Source: Small Island Developing States
21 September 2019: Prepared under the auspices of the Carbon Pricing Leadership Coalition (CPLC), one of the primary objectives of a report published by the High-Level Commission on Carbon Pricing and Competitiveness is to address, and assuage, commonly expressed concerns that putting a price on carbon, whether in the form of a tax or an emissions trading system (ETS), may adversely affect the competitiveness of businesses and economies.
Launched on the margins of the UN Secretary-General’s Climate Action Summit, the report highlights key insights and considerations that can guide countries in introducing mandatory pricing of greenhouse gas (GHG) emissions, including by providing an overview of a large body of existing studies on competitiveness. The report emerged from a multi-stakeholder dialogue facilitated by the High-Level Commission that explored the evidence base, the concerns of business, and the lessons learned in the design and implementation of carbon pricing policies in the context of competitiveness.
The Commission explored how policies, such as lowering corporate taxes and providing technology innovation assistance to emerging green industries, can support carbon pricing and alleviate competitiveness concerns, especially for energy-intensive, trade-exposed (EITE) industries. Based on preliminary analysis from advanced economies who have put a price on carbon pollution, the study finds that while there are risks in the short term, carbon pricing does not, in the long term, curtail industrial growth or prompt polluters to move to countries that do not charge such a price.
One of the main conclusions of the report is that achieving a critical mass of businesses committed to adopting low-carbon strategies, coupled with supportive government policies, can drive the shift to low-emission products and processes. Sweden’s carbon tax – which, at approximately USD 127 per ton of carbon dioxide equivalent (tCO2e), is rated as the highest in the world – is highlighted as a successful example of how to decouple emissions from economic growth through complementary policies aimed at delivering “a significant reduction in the marginal tax rates on energy, capital, and labor.” The report cites data from Sweden’s Ministry of Finance showing that Sweden’s GDP increased by 75% during the 1990-2015 period, while its GHG emissions went down 26%.
Similarly, Canada’s British Columbia is lauded for supporting the emergence of a clean technology sector, comprising over 200 companies that generate around USD 1.7 billion annually, following the introduction of its carbon tax.
California’s carbon price is another example highlighted in the report, this time illustrating how to implement a carbon pricing scheme within a broader environment of divergent policies. The report explains that although California’s electricity grid is connected to several US federal states that have not enacted a carbon price, the state uses border adjustment measures that require electricity imported from border states to obtain emissions allowances, “thus leveling the playing field.”
Differences in carbon prices among countries and regions should become smaller, alleviating competitiveness concerns.
The report pays particular attention to the current context of international trade and the benefits of carbon pricing in enhancing competitiveness, while highlighting some major concerns, including on “who is impacted.” The report cites Sweden and California as examples of jurisdictions that have successfully managed the impact of carbon prices on international competitiveness for high-emitting and trade-exposed sectors. It notes, however, that there will be some losers in the transition, notably firms that currently compete against low-emission substitutes who may be unable to adapt, increase their profitability and develop new business models. Other concerns outlined in the report include the “carbon leakage,” driven, for example, by political push-back that may result from social and economic impacts experienced in some areas.
In the context of increased global ambition to meet the goals of the Paris Agreement on climate change, the report concludes that two countervailing effects may be relevant for competitiveness impacts. On the one hand, greater ambition will generally mean higher carbon price levels leading to the potential for more significant competitiveness impacts for EITE industries. On the other hand, as more countries adopt climate policies and develop linkages between carbon markets, “differences in carbon prices among countries and regions should become smaller, alleviating competitiveness concerns.”
The Commission argues that most prevailing studies tend to highlight more potential competitiveness impacts than have actually been experienced to date. It explains that: carbon costs are only one of the many factors that influence investment decisions and competitiveness; carbon price levels in general have been moderate; and existing carbon pricing programmes include protection for at-risk sectors, which tend to account for only a small proportion of the overall economy. Furthermore, the report notes, large mainstream investors are increasingly factoring in the development and implementation of low-carbon strategies when evaluating their portfolios.
The report therefore concludes that concerns about competitiveness implications “should not preclude carbon pricing or keep regions from increasing carbon prices or emission targets over time to levels needed to implement the Paris Agreement,” for example at the level of USD 40-80 per tCO2e by 2020 and USD 50-100 per tCO2e by 2030 suggested in the 2017 Stern-Stiglitz report. However, “policy clarity,” with strong governmental commitment to meaningful policy that increases in stringency over time, is identified as a critical factor in spurring innovation and investment for the transition to a low-carbon economy. Policy is also seen as an important element in managing potential negative impacts at national or regional level, as it can ensure the design of locally tailored and complementary measures that protect industry from unfair competition while stimulating innovation and equitable transition to a low-carbon economy.
The report has received endorsements from nearly 50 major corporations, as well as business networks such as the World Economic Forum (WEF) Alliance of CEO Climate Leaders, the World Business Council on Sustainable Development (WBCSD), We Mean Business, and the International Chamber of Commerce (ICC).
Established at the 2018 High-Level Assembly of the CPLC, the High-Level Commission on Carbon Pricing and Competitiveness is a voluntary, multi-stakeholder partnership, hosted by the World Bank Group. The Commission is co-chaired by Feike Sijbesma, Chairman and CEO of Royal DSM, and Anand Mahindra, Chairman of Mahindra Group.
In 2015, the World Bank Group and the Organisation for Economic Co-operation and Development (OECD) published a joint study on the essential principles behind successful carbon pricing initiatives, which they identified as: fairness; alignment of policy and objectives; stability and predictability; transparency; efficiency and cost-effectiveness; and reliability and environmental integrity. [Publication: Report of the High-level Commission on Carbon Pricing and Competitiveness] [Publication Landing Page] [CPLC Press Release] [Video of Report Launch] [CPLC Website]