Climate change

Eight carbon pricing principles to cut emissions and boost business

  • 9 November 2016
ICC Environment and energy

Earlier this month, the International Chamber of Commerce (ICC) hailed the early entry into force of the Paris Climate Change Agreement.

Today, with discussions underway in Marrakesh to determine the ground rules for how the goals can be achieved, we take a look back at a conversation with ICC Senior Policy Manager Andrea Bacher, highlighting ICC’s eight steps for setting up carbon pricing instruments – one possible policy option to help drive emissions reductions under the Paris Agreement.

1. Create a reliable, predictable framework for cost-effective energy and climate policies

“Businesses need a clear idea of future carbon prices so they can make plans to invest in low carbon technologies. So carbon pricing instruments can only be effective at reducing emissions if governments are consistent and predictable in their approach to climate and energy policies at national and international levels.”

2. Promote consistency between climate and energy policies

“It’s vital to look carefully at how carbon pricing instruments interact with other instruments, and make sure climate and energy policies are properly aligned. There’s a real need to ensure policy consistency. The Intergovernmental Panel on Climate Change (IPCC) showed that if a cap and trade system has a binding cap, other instruments – such as subsidies or feed-in-tariffs for renewable energies – have no further impact on reducing emissions, but may affect the overall costs of the system.”

3. Prevent carbon leakage

“Carbon leakage concerns need to be addressed for sectors that are competing globally and for those unable to pass on additional costs arising through carbon pricing. One approach is to make sure that industrial installations in global competition don’t bear financial burdens relating to carbon pricing if they are among the most efficient installations of their type worldwide. It’s important that carbon pricing instruments do not simply shift emissions between regions – this brings no net climate benefit at all. Local or regional carbon pricing instruments should ideally converge over time to create a global level playing field for business and industry sectors across the world.”

4. Create a clear and robust transparency framework

“Carbon pricing instruments need to be based on a clear legal framework with robust criteria for emission reductions – ensuring that emissions are measured, reported and verified using internationally agreed criteria. This is vital to build business confidence and help scale up investments in climate friendly technologies.”

5. Maintain energy access and affordability

“If governments choose to implement carbon pricing instruments, it’s important that they ensure that the financial burdens arising from these policies don’t exclude consumers from accessing energy. There needs to be a balance between reducing emissions and promoting access to energy. That’s why carbon pricing instruments need to be carefully calibrated.”

6. Promote international linking of carbon pricing instruments

“Linking carbon pricing instruments with other countries can lower costs, and reduce the risk of carbon leakage and competitive disadvantages for certain industry sectors. Regional carbon pricing instruments should allow for the use of offsets from foreign sources, as it can increase economically viable options for mitigation actions.”

7. The right approach will vary depending to national and local circumstances

“In principle, economy-wide approaches offer the best opportunities to minimize societal costs for mitigation. The range of geographic and economic sectors included defines where and how many incentives for mitigation actions are set. It’s important to remember that even the broadest instruments can’t always cover all sectors and geographic areas. There is no “one-size-fits-all” instrument.”

8. Re-invest carbon pricing revenues wisely

“Carbon pricing instruments can bring in substantial state revenues… but this shouldn’t be the main aim of introducing these mechanisms. The policy goal needs to be firmly placed on reducing emissions, while keeping economic costs low. ICC believes that governments should redirect revenues raised carefully, ideally to climate change mitigation efforts. To maintain competitiveness, governments might also wish to consider reducing other taxes to keep the overall tax burden on business the same. Funds can also be used to support, say, exposed sectors and low income families, as well as promoting research and development in new low carbon technologies.”