum market price—the floor—can be set to provide
certainty to investors and a guardrail against price crashes. A
maximum market price—the ceiling—provides a guardrail
against rapid increases in prices, preventing backlash that could
undermine political support for carbon pricing more broadly," the
alliance said.
Those carbon prices also can raise revenue to further support
the energy transition and to lessen the impact on affected
parties.
The group said both the floor and ceiling should be increased
over time, though it also acknowledged that the OECD carbon price
of $147/mt is on the high side of recent estimates of what is
needed to control global temperatures. The largest varying factor
in those estimates is a model developer's assumptions about the
pace of advances in carbon capture technology and how industrial
processes can be revised to reduce emissions, the report said.
Again citing the OECD report, the alliance said that 64
countries, regions, and states have some type of carbon-pricing
initiative, covering about 20% of carbon emissions. Prices vary
considerably, not only by country, but also by the form of
emissions they cover.
"For instance, in the 64 countries analyzed by the OECD, the
carbon price level applied to electricity was below €30 (~$37) per
tonne for 90% of emissions. On the other end of the spectrum in
road transport, 91% of emissions were priced over €30, and 58% of
emissions were even above €120 (~$147)," the alliance's report
said.
A global price corridor will balance those differentials, and do
it in a simple, direct way, the report said. Other options for
carbon pricing, such as border adjustment mechanisms applied to
imported goods, are much more complicated and would be subject to
World Trade Organization disputes.
The alliance also emphasized that the carbon price must be
accompanied by other major policy measures, such as ending fossil
fuel subsidies, investing in development of zero-emissions energy
technologies, boosting green construction and building retrofits,
and moving vehicle transportation away from fossil fuels.
Includes original reporting by Abdul Latheef, OPIS, and
Kevin Adler, Beyond Net Zero Daily.