Daily Times

The use of carbon pricing as an effective tool to promote environment-friendly actions has significantly grown across the globe over the past decade or so. Many reliable studies including one by the Asian Development Bank suggest that in 2009, only 16 carbon-pricing initiatives had been implemented which covered about 5% of global GHG emissions. However, by 2019, 57 such initiatives had been pressed into practice covering about 20% of global GHG emissions, with approximately $45 billion in revenues raised. Likewise, there are currently over five dozen carbon-pricing instruments in operation that cover 21.5% of GHG emissions globally. This represents a visible change from 2020 when only 15.1% of global emissions were covered. There is also growing momentum for the use of carbon pricing in the Asia and Pacific with six planned and implemented carbon-pricing initiatives at the national level, consisting of four domestic ETS and a carbon tax in two jurisdictions. The region also has successfully experienced participating in baseline and crediting mechanisms through the Clean Development Mechanism (CDM) and the Joint Crediting Mechanism (JCM) under the Kyoto Protocol. At the same time, there is an emerging opportunity to mobilize finance by up-scaling international cooperation through Article 6 of the Paris Agreement. Similarly, under Article 6.2, countries can mutually agree on a cooperative approach specifically aiming at green recovery.

In the context of ensuring environmental sustainability, carbon pricing can help safeguard and even create fiscal space by mobilizing revenue that provides much-needed countercyclical support for economic recovery from the disastrous COVID-19 pandemic. However, doing so at a time of economic slowdown requires careful design considerations to ensure that pricing instruments stimulate and do not stifle economic activity or growth. They should be simple to implement and administer, and not just be designed urgently, but also sensibly. A potential way is to start with a low price for carbon, thereby establishing critical policy frameworks and infrastructure and incentivizing participation without imposing price shocks and raising the price of carbon over time to the necessary levels. At the same time, revenue generated needs to be earmarked toward climate action or green investments. If designed correctly, and in synergy with a facilitative policy framework, carbon-pricing instruments can be sustained in the longer term and thus ensure the transition to a low-carbon economy and achieve a net-zero target. The need to design carbon-pricing instruments is timely as advanced economies are seeking to raise ambition within their carbon-pricing jurisdictions, particularly in the form of addressing carbon leakage. Therefore, communicating carbon pricing is key to its implementation, and all the more so during a green recovery. Framing the introduction of carbon, pricing relying heavily on concepts such as a price on carbon and internalizing the social costs of fossil fuels, may send wrong signals to most audiences under a green recovery phase.

In the context of ensuring environmental sustainability, carbon pricing can help safeguard and even create fiscal space by mobilizing revenue that provides much-needed countercyclical support for economic recovery from the disastrous COVID-19 pandemic

The positive elements and benefits will include the gradual and phased approach to carbon pricing, the support from the government to safeguard the needs of those most impacted, and how revenue is used to promote sustainable development. Therefore, in the post-pandemic recovery phase, although global emissions have rebounded strongly, countries can still sensibly plan their economic recovery to avoid returning to pre-pandemic emission trajectories. The objective should be to create transformational change and work toward ambitious mitigation goals. To do this, there is a need for green recovery plans that restrict greenhouse gas (GHG) emissions. These plans must re-focus attention to address the climate crisis and build resilience while working toward inclusive economic recovery and sustained growth. Accordingly, there has been a strong call for and a growing momentum to build back better and for the COVID-19 recovery to be green, taking advantage of the large global stimulus to tackle the ongoing climate crisis and invest in a more sustainable and thereby ensuring a resilient future.

The role carbon-pricing initiatives can play in fostering green recovery and growth cannot be overemphasized. It also promises to facilitate transitioning to a low-carbon economy and achieving a net-zero target in the longer term. With such initiatives, countries can mobilize resources in a beatific manner and provide much-needed countercyclical support. Clear and predictable carbon price signals in domestic and international markets can facilitate not just a green recovery but also the cost-effective achievement of climate targets under the Paris Agreement. Likewise, carbon pricing can be effective in raising domestic revenues as well as mobilizing international carbon finance to incentivize investments in low-carbon advanced technologies which can be used. At the moment, many countries are experiencing an increasing need to mobilize resources in response to the immediate crisis and to support economic recovery. This need has come at a time of shrinking fiscal space and heightened debt vulnerabilities. At the same time, the threat of climate change persists, and countries could be tempted to return to carbon-intensive development. However, doing so may result in economies being locked onto a high-carbon emissions pathway that contributes to a future with high risks of severe negative climate impacts on economic and social development.

The time has already come to explore how carbon taxes and emissions trading systems (ETS) can support a green recovery and growth and highlight opportunities to mobilize finance by scaling up international cooperation through Article 6 of the Paris Agreement. Similarly, we must establish the critical role carbon-pricing initiatives can play in fostering green recovery and growth as well as the transition to a low-carbon economy and achieving a net-zero target in the longer term. With such initiatives, countries can mobilize resources in a timely way and provide much-needed countercyclical support for green recovery. A green recovery has certain benefits over a traditional fiscal stimulus including long-run economic multipliers of climate-positive policies and yielding a higher return on investment for government spending. The two primary carbon-pricing instruments are a carbon tax and an ETS both aiming for a predictable and clear carbon-pricing policy signal, either in terms of cost (tax) of future emissions or quantity of emission reductions expected. This is cost-effective in achieving environmental goals and can generate additional revenue which can be used to support green investment. A carbon tax clearly generates revenue for the jurisdiction, but an ETS can do so as well when the jurisdiction sells some or all emissions permits, typically through auctions, rather than allocating them as a free facility. It is about time to support climate mitigation actions and thereby promote green growth under normal economic conditions. Concrete efforts must be made to mobilize revenues and use them on a framework that considers the political economy, targets cost-effective abatement opportunities by removing non-price barriers, and channels support to research and development. The idea of such a framework is to reap the benefits from well-designed carbon-pricing instruments to support green growth cost-effectively while earmarking the revenue for climate action or green developments and away from general spending, such as tax cuts. Such a framework is also useful in the longer term.

There is already a clarion call for reaching net-zero emissions across the world and carbon pricing can certainly contribute to achieving this lofty ideal. The central issue for carbon pricing is the required price level. If a carbon tax is to result in net zero, what will be the price for regulated entities when approaching net zero. Identifying the highest marginal abatement costs in regulated sectors is one way of estimating the maximum level of allowance in price. It is therefore imperative that policymakers should harness the benefits that carbon pricing can contribute to environmental sustainability. It is crucial to evaluate the nuts and bolts of the preparatory work for carbon pricing and to implement an instrument in such a manner that it initially generates a low carbon price, to avoid its adverse effects on economic growth. Instead, it must seek to raise the price in a phased manner. Policymakers worldwide have a task at hand. They must find ways to evaluate available options, synergize with key stakeholders, and implement agreed carbon-pricing instruments to maximize the desired gains.

The writer is a civil servant by profession, a writer by choice and a motivational speaker by passion!