$10.6trn investor coalition calls for G7 leaders to ‘radically redesign’ carbon pricing system

Ahead of the G7 Summit in Berlin later this month, a coalition of institutional investors with $10.6trn in assets under management are calling for an agreement on changes to international carbon pricing policy, lest the aims of the Paris Agreement on climate fall out of reach.

$10.6trn investor coalition calls for G7 leaders to ‘radically redesign’ carbon pricing system

The report argues that market shifts will accelerate action

The UN-convened Net-Zero Asset Owner Alliance (NZAOA), which includes 73 institutional investors, has today (22 June) published a new position paper with recommendations on creating carbon pricing frameworks that would be conducive to the transition to net-zero, in line with the Paris Agreement’s 1.5C temperature pathway.

The NZAOA position paper outlines how, at present, just 25% of annual global carbon dioxide emissions are covered by a carbon price. Another challenge is that prices vary vastly from nation to nation, and the Alliance is concerned that prices are far too low in most cases to have a material impact on the low-carbon transition. The IMF estimates that the global average carbon price in 2020 was just $3 per tonne.

In the position paper, the Alliance emphasises the UN High-Level Commission on Carbon Prices’ previous recommendation that the average global carbon price needs to be between $50-100 by 2030 for even the delivery of the Paris Agreement’s less ambitious below-2C pathway. Higher prices may be needed in a 1.5C scenario. Prices in excess of $50 have only been recorded, in recent times, in the UK and EU.

As well as an increase in pricing and better future price clarity being needed, the paper warns of the other “regressive impacts” of poorly designed carbon pricing schemes, such as carbon leakage across international borders, and large, wealthy companies and nations being able to afford carbon prices while developing nations and SMEs bear the burden.

It sets out a set of principles for overcoming these challenges, which the Alliance is calling for G7 leaders to consider when they meet in Berlin this weekend into next week. The coalition of wealthy economies did make a formal agreement on carbon pricing at their 2021 meeting in Cornwall but subsequently agreed to dedicate more time to the topic for 2022. This year’s meeting will be the first where carbon pricing – and how it should be used to deliver the Paris Agreement – is formally on the agenda.

The Alliance’s chair Gunther Thalinger is emphasising how carbon pricing could help nations avoid a future energy price crisis as well as help them meet their UN climate commitments. He said: “The sharp rise in energy prices is putting enormous stress on households and the business sector. Continued government support and relief is needed to bridge these difficult times.

“Yet, in addition to better managing the near term, we also need to better position ourselves to avoid this happening again in the future. Accelerating the shift to net zero is essential in this regard. Structural change will need policy incentive, such as carbon pricing. These take time to implement and should not be delayed.”

Five principles

The five principles for effective, Paris-aligned carbon pricing that are detailed in the paper are:

  • Establishing a set of key principles to ensure that ‘climate clubs’ are effective
  • Ensuring that ‘climate clubs’ have clear objectives and operate on a theory of change
  • Maintaining and improving incentives to club membership
  • Implementing a well-definited and transparent governance framework, covering oversight, decision-making and enforcement
  • Promoting the linking of emissions trading schemes (ETSs)

‘Climate clubs’ are international collaborations between nations, in which members could share knowledge on carbon pricing and set agreed approaches to price floors and ceilings as well as governance. The G7 – in full or part – may wish to form such an agreement, the report states.

The paper also sets out pricing instrument design principles in a set of five, namely appropriate ambition; just transition; price predictability; competitiveness and international cooperation.

On the price predictability, the NZAOA last year issued a call for nations to agree on a binding price corridor for future of carbon pricing. Corridors include agreed floors and ceilings.

The World Economic Forum (WEF) subsequently outlined the benefits of setting an international carbon price floor was set at $75 per tonne for high-income countries, $50 per tonne for mid-income countries and $25 per tonne for low-income countries. This scenario was originally developed by the International Monetary Fund (IMF). This approach, it was claimed, could deliver emissions reductions of 12% in addition to the level already forecast by the UN between COPs 25 and 26.

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