Asset Owners Call for Climate Clubs
Green-minded nations should club together to pressure countries with weak climate policies and encourage carbon pricing, says NZAOA.
A UN-affiliated group of big investors has called on climate-conscious governments around the world to join forces and pressure laggard countries to impose a price on carbon emissions.
In a new paper, the UN-convened Net Zero Asset Owner Alliance (NZAOA) argued members of a so-called ‘climate club’ could impose carbon border taxes on non-members, while broadening and coordinating their own carbon pricing regimes.
This would encourage the spread of carbon pricing around the world, increasing policy certainty and channelling investment into vital clean energy and other low-carbon technologies, the group said.
Economists have long argued that carbon pricing is the most efficient way of incentivising investment in clean technologies. Making the release of greenhouse gases more costly would leave it to the market to develop the cheapest alternatives to fossil fuel-based technologies.
Though widely supported by investors and businesses, the concept presents political challenges. According to the NZAOA, only 5% of the world’s greenhouse gas emissions are currently covered by a carbon price, either in the form of a tax or an emissions trading scheme (ETS).
However, the alliance insists that carbon pricing is “a necessary part of the climate policy toolkit required to achieve net zero emissions and reach the Paris Agreement goals”. As such, it has been urging governments to introduce carbon prices or strengthen existing ones.
The paper also called for much more international collaboration on carbon pricing, stressing the role that climate clubs could play, alongside linking ETS and improved carbon trading rules under Article 6 of the Paris Agreement.
Other recommendations made in the paper included: measures to push up carbon prices; bringing more sectors under existing carbon taxes or ETS; using revenue from carbon tax or ETS permits to help the most vulnerable cope with higher prices; reskilling workers in carbon-intensive sectors; using revenue to subsidise clean energy sector; and using stability measures such as price floors and ceilings and clear roll-out timetables.
Climate clubs
The term ‘climate club’ was coined by economist and Nobel laureate William Nordhaus in 2015, who presented the idea as a practical alternative to international treaties under the UN Framework Convention on Climate Change (UNFCCC), such as the 2015 Paris Agreement. Nordhaus argued the UNFCCC process had failed because it required an unrealistic level of international agreement.
He said that without trade sanctions, there was no real incentive for “free-riding” countries with weak climate policies to tighten the regulation of emissions, and as a result the shift away from fossil fuels would be unacceptably slow.
NZAOA said the EU’s collective policy presented a model for a broader climate club, particularly through the introduction of the carbon border adjustment mechanism (CBAM), which imposes a carbon levy on imports based on the bloc’s carbon price under the EU ETS.
“The EU could be perceived as a form of climate club with shared decarbonisation goals, participation benefits including financial support, and CBAMs to level the playing field and encourage non-members to increase ambition,” the paper said.
Bad press
Still, the politics of domestic carbon pricing remain difficult. In the US – the world’s biggest economy and second biggest emitter behind China – legislating a national price has so far proved politically impossible, though schemes do exist in some states. As a result, any global climate club may have to exclude the US, creating geopolitical tensions.
Carbon pricing advocates say prices must be high to be effective. Last November, the US Environmental Protection Agency (EPA) published a paper putting the social cost of carbon – that is, the estimated net harm to society of emitting one tonne of carbon dioxide – at US$190 per tonne. This was more than double the cost of an EU carbon permit – currently among the highest in the world, at around €75 (US$81) per tonne. In comparison, California’s regime – the most comprehensive of any US state – prices an ETS permit at only US$29 a tonne.
Marc Hafstead, Director of the Carbon Pricing Initiative at US think tank Resources for the Future, said although in the long run carbon prices would not be inflationary as they would bring down the cost of low-carbon technologies, in the short-term price inflation is inevitable. A carbon price in the range of US$190 per tonne, as proposed by the EPA, would “create tremendous backlash around the world”, he said.
“The rule of thumb is a US$1 carbon tax raises gasoline prices by 1 cent per gallon,” he said. “Increasing gasoline prices by nearly US$2 per gallon would not be politically popular.”
After the failure of the American Clean Energy And Security Act in 2009, it’s unclear whether US lawmakers will find another window to legislate a carbon price, he said. “It depends on a myriad of factors – none more important than the upcoming US election,” Hafstead said.
Outside of the US, ratcheting up existing schemes and introducing new ones would probably face similar political headwinds, as demonstrated through the yellow vest protests in France in 2018-19.
Against the political backlash, the NZAOA suggested using revenue from ETS permit auctions and carbon taxes to help those worst affected by rising costs – pointing to schemes in California, Canada and the EU. In California, 35% of the revenue generated through ETS permit auctions is legally required to go to projects benefitting low-income communities and households.
Hafstead, however, was sceptical as to whether political resistance could be overcome any time soon.
“Overall, I’m not holding my breath that carbon pricing will be implemented globally in a manner that will reduce emissions in the next 5-10 years, consistent with keeping temperatures below 1.5°C by mid-century,” he said.
The post Asset Owners Call for Climate Clubs appeared first on ESG Investor.